Playing The Polysilicon Glut

| About: NRG Energy, (NRG)
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It's a tale of two cities in the solar energy sector.

The buy side in this case is London. If you are buying and installing solar panels, you're getting some incredible bargains. The price of polysilicon modules have fallen to about 80 cents/watt, approaching grid parity.

So a company like NRG (NRG), which buys solar farms and puts the energy into its grid, are getting better pricing. All solar developers - commercial, residential, and utility-grade - are now able to deliver more energy closer to their customers than ever before, putting long-term pressure on prices from other sources.

The sell side in this case is Paris. If you make polysilicon panels, or even produce the raw material for such panels, you're in a world of hurt. MMEC (WFR), the large polysilicon producer, is being hammered with prices for what they make falling 65%. German producers are also being hurt, and in China the shake-out has begun.

The result is a game of governmental finger-pointing. While the U.S. accuses China of selling panels at below-cost, China accuses the U.S. of dumping its polysilicon on them. Out of 43 polysilicon plants in China, only 8 are still operating, and those at reduced rates.

So if you were long Yingli Energy (YGE), JA Solar (JASO), TSL (TSL), Canadian Solar (CSIQ) or even ETFs like KWT (KWT) and TAN (TAN), you're still sitting on huge losses, losing almost half your investment so far this year after getting a 50% haircut over 2011, as the glut developed.

This is unsustainable. The Chinese producers have to consolidate, and they have to cut production on the current technology. They have to get prices back up to profitable levels.

Until those problems are dealt with, polysilicon makers like Suntech will continue getting more of the market than cadmium-telluride players such as First Solar (FSLR) or CIGS players such as Stion, which is still privately-held.

But history says the answer to these problems doesn't lie where you think. It doesn't lie in higher prices.

As in past boom-and-bust cycles involving silicon, going back over 40 years, the answer lies in new technology that can deliver profits at prices that are actually below those being paid today. Such technologies will not need any subsidy, either from government or from "green energy" credits being peddled by private companies.

The answer, in other words, lies with VC-funded companies that have a 50-50 chance of failing, and with "pink sheet" outfits such as Solar3D, that lie below the radar of conventional investors.

Until these solutions scale, in other words, stay on the "buy" side of the market.

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