At its core, thin-film solar technology refers to processes that do not use polysilicon materials to turn sunlight into energy. First Solar produces its panels using cadmium-telluride as the main ingredient. The company’s size gave it production-cost advantages over a variety of rivals, and in 2009 that difference was around 50%. Adding to this advantage was the fact that polysilicon prices were trading at historic highs of around $700 a kilogram.
As with most commodities, sky-high prices attracted new producers, and production increased. Polysilicon prices plunged to about $30 at the start of the year. These days, silicon-based solar panels aren’t much more expensive than First Solar’s thin-film panels.
Adding insult to injury, Chinese solar producers have been accused of selling their panels at prices far below cost, which they’re able to do because of subsidies provided by Beijing. Overproduction coupled with the below-cost pricing has caused photovoltaic-module prices to plunge more than 75% in over the past three years.
But perhaps the biggest issue facing First Solar and the rest of the industry is the economic situation in Europe.
Europe has traditionally been a bright spot for renewable energy, with Germany and Spain leading the way in subsidizing alternatives. Various feed-in tariffs and subsides have allowed utilities to add solar to their energy mixes at costs comparable to traditional fossil fuels.
But in the wake of Europe’s continued debt crisis as well as the plunge in panel prices, these subsides are being cut. The latest came at the end of March, when Germany announced it will reduce solar subsides by 29% — double analyst estimates. The rub for First Solar is that Germany accounts for about 50% of the company’s installation capacity.
Where does that leave investors?
With former industry leaders such as Q-Cells filing for bankruptcy and even Chinese producers such as Suntech Power (NYSE:STP) announcing factory closures, the near term isn’t shaping up to be a good for the solar industry. Current supply-demand dynamics are terrible. According to Bloomberg New Energy Finance, solar factories will be able to make as much as 38 gigawatts worth of panels this year, or about 54% more than estimated demand.
Still, for those looking at the industry as a long-term bet — perhaps decades long — there are glimmers of hope. Overall global energy demand continues to grow unabated. That has resulted in a record number of new solar installations over the last few years. Analysts expect any slack demand stemming from Europe to be made up by increases in Asia and the U.S. China has made renewable energy a priority during in its various five-year plans, and the region will continue to be driver of new capacity for years to come.
In addition, prices for solar stocks have never been cheaper, with many trading about 70% lower since the beginning of 2011.
First Solar will most likely survive. The company plans to focus on developing solar power plants and offering services to utilities rather than selling just solar panels It already entered this market back in 2007 and could parlay its leadership position into deals with larger utilities.
While I wouldn’t buy just yet — the solar shakeout is just getting started — the overall sector is starting to look like an interesting play for the long term.