Why the Gloom on Solar-Energy Stocks?

Solar-power equipment makers’ profits have been hit by the credit crunch and the glut of a key raw material

The global credit freeze and a supply glut of polysilicon—the key raw material used in photovoltaic solar panels—have hurt solar-power equipment manufacturers’ earnings this year. Over the long run, some analysts are hopeful the lower prices will make the technology more competitive with conventionally generated power and make these companies more compelling plays in the eyes of investors. But the road to solar riches remains bumpy.
The move from shortage to oversupply of polysilicon in just around 18 months has caused a major shift in business models and market share. Panel manufacturers that locked in fixed-price contracts for polysilicon, which gave them an edge over producers that had to pay much higher prices in the spot market, now have to scramble to renegotiate contracts at lower prices or write down the value of their inventories.

Another headwind for the industry: the unwillingness of banks to lend money needed for solar projects across much of the world. Indeed, the solar industry has taken lumps in a number of countries. For example, the market for solar gear in Spain, which had been one of the largest in the world, collapsed as a result of the Spanish government capping subsidies on solar-panel installation at 0.5 gigawatts after installations hit 2.67 gigawatts last year, according to analyst Edwin Mok at Needham & Co. in San Francisco. That severely limits the growth potential in Spain’s market, since demand drops when subsidies aren’t available. One bright spot: Germany’s market has grown this year, though not enough to offset the contraction in Spain.

Some analysts expect demand for solar panels to rebound as early as next year. The drop in polysilicon, though hurting earnings now, will be beneficial over the long term to the extent that it makes solar a more competitively priced alternative to other forms of power and boosts demand. In an Aug. 13 research note, UBS analyst Robin Cheng said she expects photovoltaic electricity to be competitive with power from the grid by 2010 in those parts of Europe and the U.S. that get more regular sunshine, and by 2014 in regions that experience more cloud cover. “Until then, the industry is heavily dependent on government incentives,” she writes.

BusinessWeek