Industry Insider: Creative Destruction And Opportunity In The Bloodied Solar Industry

Yesterday, I laid out the perverse situation of the photovoltaic industry, where a brutal price war – needed to bring down the cost of solar panels so that solar power could become competitive – wreaked havoc among manufacturers worldwide. A slew of them went bankrupt, others left the business. Funding dried up. Business models collapsed. The price war had been instigated by state-subsidized manufacturers in China, but now their cheap solar panels are causing another wave of losses in the bloodied industry [read my whole post… Next Shoe To Drop: Shoddy Solar Panels From China].

So today, I received an email from a sales engineer in the solar industry where, as he wrote, “bad modules and bad designs are common practice.” In fact, he spends most of his time “dealing with unhappy investors.” And his customers are precisely those companies that are now going under.

“Yes, the industry is in collapse mode, but it is not all bad, it is just a healthy shakeup needed in a maturing industry,” he wrote. Then he offered what he called “a slightly less gloomy take on the industry and with 50% more silver lining as well.”

The good news is that bankability is becoming more and more a buzz word. Big boys like First Solar and SunPower will no longer buy equipment from a startup manufacturer, and they are taking huge steps to mitigate risk. This business practice is quickly moving to all EPC (engineering, procurement, and construction) contractors and developers.

Other companies like ABB and Eaton were making huge investments in inverters, the electrical equipment needed to convert DC electricity generated by solar modules to AC electricity and then condition it so that it can be fed into a home, a business, or the grid. That was a smart move, he wrote, because every solar-panel array needed an inverter, and margins on them remained healthy.

There are a few modules companies like Samsung, Sharp, and Panasonic that are relatively bankable companies waiting in the wings. Samsung is actually waiting for some of these plants to become “bank owed” so they can be purchased for pennies on the dollar.

Once all these small players go belly up – and yes, it will get bloody, high-tech industry bloody – there will be a huge glut of manufacturing equipment. I am also expecting silicon producers to move to the US because of cheap natural gas.

Assuming that prices stay where they are today, electricity can be produced at $0.15/kWh over 20 years, unsubsidized and using bankable companies. Which is still too high where electricity is subsidized or regulated by utilities or government (most of the US, Canada…), but a good deal in unsubsidized/unregulated markets (California, the Caribbean…). So, the solar industry is far from dead. I just travel much more often south of the border to South America.

Other young industries have gone through the same bloodbath back in the day: automakers, coal miners, railroads, telcos… These shakeouts leave most companies in the dust, but a few survivors emerge that are usually stronger and more efficient. “The PV industry will be the same,” he wrote.

Creative destruction has been unleashed onto the industry, fed by a relentless price war that has brought solar power closer to the realm of the competitive – assuming the equipment will last 20 years of longer. A BIG assumption.

Solar manufacturers are constantly changing technologies and are substituting cheaper materials whose long-term durability hasn’t been tested sufficiently and won’t be known for years. And when it is finally known, these materials will have been replaced by newer and even cheaper materials. So for now, the math for power generators remains hypothetical. If the equipment fails in two, ten, or fifteen years, the hypothetically profitable deal becomes a loser. That’s a risk with all investments in equipment – a risk that investors know how to price if they know the probability of failure. But in the solar industry, that probability is like Jell-O that someone is desperately trying to nail to the wall.

Note the reference that silicon producers would relocate to the US because of cheap natural gas. Silicon is a key raw material for solar cells. Production is energy-intensive, and the cost of natural gas factors into the equation. An irony: cheap natural gas, the archenemy of solar power, the dark force that renders it uncompetitive, might be the element that draws part of the production chain of solar modules to the US. Creative destruction plowing into an industry to allow new opportunities to arise.

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