The solar industry is in a strange position at the end of 2016, a year that will see record installations and plunging stock prices. The economics of solar energy are getting better all the time, but 2017 will likely be a down year for reasons that range from impacts of the ITC extension to China's reduction in feed-in tariffs. 

Making the industry even more complicated, the policies around renewable energy in a Trump administration are currently unknown. But we may not be off to a good start on a federal level. 

Gettyimages

Image source: Getty Images.

The EPA won't help the solar industry 

The federal government, and Environmental Protection Agency in particular, doesn't drive demand for the solar industry, but they do set the tone for policies that affect it. And Donald Trump's pick of Scott Pruitt to head the EPA is concerning at best. Pruitt denies that climate change is happening, has a long history of working with the fossil fuel industry, and was even interviewed by CVR Refining owner Carl Icahn to give his stamp of approval before being offered the job

Even more concerning is reporting from Bloomberg and The Washington Post that Trump's transition team is seeking names of EPA employees involved in climate meetings and policy. If there's an outright attack on renewable energy from the next administration, it should be a concern for investors. It isn't reason to give up hope for growth, because states drive energy decisions more than the federal government, but concern is in order. 

Preparing for a challenging 2017

SunPower (NASDAQ:SPWR) also announced some major changes this week, including shutting down its 700 MW Fab 2 and laying off 25% of its workforce. This follows a similarly dim outlook by First Solar (NASDAQ:FSLR), which will lay off employees as it upgrades production to a new Series 6 product that's more efficient and lower cost than current products. 

SunPower and First Solar are two of the biggest, longest-lasting solar companies in the industry, and if they're preparing for the worst in 2017, then we know it's going to be a bad year. However, hidden within layoffs is some hope for the future. First Solar will start producing Series 6 at volume in 2018, and SunPower has said it's preparing to build next-generation X-Series solar panels (its most efficient product) at scale by the end of the decade. Both companies are in survival mode for the next year, but after that, it may be off to the races looking for growth again.  

Weak solar companies are on thin ice

Yingli Green Energy was once the biggest solar manufacturer in the world, but now its survival is in doubt. Third-quarter results announced this week showed a loss of $50.3 million in the quarter and just $144.9 million in cash compared to $1.6 billion in debt. And this is before the falling demand we're expecting to see in 2017. 

Next year will likely see weak companies fail, leaving more market share for stronger competitors. And Yingli Green Energy will likely be in a lot of trouble as it falls behind stronger competitors and sinks into a terrible balance sheet. 

China's solar industry may have a better 2017 than expected

During the first half of 2016, China installed around 20 GW of solar, enough to power about 3.3 million homes. But the country changed its feed-in tariff (FIT) in the second half of the year, and the market fell off a cliff -- and that was what drove a 25% decline in solar panel prices during the third quarter. 

The Chinese media is now reporting that FIT for 2017 may not be as bad as feared, which could bring about a recovery. After proposing 23% to 37% cuts in the FIT earlier this year, the decline is now set at 18% to 25%. On the high end, ground-mounted solar will be paid 8.7 cents per kWh, a price that should be attractive to developers. 

This will have a huge impact on developers who are still relatively healthy operationally. JinkoSolar (NYSE:JKS) and Trina Solar (NYSE:TSL) are two companies that both develop projects in China and sell a lot of panels in the country, so a return in demand would help them a lot in 2017. If they can get over near-term weakness in demand, we could see profits improve in the back half of next year. China could play a big role in a solar industry recovery. 

Travis Hoium owns shares of First Solar and SunPower. The Motley Fool has no position in any of the stocks mentioned. 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.