Can a Solar Depression Happen Again?

According to the New York Times, the European Union may reconsider its renewable energy targets. 

The EU currently has a target of deriving 20% of its total energy from renewable sources by 2020. Because of slow economic growth and high costs, however, the European Union is considering pushing back that deadline to 2030 while setting a slightly higher target of attaining between 25% and 27% of total energy from renewable sources.

The last time Europe decided to significantly reduce solar subsidies was in 2011, the year when many solar stocks began multi-year declines. If Europe does roll back its renewable energy targets and lower subsidies, would solar companies be as vulnerable as they were three years ago?

Europe's delimma
Europe has long led the world in renewable energy adoption. Spain and Germany were some of the first nations to grant generous subsidies for renewable energy sources. Those generous subsidies were the primary reason why solar companies grew so quickly before 2011.

While Spain ended its subsidies, Germany is still generously subsidizing renewable energy.

Analysts estimate that German consumers paid $23 billion more in utility bills in 2013 for using renewable energy, which currently generates around 23% of Germany's total power output.

In 2013, the average German paid an extra 5.3 cents per kilowatt hour for renewables in the form of a renewable energy surcharge. In 2014, that surcharge was 17% higher at 6.24 cents per kilowatt hour. 

The renewable energy surcharge is the main reason why Germany has the highest cost of electricity in Europe.  

Many complain that high energy costs have made German manufacturing less competitive. Because of the high costs, German energy minister Sigmar Gabriel recently announced plans to lower state subsidies for renewable energy from the current 0.17 euros per kilowatt hour to 0.12 euros by 2015.

Germany is not alone in feeling the strain of using renewable energy, however. In the past five years, European utilities have lost around 500 billion euro in market capitalization in part due to the high cost of renewable energy feed-in tariffs. 

If they were forced to adopt renewable energy more aggressively, those nations would suffer more than Germany because they have higher unemployment rates and less financial resources.

According to the European Union's statistics agency, the unemployment rate for the Eurozone is 12.1% versus Germany's 5.1%. 

"This time is different"
Due to macro weakness, it is likely that the European Union will pare renewable energy subsidies and roll back its targets. It is unlikely, however, that the solar industry will suffer the same fate as it did in 2011. 

First, solar companies are no longer as dependent on Europe.

According to the IHS, Europe accounted for more than 80% of solar demand in 2010 but less than 40% in 2013. 

China is increasingly making up for the lost demand. According to analysts, China will install anywhere between 10 GW to 14 GW of solar capacity this year, or about one quarter of the world total. 

This is in sharp contrast to 2010, when China had a grand total of around 700 megawatts of installed solar capacity. 

Secondly, there is less room for solar module prices to fall. The cost of solar power now is already 60% lower than it was in early 2011. Solar energy is also already cost competitive in many parts of the world without subsidies.  

Lastly, it is unclear whether those subsidy cuts will occur immediately. While Germany may lower its subsidies this year, other nations may choose to stagger their cuts. If those cuts occur over the course of five years, the solar industry will not feel the effects as much.

The bottom line
I don't think the solar industry will see another depression. If European demand weakens, the low-cost producers such as JinkoSolar (NYSE: JKS  )  and the companies with solid balance sheets such as First Solar (NASDAQ: FSLR  ) or SunPower (NASDAQ: SPWR  ) will still do fine, while the companies with higher production costs or the highly levered companies with more precarious balance sheets will not do as well.

The outlook for the sector leaders is still bright in the long term. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2014, at 12:39 PM, max86 wrote:

    What I take from this article is the admission that solar power is nowhere near being cost competitive when compared to fossil fuel power generation, unless it is heavily subsidized by the tax payers. Given this fact, investing in solar power at this point is just speculation because the business models are still reliant on government regulations and financing. The other fact is that government cannot be relied on to continue this support. The technology has not yet arrived to make solar power cost effective to the average citizen. Just like the other Fool darling Tesla, I would still consider these investments to be high risk with the possibility of high reward. You could easily lose everything on the turn of a government dime.

  • Report this Comment On February 02, 2014, at 1:09 PM, mikegalt wrote:

    These articles promoting some liberals wishes for the future utopia they think they are building are always one sided. I have owned solar panels for my home for 6 years now.They were made in germany and not in China so i hope they lasy 50 or 75 years but longevity is really unknown in solar panels. They are not insurable and I hope they never get struck by lightning and damaged badly. To qualify for the Federal tax credits one must have enough income so that the tax credits are really worth something. I took money out of my pension plan to buy the panels. That money could have been left in my pesnion plan to generate interest that would have just bought the electricity I use. Initially the RECs were worth $6,000.00 a year but they rapidly dropped in value and this past year were only worth $900.00. Initially I had calculated in would take 8 years to break even on the investment not counting lost interest but now it will take at least 20 years to break even assuming electricity rates don't go up markedly. The higher electricity costs the quicker the panels break even. With natural gas and oil more plentiful and cheap it looks unlikely that energy prices will rise sharply.

    If interest rates stay at 4% it would have been cheaper to just use the interest to buy electricity from the Power Company assuming stable prices per kWH. I also have to count as a loss the cheaper cost of solar panels now. This article says they cost 60% less than a few years ago. Unless they are really junk compared to my German panels, I spent about $60,000.00 more dollars to go solar than I would buying the panels now even including the subsidies. As with any new technology subsidies distort the market. Would I have purchased solar panels without the tax credits and a $10,000.00 grant from the state of Maryland? NO. If costs of solar panels contnues to drop as mking them becomes cheaper i also could have gotten the same electricity at a far lower cost to me and to the government by waiting until the solar market was mature and much cheaper. So, I lost a sizeable amount of money as did the government that could have been used to buy other manufactured goods that would have stimulated the economy. It reminds me of kenes claiming if you broke all the windows in the city the economy would have a boom in manufacturing new glass windows. What a farce since at the end of the day the people have no more wealth than before the windows were broken. Throwing money away in non-productive purchases is a loser. If it was the answer to increasing world wealth, then governments could just nuke a few cities every year around the world so countries could spend all their money rebuilding them.

  • Report this Comment On February 03, 2014, at 12:09 PM, rw93003 wrote:

    I've never heard anyone talk about what happens in 25 years when all of these photovoltaic cells will need to be replaced--their ability to generate electricity declines steadily from the day they are manufactured. Are governments going to pay to replace them all too?

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