Companies that manufacture solar power equipment had a great year in 2010 thanks to generous government subsidies. While 2011 may turn out to be a year of transition, most solar companies should do well and the long-term prospects for the industry are bright indeed.
Solar power installations worldwide increased 120% in 2010 with 16 gigawatts added, up from 7 gigawatts added in 2009. That brought total capacity to 40 gigawatts, still just 0.2% of the world's electricity generation in 2010. That leaves a lot of room for growth.
The rate of growth will slow in 2011 – the world will install 22.2 gigawatts this year, an increase of 39.3% over 2010, according to projections by IHS iSuppli (NYSE: IHS) – but increasing activity in the United States and China should re-ignite the market.
The European Photovoltaic Industry Association said in a report earlier this month that by 2015 it expects global investment in solar panels to roughly double from $46 billion in 2010.
Until recently, most of the growth in solar power installations was coming from Europe, led by Germany. In fact, Germany alone consumed almost half of the world's solar panels in 2010. Europe as a whole accounted for more than 80% of the global solar panel market, $65 billion worth of business.
Of course, that pattern figures to start shifting in 2011.
The Shifting Solar Landscape
The primary engine driving solar panel adoption in Europe has been extensive government subsidies.
However, Germany, Spain, and France started cutting back on the subsidies in 2010, partly because of increasing budget constraints and partly because they were working too well – the subsidies encouraged an excessive number of projects. France imposed a three-month freeze on projects in December after getting swamped with up to 3,000 applications per day.
China has lagged in deploying the technology as it studies the European model. China last year accounted for only 3% of the global solar panel market as a purchaser, even though it produces about half of the equipment sold.
"China is definitely playing a longer game in solar," Daniel Guttmann, head of renewable energy strategy at PricewaterhouseCoopers LLP inLondon, told Bloomberg News. "It has done a lot to subsidize its manufacturers."
The Chinese government, via the China Development Bank, approved $19 billion in loans for companies involved in the manufacture of solar panels just in the last six months of 2010. The strategy, apparently, is to reduce the cost of the technology before investing heavily in building solar power facilities. Still, China expects to add 20 gigawatts of solar power by 2020.
Another key hurdle preventing more rapid adoption of solar power is that the cost to generate it still exceeds that of more traditional energy sources. Though the cost of solar power continues to fall, it won't become a truly attractive alternative until it reaches so-called "grid parity."
Still, some companies, such as AU Optronics (NYSE: AUO), are investing now with the expectation of cashing in down the road. AU, in a joint venture with SunPower Corporation (Nasdaq: SPWRA), is building a $1.3 billion solar cell plant in Malaysia. Likewise, Taiwan Semiconductor Mfg. Co. Ltd. (NYSE ADR: TSM) is building a solar cell facility in Taiwan.
"Over these two or three years, there will still be a lot of dynamic changes in the industry [structure], but after that, the market will be more mature," James Chen, the head of AU Optronics' solar business, told the Financial Times. Chen added that he thinks the entry of larger tech companies such as Samsung Electronics (PINK: SSNLF) and Hon Hai Precision Industries (PINK: HNHPF) into solar could hasten the arrival of grid parity.
Until then, the solar industry will remain largely dependent on government subsidies to drive growth. But with Europe scaling back and China holding off, only the United States can provide any short-term kick to the solar market.
A Brighter Future
Some recent positive developments hint that the U.S. market could accelerate this year. U.S. President Barack Obama designated $8 billion for clean energy research in his 2012 budget (though deficit-conscious Republicans in the U.S. House of Representatives may well slash that) and the state of California is close to requiring that utilities generate a third of their power from renewable sources.
And the European Photovoltaic Industry Association report predicts that the United States will overtake Germany as the world's top solar customer in 2014.
"While it makes sense on paper that the second half of 2011 will be weaker, there is a good chance that something could surprise us: that could well be the U.S.," Commerzbank analyst Ben Lynch told Reuters.
If any dark clouds lurk on the solar power horizon, the stocks of the companies that make the equipment haven't noticed. Two companies that reported earnings within the past week, San Jose-based SunPower and China's Yingli Green Energy Hold. Co. Ltd. (NYSE ADR: YGE) both beat estimates and gave positive outlooks for 2011.
In fact, the stocks of solar companies have done very well in recent months, rising about 30% on average heading into earnings. Yet even with those gains, most solar stocks are far below highs reached in late 2008 and early 2009.
"Things look pretty good for the solar market as we enter the first half of the year," Auriga USA analyst Mark Bachman told Reuters. "Italy and the U.S. are starting to pick up all of that slack in Germany right now. That adds an air of bullishness."
A few companies of interest include:
Yingli Green Energy: Yingli gained a foothold in the U.S. market by signing a deal to supply San Diego developer Borrego Solar with photovoltaic modules. The company reported last week that it expects shipments to increase 60% in 2011.
SunPower: SunPower should benefit from having projects already underway in Italy, which is expected to grandfather existing projects even if the country tightens policy on solar power subsidies. The company recently opened a manufacturing facility in California to exploit increasing U.S. demand.
Trina Solar (NYSE: TSL): A China-based company with a global footprint, Trina Solar is investing $800 million in a solar cell park in China. Trina's CEO has said he expects 30% growth for 2011, including a doubling of business with the U.S.
Suntech Power Holdings (NYSE: STP): Suntech is expected to ship 1.5 gigawatts of equipment in 2011, which would make it first among all solar suppliers. The company is working on a low-cost technology that would increase solar cell efficiency, a major goal within the industry. Suntech is also active in the growing U.S. market.
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