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There does not seem to be many bright spots in today's solar industry. Bloomberg reports that solar panel makers' production exceeds demand by 53%. That means that there is no market for more than half of the panels that the industry is marketing. If that was not bad enough, 11 U.S., French and German solar equipment makers have gone bankrupt in the last year.

Such reports are sure to cause a collapse in solar panel stock values. After all, how are companies that seem to have no market for products supposed to generate earnings per share or pay a dividend?

Things have become so bad that many customers are asking that panel installers provide a warranty insured by a third-party reinsurance firm, such as Munich Re. Such companies cover warranty claims even if the solar panel maker goes out of business. Offering such a warranty can be the only way that solar companies, such as SunPower (NASDAQ:SPWR), can get major corporations to buy their products.

A number of big corporate names, including Coca-Cola (NYSE:KO), got burned when Solyndra abruptly declared bankruptcy and went out of business last year. Most customers have had to use more caution when buying solar panels, or when buying a home fitted with solar panels.

Warranty Claims Could Eat Up Solar Panel Maker Profits

Warranty claims, many of them resulting from manufacturing defects, now appear to be one of the biggest expenses facing panel makers. Some recent news stories of such claims could eat up profits at solar companies.

First Solar (NASDAQ:FSLR) has received more than 5,000 warranty claims since 2008 because of manufacturing deficits. Bloomberg reported that S&P estimated that First Solar has paid $37.8 million in warranty claims since then. The warranty claims apparently result from defects that cause First Solar devices to fail in warm climates.

Unlike some of its competitors, First Solar does not use a third-party reinsurance firm. Munich Re has calculated that most insurers don't have sufficient cash reserves to cover such claims, so it has started insuring solar panel systems. It should be pointed out here that Munich Re is in the reinsurance business, so it has a vested interest in exaggerating this danger.

Most of First Solar's competitors, such as SunTech Power Holdings (NYSE:STP) and Kyocera (NYSE:KYO), don't have a third-party reinsurance on their products either. Nor does Sharp, First Solar's largest competitor in the thin film solar business.

Third Party Reinsurance Could Be the Key to Increased Solar Market Share

It should be noted here that First Solar could be costing itself some business from major customers, including large corporations and government agencies, by not offering such reinsurance. If it were to start offering such insurance, it could raise its stock value by reducing some of the risks associated with solar and increasing market share. If it does not, First Solar could see its stock value dropped, because customers might not be able to get its products financed in the future.

Dan Danh, a vice president at East West Bancorp, told Bloomberg reporters that his bank would not finance solar projects that did not carry a third-party reinsurance. East West and U.S. Bancorp (NYSE:USB) set up a $47 million fund to finance 14 solar projects in February. Customers without a third-party reinsurance would not be able to apply for those loans.

Several solar panel makers, including LDK Solar (NYSE:LDK), Canadian Solar (NASDAQ:CSIQ) and China Sunergy Limited (NASDAQ:CSUN) offer a third-party refinance. This could give them a leg up in an extremely volatile solar power industry.

Solar Power Efforts Expanding in the Middle East

Even though the solar panel industry is down, efforts to increase the use of solar power are expanding in the Middle East. An Israeli company called Arava Power has raised $200 million from investors as the Noy investment fund, the French energy company EDF, Bank Hapoalim, Amitim (a pension fund manager), and the Israeli insurance company Midgal. Arava will use the money to build eight solar power plants in Southern Israel's Negev desert that are supposed to generate 58.5 megawatts of power. Similarly, Saudia Arabia wants to generate at least 10% of its electricity from the sun by 2020.

This kind of news should raise the price of solar stocks because it proves that there is still a viable and growing market for solar panels. It also shows that major investors are still willing to risk large amounts of money in this industry. Solar power stocks should go up on this kind of news.

Israel is not the only Middle Eastern country interested in harnessing solar power. Saudi Arabia wants to spend some of its oil money to become a major producer of solar electricity. Switching to solar power would make a lot of sense for the Desert Kingdom because it now gets most of its electricity by burning crude oil. If the Saudis could get their power from the sun, they would have more crude oil to sell.

Saudi Arabia's energy planning agency has unveiled a plan to generate one third of the country's electricity with sunlight within 20 years. The kingdom wants to spend $100 billion on technology to generate 41 gigawatts (41,000 megawatts) of electricity.

This is obviously very good news for solar energy stocks because it means that there is a huge market for solar panels and power systems out there. It also means that there are paying customers that are serious about buying this technology. Makers of solid state crystal photovoltaic solar panels, such as SunTech and Kyocera, should be the big winners here. Their technology is sturdier and more likely to stand up under harsh desert conditions. Solar power stocks should definitely move up on this news.

Manufacturers of photovoltaic film, such as First Solar, will have a much harder time tapping the Saudi and Israeli bonanza. Their thin film develops defects when it is used in areas with high temperatures. Saudi Arabia is one of the hottest places in the world, and it has other problems, such as dust storms to deal with. Despite these challenges, First Solar has opened an office in the Persian Gulf area to tap the Middle East market.

If companies like First Solar can figure out how to make film that stands up in the harsh conditions in the Saudi desert, they could greatly increase market share. The newer, more rugged film would presumably have fewer defects and breakdowns, which would reduce the number of warranty claims and the need for reinsurance. It could also make the financing of solar panels easier, which could also grow market share.

One big challenge that solar companies could face is that the Saudi government wants to award as many solar contracts as possible to Saudi nationals. That could make it tough to enter that market. It could also be a major opportunity because it could lure more investment from Saudi nationals.

So, it seems that solar companies do have a fairly bright future, despite the shakeout in the industry. If they can tap it, there is a huge potential market for them in some parts of the world.

Source: These 8 Solar Stocks Could Rise On Saudi Demand