Solar Panel Makers See Demand Moving East

| About: VanEck Vectors (KWT)

America's natural gas glut is causing a re-think of demand patterns on the part of solar panel companies.

Chinese panel makers like JA Solar (NASDAQ:JASO), Trina Solar (NYSE:TSL) and Yingli Solar (NYSE:YGE) feel confident they will see a doubling of demand in their home market this year, to 4 Gwatts of capacity. That's out of a total global demand that could be as low as 30 Gwatts (according to Bloomberg) or as much as 35 Gwatts (according to Trina).

This will be good news for those who buy solar ETFs like KWT and TAN, which lost over half their value in the last year. The ETFs are dominated by big Chinese solar players, and last year's plunge in prices (as much as 47% by some estimates) resulted in many panels being "dumped" into other markets, which nearly killed the U.S. industry.

Grid parity or convergence, the point at which solar energy becomes the cheap energy, remains a moving target. In China, which has expensive grid energy, this point may have already been reached, according to Chinese panel makers. In the U.S., where shale gas is causing natural gas (and electricity) prices to plummet, grid parity is some years away.

But the U.S. is becoming relatively isolated from the demand side of this market. Grid prices are higher in Europe than they are here, so grid parity is closer there. Much of Asia and Africa lacks any grid at all, and solar delivers non-grid power without competition there. Thus aggregate demand continues to rise, regardless of what happens here.

Still, the gas glut means that for the domestic industry we're looking at another year of looking for companies like BioSolar (OTCQB:BSRC) to deliver breakthroughs that can get costs below the 50 cents per watt level, half of where First Solar (NASDAQ:FSLR) said its costs were last year. (First Solar, however, does not benefit from improved polysilicon backplanes.)

There are many ways in which this can happen. BioSolar's technology increases yield directly with a more efficient backplane, made from organic materials. FirstSolar has been focused on direct improvements to its Cadmium-Telluride technology, not only in terms of yield but in terms of manufacturing costs. The use of micro-inverters and building panels as simpler plug-and-play systems cuts installation costs, which goes directly to the solar customer's bottom line. Simplifying government approvals, financing options and distribution channels is another way to cut costs.

Given the gas glut, however, many of these improvements will take place under the surface in 2012. Increased demand from China will give companies like First Solar a respite, assuming it materializes, but the dominance of Chinese polysilicon will remain in the near term, and most of the gains in the U.S. market this year will again go to venture capitalists, not public investors.

For public investors, you're depending on China to fulfill its promise as a solar customer, or you have a longer-term horizon.

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

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