Solar Disruptions: The Economist highlights the problem of picking winners

Posted on 27 July 2009

We see at least four structural problems facing existing public solar power companies:

1. There is risk that some new entrant will leapfrog them by developing a better, disruptive technology.

2. Solar energy has to compete with the memory chip industry for its raw semiconducting materials, which, much like corn, gasoline and ethanol, breaks the link between input cost and selling price.

3. Competition comes not just from other producers of solar energy, but from other producers of electricity from other alternatives and conventional sources.  On a LCOE basis, solar will usually lose on pure economics.   Thus,

4. Demand is heavily reliant on subsidies that will inevitably be reduced or phased out.

Solar produced energy, ultimately, is highly compelling, given it is the shortest path to useable power, provided it can continue to lower costs significantly; there are plenty of other reasons  to like solar which we don’t need to list as they are well known.  Also, it is competitive now in some marginal situations (locations with very high insolation, very high costs of grid-based electricity, very high subsidies), but valuations suggest investors anticipate far larger markets.   Something we don’t predict will be seen from the current set of public solar companies.

On point #1, we noted an article in the July 25 Economist magazine about two private Israeli companies (GreenSun Energy and 3G Solar), each with a promising-sounding technology.  We won’t try to summarize them here, but the point is that this is one of many examples of pre-commercial technology that could potentially render current production methods obsolete, very quickly.

The rapid growth of many of the public solar energy companies also suggests that this is a relatively easy business to enter, another risk to the valuations of the current players. Suntech Power Holdings began operations in May 2002, went public in December 2005, and is a major player, to pick just one example.

In our view, it is far too early for the market to be declaring who the “winners” are in the race for dominant positions in solar energy, as these two companies profiled in the Economist are just examples of what are probably hundreds of companies working on solar technologies.