Buying low: Solar industry’s imminent return to health and profitability

USA: Overcapacity and poor margins have bankrupted a multitude of solar suppliers and forced corporate investors out of the market over the past two years.

However, according to Lux Research, the industry is set to recover quickly thanks to converging supply and demand. Smart corporate investors have recognized the coming resurgence and formed partnerships in strategic areas like system deployment or balance of systems technologies. Further, companies are seeking differentiated technologies to position for growth that will define winners and losers years down the line.

The industry’s turnaround comes as a result of multiple factors reversing its downward momentum. Lux Research’s Solar Systems Intelligence and Solar Components Intelligence teams analyzed solar market economics and industry movement, and found the following:

Margins recover as oversupply plummets in 2015. Thanks to the bankruptcies of uncompetitive players, and underlying financial constraints preventing capacity expansion, overall module capacity will decrease to 58 GW in 2015.

Meanwhile, the growth of new markets like China will lead to global demand growth from 31 GW in 2012 to 52 GW in 2015. In combination these will lead to module oversupply of only 12 percent, down from 100 percent in 2012. As a result, module margins will recover up to 10 percent from their near-zero averages today.

Corporate thought leaders will race to re-enter the market. Some early movers like BASF and Johnson Controls have already made strategic moves to enter the market by leveraging existing technologies or market platforms, while ABB made a billion-dollar acquisition of a major solar inverter supplier. Others will race to form partnerships and make acquisitions in 2015, driving up the cost of entry. Those that choose to slow-play the market will risk finding themselves on the outside looking in.

Stakeholders are planning years ahead. As the surviving supply landscape becomes increasingly clear, winners are ensuring their positions in the market for the long-term by investing in technologies to increase performance, lower costs, improve product quality, and enable new features.

Areas of investment range from high-efficiency crystalline silicon cell technologies – note First Solar’s acquisition of Tetrasun – to hybrid photovoltaic/thermal cogeneration systems from the likes of IBM, to coatings for higher-quality, longer-lasting modules – a major focus in light of recent allegations of defective products.

The market has changed drastically over a short span of time. Large, dominant manufacturers have risen in concert with many spectacular failures thanks to steep cost reductions. Meanwhile, corresponding incentive reductions have forced developers to quickly adapt business models and find new markets. These growing pains have scared many investors away but the positive outlook on market and industry player health is sure to bring many back into the fold.

The industry’s rough maturation has cast it in a poor light, but solar’s growing presence in the future energy mix is undeniable, as also exemplified in the energy outlooks from several prominent oil companies. It remains to be seen is which corporate leaders will find mutually beneficial partnerships and investments early and reap the rewards of growth for a low price, and which laggards will miss out on the opportunity.