Can a Solar Depression Happen Again?

The European Union is reconsidering its renewable energy targets. Can the solar valley of 2011 happen again?

Feb 2, 2014 at 11:09AM

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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