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The solar industry has been plagued by the effects of oversupply in the recent past. But according to a senior research director at IHS, the global solar industry is on a rebound and is set to grow in 2014.

Apr 29, 2014 at 9:37AM

The solar industry has been plagued by the effects of oversupply in the recent past. Oversupply affected the average selling price of solar panels, and the industry incurred losses as a result. However, the industry is recovering from this downturn, and 2013 proved to be a positive year as many companies returned to profitability. According to a senior research director at IHS, the global solar industry is on the rebound and is set to grow in 2014 and beyond. This resurrection has attracted investors from across the board, but none as celebrated as Google (NASDAQ:GOOG)(NASDAQ:GOOGL). The search ad giant is investing heavily in renewable energy, especially solar power. The company recently inked a deal with SunPower (NASDAQ:SPWR) for consumer rooftop financing.

The three determining factors for the solar industry are demand, manufacturing costs, and growth (adoption rates). Demand and manufacturing cost predictions are positive, while the module ASP outlook is not favorable. Let's look at these factors individually.

Demand
The European Photovoltaic Industry Association expects the global annual PV market capacity to increase to 48GW in 2017 under a pessimistic scenario. Under a policy driven scenario, it could reach 84GW.

Jpg

Source: EPIA

IHS, on the other hand, believes that global installations will reach 40GW-45GW in 2014. GTM and SEIA predict a 26% growth for U.S. solar in 2014.

Manufacturing costs
The U.S. Department of Energy predicts manufacturing costs of $0.50 per watt by 2020. On the other hand, GTM Research indicates that manufacturing costs will decrease to $0.36 by 2017. First Solar's (NASDAQ:FSLR) cost roadmap reveals that the company expects to reduce its manufacturing costs to around $0.35 by 2018. Considering these forecasts, the DOE's cost projections seem high, and they should lie in the range of $0.30-$0.35 per watt by 2020. Whatever the exact figure may be, it is a certainty that costs will follow a declining trend going forward.

ASP
IHS believes that the average selling price of solar modules will decline by 10% in 2014 and will have declined by up to 40% by 2020 (as compared to 2013's prices).

Jpg

Source: GTM research

Despite improved demand and a market recovery in 2013, the ASP remained flat at best. IHS' prediction appears to be spot-on because supply is not expected to decrease, as all major companies are adding production capacity and, even more importantly, because solar energy has to achieve parity (i.e. comparable or lower costs) with conventional energy-generating sources.

To review, the demand situation is improving, the costs of panel manufacturing are going down, and ASP is expected to decrease in the future. As the demand situation is correlated with ASP, declining ASP will result in increasing demand going forward. The decline in ASP will be partially offset by cost reductions, and large players will be in a position to gain market share and sustain margins to some extent. The margins will decline, or at best remain flat, for solar panel manufacturers.

Profitability can be achieved by offering downstream services, rather than just selling panels. Hence, rooftop installation with financing, like SunPower is doing, and building and leasing utility-scale projects along with related services, like First Solar is doing, will be the profitable models in the coming years. Solar energy is expected to grow, though the margins will vary in different segments of the value chain. One fact that strengthens this thesis is Google's interest in renewable energy, especially in the solar and rooftop market.

Google and renewable energy
Google believes that an investment in renewable energy is sensible business. The company's head of corporate finance commented on the recent partnership between Google and SunPower. Under the program, Google and SunPower will contribute $100 million and $150 million, respectively, for residential lease projects. Regarding the mechanism of the deal, a Google official said that the fund will, essentially, be used to purchase solar systems and lease them to homeowners at a cost that is lower than the average electricity bill.

If this claim is true, the future holds promise for the rooftop market. This is an important disclosure because, at current manufacturing costs, solar systems can be provided to consumers at a lower cost than conventional electricity. Furthermore, the expected decline in cost per watt in the future can make solar energy an economical alternative to conventional methods. Clearly, Google is optimistic about the future of renewable energy.

Google's Solar Interest

  

Investments

16

KKR investments $80 million; Mountain Signal $103 million;

Recurrent Energy $94 million; Bright Source $178 million

Rooftop Market

3

SunPower $100 million;

SolarCity 280 million; CleanPower Finance $75 million

Cumulative Capacity

2GW+

 

Investments ($)

>$1 billion

 

Source: Press release and Google green

Bottom line
The solar industry had a few bad years that resulted in an atmosphere of uncertainty regarding future prospects. However, last year, the industry started recovering thanks to increased demand. Forecasts for the future are also healthy and reveal increasing demand and lower cost per watt. Downstream businesses are expected to be more profitable in coming years amid constricted margins in the panel market. The interest of big corporations like Google indicates that the industry will grow in the future, and the company's heavy interest in rooftops supports the thesis of downstream business growth. The industry will surely grow, but companies with more downstream business models, such as First Solar and SunPower, are more likely to succeed.

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Muhammad Saeed has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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