In 2012, A Tale Of Two Solar Industries

by: Dana Blankenhorn

For 2011 solar was a Dickensian industry. As in “A Tale of Two Cities.” It was the best of times, it was the worst of times.

It was the best of times because the “solar halo,” along with big heapings of government aid, brought huge supplies of panels and systems to the market. It was the worst of times because over-supply caused most to be sold at a loss, and the political reaction to financial losses has been to cut subsidies for 2012.

And what will be the theme of next year? Some would say Martin Chuzzlewitt, the Dickens story of a trip to an America peopled with rogues and scoundrels. But I'm calling for "Great Expectations," a story of strife with a fairly happy ending.

Fact is, solar energy is in the process of becoming cheaper than fossil fuel or nuclear energy. Many can be expected to keep generating power long after their useful life. When costs of panels and the useful life are correctly estimated, the lifetime cost of photovoltaic electricity is much lower than previously thought.

This is why companies like NRG Energy (NRG), which build and re-sell large systems rather than make panels, look like such great bargains, even at PE ratios north of Apple's. Their capital can be recycled, systems sold to willing buyers like Berkshire Hathaway (BRK.A)(NYSE:BRK.B) unit MidAmerican Energy, so the industry has a future at today's panel prices.

The longer-term future is for better panels whose price-performance makes today's technology look bad. 3D solar cells, printable cells, building integrated photo voltaic systems that don't need installers, and the use of viruses in solar panel production are being followed, in the lab, by multiple breakthroughs that will double panel efficiency over the next few years while opening new markets.

So while next year may be the worst of times for players like First Solar (FSLR) and Sunpower (SPWRA), whose technology is about to become obsolete, along with the two main solar ETFs, TAN and KWT, it will remain a very good time for installers and those they sell to. New companies are very likely to emerge from the current industry shakeout, and it's the great expectations of companies who achieve crossover we should all look forward to.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.