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This has been a year to remember for the solar industry. On the positive side, prices fell, new efficiency records were reached, and grid parity was reached in some areas.
But solar stocks had a terrible year almost across the board, with a small blip when Total made a tender offer for 60% of SunPower's shares.
So what happened in 2011, and where do we stand to end the year?
Moore's law in solar
This year, the concept of Moore's Law in solar seemed like a reality. The price of polysilicon has fallen 94% in the past three years and modules are now being sold for close to $1 per watt. Even a year ago that price didn't seem possible in such a short time.
But we've reached these prices because manufacturers up and down the supply chain are fighting for scraps in the solar market. Demand in Germany, Italy, and Spain waned this year as feed-in tariff uncertainty and tight credit markets froze installers.
Even top-tier manufacturers such as Trina Solar (NYSE: TSL ) , Yingli Green Energy (NYSE: YGE ) , and Suntech Power (NYSE: STP ) were left with excess modules that had to be sold at ever-lower prices. This led margins lower and caused most manufacturers to write down inventory during 2011.
Trina Solar, for example, saw average sales prices for its modules fall from $1.82 per watt in Q4 2010 to $1.25 in the third quarter of 2011, an amazing 31% drop in just three quarters. That's good for the long-term viability of solar, but it's leading to a lot of short-term pain right now.
Bankruptcies begin to pile up
As top-tier manufacturers struggled, lower-tier manufacturers began to fold up shop in 2011. Solyndra was the highest-profile bankruptcy, but Solar Millennium and Solon also declared insolvency while Q-Cells in Europe may be headed that way soon. Even oil giant BP gave up on its halfhearted solar dreams.
This trend will probably continue at an even faster pace in 2012 as the weak are pushed aside and manufacturers with a competitive edge begin to flex their muscle.
Contender or pretender?
This year has been the start of the separation between contenders and pretenders in the solar industry. Companies such as SunPower and First Solar (Nasdaq: FSLR ) have competitive advantages in efficiency and cost, respectively, and other manufacturers are fighting to keep up.
On the flip side, JA Solar (Nasdaq: JASO ) , LDK Solar (NYSE: LDK ) , and Renesola (NYSE: SOL ) saw their solar dreams turn into nightmares as grand plans to build capacity on short-term cash backfired this year. If these companies were U.S.-based, I would say bankruptcy risk was a legitimate concern, but with backing from the Chinese government, it's hard to predict exactly what will happen in 2012.
Emerging solar markets
Arguably the most important developments in 2011 were the emergence of the United States as a major solar demand source and further solar development in China and India.
According to a report by SEIA and GTM Research, during the first three quarters of 2011, solar installations grew 99% to more than 1 GW for the first time. In the fourth quarter, experts predict that another quarterly record will be reached as installers scramble to beat the expiration of the 1603 Treasury Program, a cash-grant program for solar installations.
China recently implemented a feed-in tariff to grow domestic demand for its locally manufactured modules. And India is using a reverse auction to build solar to its goal of 20 GW by 2022.
These three markets are not only the future of solar power, but they also started to ease the pressure on European demand in 2011. They aren't ready to overtake Germany as the king of solar just yet, but given a few more years, we could be talking about these three countries being one, two, and three in solar demand annually.
A good year for solar, depending on whom you ask
With all of these things considered, the year was a huge step forward for the long-term viability of solar as a power source even though it wasn't good for solar investors. We still need to keep in mind that the health of the industry as a whole and the health of individual companies aren't always aligned.
The solar shakeout has just begun in earnest, and investors willing to take a long-term view should look for companies with a strategic advantage in the industry. The weak manufacturers in the industry will continue to be washed away.
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