The birth of the computer mouse is a famous but cautionary tale from Silicon Valley. In it, Xerox develops an early version of the now-omnipresent PC pointer, but Steve Jobs and Apple actually make it omnipresent. Those who move first do not always end up dominating a particular field. This applies to another hot technology, solar power.
In June of 2008, solar power looked poised to conquer the world. The 12 largest manufacturers had a combined market value of about $US70 billion ($67.9 billion), according to Sanford C. Bernstein. Today, they are worth about $US6.4 billion. One of them, Germany’s Q-Cells, filed for bankruptcy just last week. On the same day First Solar, worth more than $US20 billion in 2008, saw its stock drop by almost 8 per cent. The company is now worth less than $US2 billion.
First Solar has suffered several setbacks recently, one being having to budget more money for warranty provisions because its solar modules may suffer “increased failure rates in hot climates”, which seems contradictory to the purpose of the systems and the climates of the regions where they are popular.
The more pressing issue for First Solar and other major manufacturers is a structural shift in the industry. In 2008, various governments, particularly in Europe, offered generous subsidies to encourage the change to solar power; carbon caps in the US seemed not far off; and financing flowed easily. System manufacturers were expanding rapidly and lowering costs to make solar power competitive with rival sources such as coal and natural gas.
One financial crisis later, public subsidies and private financing are far tighter. In the US, shale gas has upended the economics of electricity. Citigroup believes that even at an installed cost of $US1.50 per watt for new projects, and even in the sunniest regions, solar is unable to compete with natural gas a low cost of $US5 per million British thermal units. Right now, gas costs less than half that and even utility-scale US solar projects cost well north of $US2 per watt.
Still, the solar-power industry has successfully cut the cost of equipment. The problem is how this was achieved. All those enticing subsidies attracted competitors, particularly from China. The result is an industry that will likely end the year with the capacity to build 40 gigawatt’s (GW) of solar modules, according to Citi – which also estimates demand this year of just 24GW. The bank doesn’t expect annual demand to hit 40GW anytime this decade.
This oversupply is driving down prices for solar panels. Bernstein puts the compound annual decline at 32 per cent between 2007 and 2011, noting that this number is not dissimilar to the decline of the price of computer memory, which has fallen at an annual compound rate of 33.4 per cent since 1974.
Such falls are great for the technology as it expands the available market. But with the resulting focus increasingly on price, firms involved are disadvantaged as the economic benefits leak away to others. Falling profit margins and share prices – as well as bankruptcies – are the unfortunate result.
Another analogy can be drawn with the US exploration and production sector, which did excellently to develop lots of natural-gas reserves. But the consequent oversupply has damaged the economics of the business. Value is accruing instead to those who transport and use the fuel.
The bull case for solar power is that when prices drop low enough to compete without the aid of government subsidies, the resulting expansion of demand will further the industry’s fortunes.
The victors will not necessarily be the pioneers we are familiar with today. Rather, they will likely be companies large enough to compete on price and absorb the inevitable losses that afflict most manufacturing industries that are prone to bouts of superfluity. A smaller group of large companies such as General Electric, for example, look more like the long-term winners as solar power eventually finds its place in the spotlight.
