Solar to hit speedbumps: Falling prices, rising supply and red tape

Solar’s been booming, with hundreds of millions of dollars in venture investment flowing into the industry last year alone, and dozens of companies vying for a piece of the growing market. That’s had the wise old heads all nodding in agreement that the bubble will soon burst. Now Lux Research has put some numbers and reasoning to the pessimism, saying that solar will experience a shakeout in about two years’ time.

The situation so far has been that there’s more demand for solar cells, both silicon-based and thin-film, than there is capacity to make them. High demand has kept a competitive market from developing, in turn supporting companies with technologies that aren’t cost-effective — which, at the moment, means most of them.

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There’s also been a shortage of polysilicon, the raw material used for many cells. That shortage will begin to ease right around the end of 2009, and the market will start flooding in 2010, according to Lux. That’s right around the time many manufacturers will be scaling up production, leading to demand for 8.96 gigawatts against a supply of 9.57 GW in 2009.

Crystalline silicon photovoltaics will be the hardest hit in this scenario, but the picture isn’t all rosy for thin-film technologies like First Solar’s cadmium-telluride and the CIGS that Nanosolar and others use. Those manufacturers will face a short-term challenge from the glut in photovoltaics until they can bring their own prices down.

Figuring into all of this is an uncertain regulatory environment in the United States. The long-standing investment tax credit is set to disappear this year, which will leave utility-scale developers in the lurch until a new president is elected. Michael Holman, a senior analyst at Lux, told me that states like California and Oregon will likely pick up the slack, but that bureaucratic problems will continue to figure into the market until around 2011.

Overall, he says, the market is likely to move into a phase of acquisitions and mergers. Big companies like DuPont and Hitachi will likely try to buy their way in by picking up small companies, and as prices drop, some players will probably choose to join forces rather than toppling. Meanwhile, some crystalline silicon-based companies will try to buy up thin film manufacturers to diversify.

So should anyone really be pessimistic about solar? Not unless they’ve invested in an unproven technology. The phase of torrid venture funding for solar is coming to a close, and some investors will end up getting burnt pretty badly. Others, though, still have a big payday to look forward to. Lux is predicting the market will grow at 27 percent a year, boosting it from $21.2 billion in revenues in 2007 to $70.9 billion in 2012.