Solar Can't Tread Water Forever

The much-awaited report on alternative energy by marketing firm Clean Edge had some seemingly good news for the solar industry. The Clean Energy Trends 2012 report noted that revenues for solar increased 29% from 2010 to 2011, while installations rose by 69%. Notice anything funny? Yes, companies are losing more and more of their profit on the solar panels they are installing.

Aside from pointing out this fact in stark terms, this isn't really big news to solar investors. There has been a real bloodbath in recent months with big names in the industry such as First Solar (NAS: FSLR) , Suntech (NYS: STP) and SunPower (NAS: SPWR) losing up to 80%, 63%, and 50%, respectively, of their stock value over the past year. A major culprit has been the tanking price of silicon, which fell 40% during the time covered by the report. This scenario is shrinking margins to the point where the very survival of the sector has been bandied about quite a lot in recent months.

That's not even the worst of it. Clean Edge predicts that prices will fall even further until 2021, when the cost of installed solar systems will be about 33% of what it is now. Revenue is expected to reach $130 billion by that year. This may not seem like much if you consider that an increase of $39 billion will take 10 years to accomplish, while it took only one year to see a rise of more than $20 billion. However, the $20 billion push was also fueled by an expiring federal subsidy, and that $39 billion rise will be incorporating the far lower installation prices mentioned earlier, so actual panel installation will in fact be higher than that suggests.

Is there any hope for solar manufacturers?
Things are looking pretty grim for the solar industry at the moment. Even the current increased installation activity is unlikely to last, as it was most likely fueled by a key federal subsidy that expired at the end of last year, and which also has failed renewal recently. Although other federal subsidies will be intact until 2016, the decreasing profit margins don't leave a lot of wiggle room. Reductions of feed-in tariffs in Germany and other European countries have hit the industry hard, as well.

Unfortunately, even companies like First Solar, which uses cadmium telluride instead of silicon, don't wind up getting an edge because their technology is not quite as efficient as its competitors'. This was fine when silicon prices were high, and First Solar enjoyed the fattest margins in the industry, albeit for a less desirable product. But it's not so fine now that they are down in the trenches competing against everyone else.

One bright light on this darkening horizon appears to be ReneSola (NYS: SOL) , which has enjoyed a renaissance over the past three months, seeing its value rise over 90%. This may be due to revenue numbers for the fourth quarter that, despite declining year over year, still beat estimates. Despite investors' enthusiasm for the stock, the sad fact is that ReneSola's 2011 income fell precipitously due to a considerable decline in the price of its modules year over year, and 2012 doesn't look a whole lot better.

Will any of these companies be able to rally once the weak have been weeded out and the market stabilizes? It seems possible, particularly with renewed interest in alternative energy sources stemming from the Fukushima nuclear accident and the rising price of oil. Without subsidies, however, the future of solar has lost much of its brilliance, at least for the short term.

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At the time this article was published Fool contributorAmanda Alixowns no shares in the companies mentioned above.Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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