What's next for Solar

bWhy are solar power companies so hot?
Everytime oil prices rise and stay high, solar power becomes the rage. This time, however, it's different. This time, it's a global phenomenon:
* China - Mandating more solar power
* India - Struggling to handle the massive cost of subsidizing oil and kerosene
* Germany - Aggressively subsidizing solar power
* Thailand ramping up solar power
* US MegaWatt output grew ~60% in 2007 (despite the lack of an energy policy)

Solar power represents a different proposition for the consumer. In essence, the consumer is asked to pay upfront for 30 years of energy cost. At $40K for a home, many homeowners hesitate.

Government subsidies are the primary way to reduce cost and have been very effective at boosting demand, especially in Germany which is driving 52% of world demand for panels. US federal and state incentives have dropped costs 30%.

Rising sales volumes lead to cost efficiencies as well. For example, using thinner wafers because the electricity is produced in the top portion only. But silicon prices are definitely putting a damper on things: prices have surged from $25/kg in 2004 to ~$220 today.

In response, established producers like MEMC are boosting supply. And Chinese makers are entering the market soon. Eventually the silicon shortage will end, possibly by 2010. Companies like nanosolar (private) and FSLR use other technologies, but for the next few years, silicon will dominate.
(Check out Phoenix silicon - they are a scrap silicon company)

The prospect of dropping costs makes solar power very attractive. I believe in this market, but I think that there are far too many players. Here's a list of companies making solar panels.
http://en.wikipedia.org/wiki/List_of_photovoltaics_companies

And here are the 2008 sales projections for a few of them:
stp $2300M
fslr $796M
ldk $970M
solf $4440M
ja solar $761M
canadian solar $713M
eslr $101M
trina solar $668M
Q cells $1760M
Sharp $2000M
That's ~$15B in sales for 2008, which would be a 50% jump in sales.

The reality is that sales is really concentrated in Japan, Germany and the US. Sure, China and India are growing, but the markets are limited. China is providing incentives of $1.5B.

At today's prices and supply constraints, sales is limited. I think there isn't enough to go around and many companies aren't going to meet their forecasts. Also, supply constraints will eat into both sales and margins. Trina Solar, for example, just reported a reduction in sales forecasts due to supply constraints.

So these are my takeaways:
1. Solid but concentrated market. Developing companies have enormous need but can not afford the panels. Demand continues to be driven by Japan, Germany, California, & to a lesser degree India and China.
2. Extremely sensitive to government incentives. US Federal incentives were $170M in 2007. California spendt ~$3B annually to offset costs. With the housing bubble bursting and home prices getting re-appraised, government tax revenues may not support these credits. Of course, the Democrats are proposing large boosts in solar power subsidies. The message is: government incentives drive this market
4. Silicon driven costs will ease in ~2 years (beware MEMC investors)

I haven't invested in these companies because I don't see much difference between them. I also believe that there are too many suppliers for the market.

But if I were to invest, I'd go with FSLR as a thin-film play. Then I would go with ESLR as an efficient producer. Otherwise stick to the large producers, because they get better supply and pricing from the wafer makers.