One of the most disturbing things about the solar industry, the rising star of cleantech, has been its recent rising prices. According to the SolarBuzz.com survey, module prices are up close to 7% in the US this last year, after years of falling.
The main culprits according to most solar watchers are a combination of:
High demand driven in large part by the US state and German subsidy programs Tight supply on module capacity Tight supply on silicon capacity
The first issue here is that rising solar module prices threaten the viability of the industry, at a time when it is gaining momentum and trying to reach critical mass. Worse, almost every manufacturer of solar modules is increasing capacity trying to take advantage of the industry growth. As a result, we think the industry may be in for a rude awakening if that capacity increase begins to outstrip demand, or if key subsidy programs underpinning growth falter for political reasons.
The businesses most at risk are the young technology developers, who are spending significant equity dollars on technology development and building to a critical manufacturing and sales base. These are the businesses that the VC community is funding at a tremendous rate. These aren't businesses that are throwing off tremendous amounts of cashflow to weather a storm.
One concern, if the market does turn down, the major Japanese, European, and oil company solar manufacturers are likely to lower prices to keep their factories full, and really hurt the smaller businesses. Keep in mind, if you launched a solar business 5-10 years ago, reaching a 20 MW plant would put you in the top 20 manufacturers. With that same launch today, looking ahead five years to when your technology is commercialized, you will have to hit perhaps 50-100 MW of capacity to be an elite player. That's a big difference that I don't think the investment community has understood yet.
I thought now was a good time to rethink some of those conclusions, given all the recent news in the solar energy sector, and add a few new thoughts:
I still believe a silicon price reversion to the mean is coming, and a shakeout with it whose winners are the lowest cost and highest capacity providers. Young technology developers are still the most at risk from this. We have since written about Applied Material's (NYSE:AMAT) entry into solar and the potential for the double junction tandem cells - which are really hybrid thin film/advanced silicon cells. I think this technology, along with dramatically increased industry capacity, and First Solar's (NASDAQ:FSLR) low cost advance into the sector, is moving the bar for new entrants. So perhaps I was off on my expected timing. And perhaps a coming shakeout will be even more drastic. Or maybe I'm dead wrong and the whole industry will keep growing with no business cycles to worry about. You decide what you want to believe.