Investments pour into solar energy, but the sector is scary

When Rick Hanna and his fellow energy analysts at Morningstar in Chicago sat down recently to discuss solar energy stocks, the question on the table was this: Is solar the next Internet-style bubble?

Last year’s IPO hype aside, solar is an industry driven by commodities, not technology: Any declines in crude oil prices will be felt because such activity upsets the price competitiveness of solar energy. Then there are those ongoing shortages of polysilicon, the chief raw material used to make most solar panels.
Despite recent announcements of capacity expansion, the sector is still jittery over supply. In May, Morningstar reported that spot prices for the raw material hit $500 per kilogram. Though contracted prices are still well below that level, continued supply restraints could cut into future gross margins, Hanna said.

“This is a sector that depends on government subsidies, that can’t yet stand on its own,” he said. When governments tinker with their support of solar energy subsidies, it can send shock waves through the industry.

After months of debate, Germany’s Parliament passed a law in June reducing customer subsidies on solar purchases – known as feed-in tariffs – by 10 percent. While that is better than the 25 percent the industry was bracing for, it was nonetheless unsettling given Germany’s status as the world’s largest solar market based on installations.

With oil and gas prices skyrocketing and output capacity for both peaking, the very real threat of energy security as well as affordability has finally arrived. This, coupled with mounting public concern over impact of carbon emissions, has public policy makers in a hot seat with little relief in sight. As Hanna put it, the world is, “hitting the pain threshold” where the opportunity costs associated with not supporting rigorous renewable energy programs far outweigh their upfront capital expenditures.

And even if oil and gas prices do correct in the short-term – diminishing for a time the case for alternatives including renewables like solar energy – mounting evidence shows that fossils fuels are in their twilight, for transport fuel and for power generation.

In fact, while public attention is squarely focused on prices and availability at the pump, industry experts warn an even larger supply crisis is mounting around power generation.

According to a published report from Exxon Mobil, the largest energy-consuming sector is not transportation or industry but power generation. By its own calculations, the U.S.-based oil and gas giant estimated some 35 percent of the world’s total energy usage goes toward the production of electricity. Within two decades, global demand for electricity will skyrocket, fueled in large by rapid economic growth in developing markets where per-capita energy use is still relatively low.

International Herald Tribune