The solar market seems to be bailed out by Germany once a year, saving countless companies from meeting their demise if installations fall in solar's leading country. 2011 was no different when the country set a new record for solar installations at 7.5 GW, with 3 GW in the month of December alone.
On Wednesday, this was good news for everyone, especially manufacturers that get much of their demand from Germany. JinkoSolar (NYSE: JKS) and Hanwha SolarOne (Nasdaq: HSOL) were the biggest winners of the day, climbing more than 35%. Across the board, manufacturers were up more than 10% because reports were that module prices had stabilized. After falling rapidly in 2011, I'm not sure how much further they could have fallen without stabilizing some.
But the German government had set out to reduce solar installations to around 3.5 GW per year with a feed-in tariff schedule that cut the euro/kWh payment depending on how much solar was installed. The more solar was installed, the more the feed-in tariff would be cut. To see the schedule, click here.
The crazy rush to install solar in Germany at the end of 2011 will likely lead to another lull in demand to start 2012 -- just as we saw in 2011 -- and another 15% feed-in tariff cut mid-year. Since installers in the U.S. were also rushing to beat the deadline for the 1603 Treasury Grant program, which expired at the end of 2011, the same kind of dynamic will take place in the U.S.
In the short term, solar earnings should be strong in the fourth quarter, and reports are that inventory is at record lows, according to Deutsche Bank analyst Vishal Shah. Inventory writedowns were one of the big reasons many manufacturers lost money in 2011, and maybe this can be a cushion for the next couple of quarters.
Where will demand come from in 2012?
With Germany saving solar manufacturers to end 2011, the focus moves to future demand. Module sale prices have fallen so far in the past year that new markets should open in 2012, and broad growth around the world will help make the industry less reliant on Europe.
But the boom-and-bust nature of feed-in tariffs in Spain and the Czech Republic should lead to some caution that the trend will continue in German and Italy. Bloomberg New Energy Finance estimated that 29 GW of solar was installed in 2011, meaning around 25% of the world's demand came from Germany. If demand in Germany falls, I'm not sure China, India, and the U.S. are ready to pick up the slack with more sustainable solar programs. Italy is also a wild card in 2012 with a potential bust on the horizon.
Foolish bottom line
Germany bailed out the solar industry big-time to end 2011, and by the end of 2012, I think we'll start to see steady, sustainable demand from places around the world. In the meantime, I wouldn't be surprised to see another year of big ups and downs as manufacturers fight for position in the market.
Exactly how the next year plays out could determine the fate of lower-tier suppliers LDK Solar (NYSE: LDK), Renesola (NYSE: SOL), and JA Solar (Nasdaq: JASO). Each has struggled with lower sales prices and falling demand for their solar products as other manufactures integrate vertically. If demand in Germany doesn't fall in 2012 and other countries pick up demand, these could be big winners and even acquisition targets for their polysilicon and cell capacity.
Whether 2012 leads to another record of solar installations, I would rather place my bets on industry leaders like SunPower, First Solar, Trina Solar, and Yingli Green Energy. If demand falls, these companies are in a better position to handle the future, and if demand rises, they will be the first modules to start showing up on rooftops around the world.
What other energy stocks should you be looking at in 2012? Our analysts have identified a stock they think will outperform the market in today's volatile energy environment. It's revealed in our free report called "The One Energy Stock You'll Ever Need." You can access if for free by clicking here.
