Has the Sun Set on Solar Stocks?

The sun has so much potential. Our neighborhood star literally shoots energy at our world all day long, and scientists don't expect it to stop doing that for about 5 billion years. One day, we'll probably harness all the energy we need from it. But we're not quite there yet, and here's why.

A perfect storm
Solar energy over the years has needed a lot of research and development, which doesn't come cheap.

Government subsidies have fueled manufacturing and installation of solar panels all over the world. The U.S., China, Germany, and many other countries have provided incentives to solar companies over the past few years, but the sun is starting to set on those programs. Even in Germany, where the government has spent about $130 billion in subsidies, the country gets only 0.3% of its energy from solar, and its citizens pay the second-highest rate for electricity in the developed world, according to a Slate article.

The worldwide economic slowdown forced countries to cut back on spending for solar power support, and with a slow financial recovery, it might be a while until we see big subsidies again.

I was for the sun, before I was against it
When the stars do align for solar power, there are problems to consider -- mainly, the political ones. If lawmakers determine constituents don't like policies that give money to solar companies, they're not likely to pass laws for it. In 2011, the U.S. government gave $24 billion  to renewable-energy projects, but public failures like Solyndra draw negative attention to increased government funding for similar companies.

This leads to back-and-forth approaches to an industry that desperately wants (and needs) to move forward. Our global climate may be ready for solar power, but our political climate often gives it a cold shoulder.

If you can't stand the heat, get out of the sunlight
Think of the U.S. energy-source usage like Mount Doom in the Lord of the Rings trilogy. Coal, natural gas, and petroleum are the core energy sources dominating the landscape and fueling the volcano of energy. You can't escape their presence, and their sheer magnitude of power is terrifying. Smoke and dark clouds around the mountain make it a very dark place to be. And where is the sun? Nowhere to be found.

Renewable energy accounted for only 9% of the United States' overall energy consumption in 2011. The total primary consumption includes uses of power such as transportation, not just electricity, but if you take into account all other forms of renewables, solar power made up 2% only of the entire renewable-energy category. Take a gander at the following chart for the full breakdown.

Source: U.S. Energy Information Administration.

We're getting more energy from wood right now than we are from the sun -- that's right, wood. Solar has a long way to go before it has any significant impact on our energy supply, and it's going to take a lot of price changes to coal, natural gas, and oil to move solar up the list of must-have energy sources.

Right now, natural gas may be one of solar's biggest opponents. In 2008, the price of natural gas was $12 per million BTUs, while the current price is just $3.54 per million BTUs. According to The Wall Street Journal, the U.S. government expects the price to stay below $5 for the next decade, adjusted for inflation. With cheap natural gas available in the U.S., it might be harder for solar companies to get the funding they need to make solar mainstream, and profitable.

Cloudy days for solar companies
This may be one of the reasons about a dozen solar companies went out of business last year and why major companies such as BP (BP 0.23%) and German industrial group Siemens (SIEGY -0.64%) are getting out of the solar game completely. This month, Siemens said it's leaving solar after spending $418 million just three years ago on an Israeli solar company. Falling prices and cutbacks on German subsidies have contributed to their solar exit.

BP left the solar industry last year, after 40 years of trying to make solar work -- 40 years. It's still going to spend $8 billion on developing alternative energies by 2015, but it won't involve solar. Maybe the company should change its logo? Obviously, having two major companies duck out of the solar business doesn't mean the whole thing can't work, but smaller solar companies are having a hard go at it as well.

Two top solar-panel manufacturers, First Solar (FSLR -2.84%) and SunPower (SPWR -6.70%), have been hit hard. Let's take a quick look at the net income for these two companies over the past three years.

Source: 10-K filings from both companies.

In the past three years, the price for photovoltaic solar panels has dropped by 75%. An influx of Chinese solar panel manufacturers drove the price down quickly. The drop in price caused higher demand, but the cheap panels, mixed with falling natural gas prices and problems with the U.S. and European economies hurt companies such as First Solar and SunPower.

Total revenue was growing year to year for both companies, yet they finished in the red last year. It's not a good sign when two major solar panel producers are losing money after two good years, despite revenue increases.

The sun will come out, tomorrow
Solar power should by no means be written off, but as fellow Fool writer Travis Hoium said, it's going to be difficult to know which solar companies are going to be profitable down the road. With an industry that's seen a lot of growth, but not a lot of profits, knowing when to jump in, and whom to jump with, is hard. The industry is facing some tough times, and it's difficult to predict when one of these solar companies will rise over the horizon and make it all worthwhile.