With the Solyndra debacle and other bankruptcies (e.g., Evergreen Solar, SpectraWatt), and a 65% decline in the MAC Global Solar Energy Index (SUNIDX), 2011 was a bad year for the solar industry. Now into 2012, the hits just keep on coming.
Last week, the long-time solar energy poster-child First Solar (NASDAQ: FSLR) announced it was closing its German factory and laying off 2000 employees. Earlier in April, Solar Trust and Q-Cells filed for bankruptcy, following on the heels of the bankruptcy filing of Energy Conversion Devices in February. Turning from photovoltaics to solar thermal, BrightSource Energy withdrew at the last-minute its planned initial public offering on April 11, citing “adverse market conditions”.
Adverse market conditions, indeed! Quoting the immortal Vince Lombardi, “What the hell is going on out here?”
There are at least four fundamental forces at play that are battering the solar markets:
First, over the past few years, China has made an astounding push into solar energy. Whereas China was a non-factor in the solar industry not long ago, today China owns about 50% market share of supply. Achieving this massive leap-frog was clearly an act of state-driven industrial policy, as it required enormous sums of capital — far beyond what would be justified solely to supply the Chinese domestic market for solar energy. But, it’s more than merely state-sponsorship: in March, the U.S. Department of Commerce found that Chinese solar manufacturers had been “dumping” their products into U.S. markets at prices below cost, exploiting unfair subsidies available to them from the Chinese government but not available to non-Chinese players. Stay tuned to this brewing trade war.
Second, a ton of capital has been invested over the past several years in next-generation solar technology ventures. While the technologies have differed widely, all have been premised on significantly reducing the costs of solar energy and enabling the market to expand by orders of magnitude. Although some of these ventures have crashed-and-burned (e.g., Solyndra), others are still alive and may end up doing very well. At the very least, these ventures have pushed the boundaries of innovation in the solar industry overall, which in turn has reduced the costs of solar energy in many ways and aspects — which in turn is in fact exponentially expanding the potential market for solar energy.
Third, European demand for new solar installations has fallen off a cliff. Many of the leading European solar markets — Germany, Spain, Portugal and Greece — all had very aggressive “feed-in tariff” policies, promising very high prices for any electricity generated by solar installations. These prices had remained high, in fact escalated, while solar costs declined precipitously, enabling solar investors windfall profits: a classic bubble, which has now largely burst, given the financial straits in which many of the above-noted European countries find themselves. (Dedicated readers of this blog will recall my long-standing lack of enthusiasm about the feed-in tariff subsidy approach. Its flaws are now being starkly revealed.)
Fourth, plummeting natural gas prices — due to the surge in supply, associated with the shale gas boom enabled by the broad deployment of advanced fracking approaches — are causing U.S. electricity prices to fall, and solar companies struggle to compete. A quote from Andrew Beebe of Suntech (leading Chinese manufacturer, widely accused of dumping) in a recent New York Times article called “Clouds on Solar’s Horizon” speaks volumes: “We’re really not competitive” at current natural gas prices.
The first two forces have dramatically increased supply and reduced costs of solar energy, whereas the second two forces have substantially depressed demand for solar energy. When combined, the conclusion is simple: the solar market is experiencing a massive glut. Solar customers clearly benefit, but solar companies feel the pain acutely.
So, these are dark days for the solar industry. According to this article in the Washington Post, even the Chinese companies that have come to dominate are hurting.
But, as they say, it’s always “Darkest Before Dawn”…which in fact is the title of a new white paper by McKinsey & Company that presents the flip-side of this story. The authors — Krister Aanesen, Stefan Heck and Dickon Pinner — argue that the impending shakeout and consolidation is quite typical of industry at solar’s stage of maturity, and that there will be a bright future for solar energy not that long from now. That may be more true for customers and the planet, as low-cost and non-emitting solar energy becomes much more widespread, than for industry participants, who will face increasingly intense and relentless competitive pressures to constantly innovate and improve their technologies and business processes.
From an investment perspective, perhaps the bottom is approaching or is being hit right now for the solar industry. Earlier this year, Gordon Johnson, solar industry analyst from Axiom Capital Management, reversed his 14-month bearish position on the industry. However, as of this writing, SUNIDX is still trending downwards — though the decline is shallowing.
For those in the solar sector, the road is bumpy and will be for at least awhile. Seat belts fastened, please.