It's no secret that the solar industry is struggling mightily.
The latest proof?
Suntech Power Holdings (STP).
In its heyday, the company traded for almost $90 per share, with a market cap of roughly $16 billion. As recently as 2011, it ranked as the world's largest producer of solar panels, too.
Fast forward to today, though, and it's kissing concrete on the courthouse steps. It filed for bankruptcy protection a few weeks ago. And now shares trade hands for less than $0.50.
Like I said, times are tough for solar companies.
It's no secret, either, that I'm not a fan of solar investments. (See
here and
here.)
But it's not because I couldn't care less about the environment. It's all because of economics.
I refuse to invest in
any company that requires hefty government subsidies to generate profits. And all solar companies do.
The irony here is that solar's terrible economics could now end up being the industry's salvation.
I know. Sounds back-asswards. So let me explain what I mean and, more importantly, tell you how we can start to position ourselves to profit from the situation.
More Bankruptcies, Please!
"Almost all of the world's largest solar panel makers are in danger of going bankrupt within a year."
So says Kevin Bullis of
MIT Technology Review. And he's absolutely right.
Overinvestment has led to a worldwide glut of solar panels. In fact, there's enough capacity right now to produce upwards of 70 gigawatts' worth of solar panels. Yet, current demand checks in at roughly 30 gigawatts.
The end result? Solar panel manufacturers can't drop prices fast enough to overcome the supply glut and drum up sales. Couple that with declining subsidies, and profitability isn't even a remote possibility.
Forget profitability, though. The most troubling impact of plummeting prices involves innovation. It's been put on life support.
How so? It's simple, really...
Solar companies are too preoccupied with survival to even bother innovating. And even if they wanted to invest in new innovations in-house, they can't afford to develop them or upgrade production lines to incorporate them. Likewise, they can't afford to partner with promising startups to "import" innovations.
And yet, innovation is the solar industry's only hope. Without it, solar energy will never be able to compete with fossil fuels on a cost-per-watt basis.
As Bullis notes, "The best way to reduce overall costs significantly is through improved solar cell efficiency, since that can both reduce the cost per watt of solar panels, and also reduce installation costs by reducing the number of solar panels needed."
I concur. And I can assure you that there's plenty of room for innovation when it comes to efficiency, too.
Consider: The average solar cell only converts about 17% of sunlight into electrical energy. That's pathetic.
I can also assure you that there are a handful of promising startups on the cusp of breakthroughs that could dramatically improve solar cell efficiency. (I plan on sharing at least one of them with you next week, as it represents one of the best potential investments.)
But these startups desperately need capital to complete their work. And it's going to have to come from solar panel makers, because venture capitalists are tapped out.
Bottom line: The solar industry desperately needs to start innovating again. Yet, that requires money, which is in short supply because of the worldwide solar panel supply glut.
The fastest way to rectify the situation would be to bring about price stability by drastically eliminating excess capacity. That would require a few hundred solar companies going belly-up, just like Suntech.
Forget creative destruction. I'm talking about plain old destruction here.
So attention all solar companies: Hurry up and fail! By laying down your own lives, you might actually resurrect your industry's.
Ahead of the tape,
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Louis Basenese
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