Solar's Evolution: Survival of the Fittest


This article is part of ourRising Star Portfolio series.

Shadows have fallen over the solar industry in recent weeks. Will this sector leave socially responsible and green investors burned, or do brighter days still lie ahead?

Ugly times, unfair advantages
Last spring, Bill Gates brushed off solar technology as "cute," but lacking the power to deal with climate change or the developing world's energy requirements. Unfortunately, we can't dismiss many of the industry's recent setbacks so lightly.

Solyndra's high-profile bankruptcy scandal has tarnished the concept of government-backed green investment. Supporting a green tech company with a shaky foundation hardly seems like a sound "investment," for taxpayers or anybody else.

The Obama administration's hasty push to provide Solyndra's government loan guarantees, when even its own analysts raised the alarm about the loans, only provides additional ammunition to those who dislike government-funded green investments.

Unfortunately for the struggling U.S. solar industry, China has no such qualms about subsidizing its own alternative-energy efforts. The country's three biggest solar concerns, Suntech Power (NYS: STP) , Yingli Green Energy (NYS: YGE) , and Trina Solar (NYS: TSL) , have all recently reported stunning sales and stoked investor excitement. However, U.S. investors (and solar end-users) should remember that the Chinese government is handing these companies billions in loans, major tax breaks, and free or subsidized land. These unfair advantages may help Chinese solar contenders, but they definitely hurt their U.S. peers.

Cute... or cutting a path into a cleaner future?
Don't assume that solar's future looks permanently dim. China's cheap solar products could face a backlash, as global consumers rebel against Chinese manufacturers' decidedly lax approach to environmental responsibility. Just yesterday, JinkoSolar Holding (NYS: JKS) apologized for polluting a body of water in Zhejiang province with fluoride waste, killing fish and sparking citizen protests at its factory. Solar's advantage hinges on its clean reputation. If Chinese solar companies end up causing pollution, their managers may be significantly missing the point.

Furthermore, even though the downward trajectory of pricing currently makes survival difficult for U.S. solar companies, those lower prices will help solar gain greater ground as a viable energy source overall, and lower the bar for installation. Higher levels of solar cell efficiency are also changing the landscape in favor of solar, too.

Bill Gates may scoff, but last spring, inventor and futurist Ray Kurzweil offered a very different solar outlook. Though solar currently delivers less than 1% of global energy needs, Kurzweil believes it will actually be able to power the entire world in 16 years.

His prediction hinges on declining cost per watt and progress in nanotechnology, which he believes will lead to to exponential growth very similar to Moore's Law. This rule, which has successfully predicted the dramatic increase in computers' processing power over the past few decades, is so entrenched in our collective consciousness that it can be hard to recall how mind blowing it was to see it proven out. Despite investors' current pessimism about the solar sector, the same sort of world-altering changes that put massive computing power in our collective pockets could also lead to a surge in solar successes.

The scary side of industry evolution
I recently bought shares of First Solar (NAS: FSLR) for my socially responsible Rising Star portfolio. Although the solar industry is currently plagued by conflicting prognoses, I believe brighter times lie ahead for this particular company. First Solar's reputation as one of the more stable businesses in the sector gives me even more confidence.

Meanwhile, if Kurzweil's solar prognostications are correct, energy's future could be all about power harnessed from the sun. The present looks precarious, but the future rewards of picking the winners in the solar industry should be hefty.

At the time thisarticle was published

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.