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Prosperous solar PV sector confronts specter of looming investment 'bubble'

The solar photovoltaic industry since 2000 has established the best track record for growth among all energy sources, oil and gas included.

"A far more probable scenario is that the weak, inefficient players get weeded out" - Andrew Leonard,

But some analysts caution that solar PV companies are ramping up capacity too fast, threatening the market with a glut of solar cells and modules that will sink company profits - and perhaps some PV companies themselves.

So is the high-flying solar photovoltaic industry heading for a fall in the coming years?

Several analysts have warned over the past two months that solar PV companies are on the brink of a major tumble in the prices of their shares. Bear-market forecasters are predicting that the industry, following years of chronic shortages of PV-grade silicon and lack of production facilities, could suffer from major overcapacity through the end of the decade.

The PV industry has thrived in recent years as solar markets expanded in such countries as China, Germany, Spain and the United States.

The Worldwatch Institute, a Washington, DC based think tank, citing industry analyses, reported in its Vital Signs 2007-2008 that global production of PV cells jumped 41% from 2005 to 2006 to a record 2,521 MW, making it the world's fastest growing energy source, with global production (see chart: 2010 projections for solar photovaltaic production, GW) in 2006 six times higher than in 2000.

Some observers, however, predict the good times will soon come to an end.

Writing on the Alternative Energy Trading blog on December 31, 2007, analyst Jerome Ball said, "I've recently gone from near-term bullish to bearish on the PV stocks based on two trends I see emerging for 2008-2010 - first, that cells and panels will be in major oversupply by year-end 2008 and second, that demand is set for a pause due to declining or delayed incentives in Germany, Spain, and the US."

Ball calculated, based on PV companies' own projections for expansion, that cell producers will have installed capacity of 12.2 GW of annual production by the end of the year and more than 17 GW of production capacity by end-2009.

This capacity, he cautioned, far exceeds even the brightest scenarios for PV installations.

The European Photovoltaic Industry Association, for instance, forecasts that under favorable policy conditions 5.6 GW could be installed annually by 2010 (see chart: Global annual installations of photovoltaics).

Solar PV growth

Even under a pessimistic scenario, the global PV market will at least double in size from 2006 to 2010, according to EPIA estimates. "Not many industry sectors are facing such positive growth rates," the association said.

Still, even under the most upbeat industry forecasts of 8 GW of annual expansion, PV production will far outstrip installation, Ball said.

"The PV industry is heading for at least 50-100% capacity oversupply," Ball wrote.

"While manufacturers have been aggressively ramping for the last 18 months, since October 2007, the rate of capacity increase announcements has recently accelerated to new highs. Not only does everyone want in to PV, but they all know they need to scale up to top-10 status in order to stay viable. In addition, PV has relatively low barriers to entry."

At the same time, he noted, PV policy stalwarts like Germany and Spain are planning to gradually reduce or cap their feed-in tariffs for electricity produced from PV (RER 146/3). The bottom line, he said, is that solar PV is facing troubled times.

"I'm not a pessimist on PV; there's basically infinite demand, post-parity, at sufficiently high scale and low enough prices," Ball wrote, referring to the prospect of PV achieving grid parity with other electricity sources.

"But the industry will have its share of booms and busts along the way, and right now, we're heading for a 'bust' even as the current headlines all say 'boom.' It won't happen overnight; it'll take a few quarters to develop, but it is coming."

Andrew Leonard, writing in the online magazine, sounded a less pessimistic note - but still cautioned that the industry could be headed for a shakeout.

While Ball warned of policy retrenchments in countries that in the past have strongly supported solar PV, Leonard said there are too many policy unknowns to expect the industry to go bust, even in the short term.

He pointed out that the US market could expand if Democrats win control of both the White House and Congress this year, and that China's appetite for energy is so insatiable that it might gobble up any oversupply of solar cells and modules.

The solar industry, then, is unlikely to simply crash and burn, he said.

"A far more probable scenario is that the weak, inefficient players get weeded out," Leonard said. "It isn't easy making money in the semiconductor or computer industry - just ask Dell. As consumers we should hope that holds true for solar power.

Vicious, nasty, brutish, only-the-strong-survive competition based on relentless cost-cutting is exactly what the doctor ordered."

Rimmy Malhotra offered similar warnings about the PV industry's prospects January 23 on The Motley Fool Web site, saying some solar PV stocks are substantially overvalued - noting, for example, that First Solar's price has soared 400% over the past year.

"Despite First Solar's massive appreciation, I just don't get it at these prices," Malhotra said. "With a forward P/E ration at around 80, First Solar makes even Google look cheap. These numbers send shivers down my value-investing spine."

Created: February 27, 2008

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