SAN FRANCISCO (MarketWatch) — After two years of tight supply, the solar market is now awash in modules and cells to make solar panels.
That is the word from two market-research firms this week, and it’s not clear if investors have baked in some of the more drastic observations into the shares of the many publicly traded solar companies.
But with all the gloom and doom that too much inventory implies for investors, there is also an opportunity for solar companies to try to further expand their industry.
First, how bad is the current glut and how did it occur?
Paul Semenza, a senior vice president at DisplaySearch, a unit of the NPD Group in Port Washington, N.Y., said that a big reason for the current glut of product is that government subsidies in Spain, a big market for solar panels, were cut.
“There was a tremendous amount of activity and then the subsidies were pulled back,” he added.
Spain accounted for 50% of worldwide installations in 2008, according to market research firm iSuppli, based in El Segundo, Calif.
“Solar-module prices have dropped 40% since the beginning of 2009,” wrote Henning Wicht, principal analyst for photovoltaics at iSuppli, in a report this week on the industry. He said that almost one out of every two panels produced in 2009 will not be installed, but stored in inventory. “This inventory glut will have a long-term impact on the solar business, with panels set to remain in a state of oversupply until 2012.”
ISuppli cut its forecast for solar-panel production for 2009 through 2012.
The solar business should use this opportunity to move product. Older technology sitting on shelves helps no one.
Some Wall Street analysts have also been warning investors. Last month, Al Kaschalk, a Wedbush Morgan analyst, said the earnings season would likely reflect the negative impact of “rapidly declining average selling prices, inventory write-downs and cancellations/push-outs of customer orders.”
Some stocks have taken hits. On Wednesday, for example, JA Solar Holdings Co. /quotes/comstock/15*!jaso/quotes/nls/jaso (JASO 4.50, +0.03, +0.67%) , based in Shanghai, reported a 51% plunge in second-quarter revenue and a net loss, including charges. The company also saw higher inventories and sharp price declines for its solar cells in the quarter. JA Solar told analysts it expects to see average selling prices fall another 5% to 10% in the third quarter. JA Solar’s U.S. shares tumbled 15% Wednesday to $4.47.
That was not the only pain inflicted this week. Steve Milunovich, a BankAmerica Merrill Lynch analyst, downgraded San Jose, Calif.-based SunPower Corp. /quotes/comstock/15*!spwra/quotes/nls/spwra (SPWRA 28.91, +0.15, +0.52%) to underperform from market perform. “We think the stock is somewhat overpriced given the company and industry outlook,” he said.
But more fallout is likely, just as is consolidation in the industry. Analysts estimate there are at least 200 solar companies, including startups, developing different types of solar-cell technologies.
One major issue in the solar business is its dependency on government subsidies. For consumers, spending tens of thousands of dollars on a solar roof does not have an immediate payback. Their monthly utility bills might drop from a $100 or so to a few dollars or even to zero, but it can take between 10 to 20 years before they can amortize the total cost of installing those energy-generating solar panels.
But the U.S. market could be a growth area for the industry, if the recent price cuts can somehow be used to bolster consumer demand. Instead of storing their products in inventory until demand returns, as iSuppli predicts many firms will, the industry should grab this moment to expand.
If the solar industry is to become more like the semiconductor industry, where Moore’s Law dictates that prices continually fall and the power of the chips increase, the solar business should use this opportunity to move product. Older technology sitting on shelves helps no one.
Lower prices might also inspire the Obama administration to come through with more tax rebates that are needed to spark buying interest on behalf of consumers.
“There is a good expectation that some of the stimulus programs in the U.S. will result in more demand here,” said Semenza of DisplaySearch. “But it’s one step removed from the end consumer in many cases.”
Most consumers, still in the grip of a recession, are unlikely to want to install expensive new solar panels, no matter how much it helps the environment, unless they can see a much quicker return on their dollars spent.
So until consumer spending comes back, perhaps the U.S. government should look at more stimulus for the solar industry. A great example is the solar-energy plant at Nellis Air Force Base, outside North Las Vegas in Nevada. Enabling more projects like that, instead of continually funneling money into the struggling auto industry, might have a quicker return for government and help make good on the administration’s promises to boost the clean tech industry.
But until new programs are introduced, investors will probably be paying the price.
Therese Poletti is a senior columnist for MarketWatch in San Francisco.
