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Dark Days for the Solar Industry

A perfect storm is wreaking havoc on the solar industry.

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After years of breakneck growth, dynamics within the solar industry have rapidly changed. Recently, the demand for solar power has been hurt significantly by both tighter lending to project investors and the introduction of a 500-megawatt cap on Spain's solar subsidy program (the world's largest last year) that will shrink the Spanish market by at least 80% in 2009. Although the United States and China offer very attractive long-term stories, both markets remain relatively undeveloped, and it is likely newly announced incentives/subsidies will not materially increase installations until 2010. As a result, we expect growth in global solar installations to decrease for the first time this decade in 2009 (see Chart 1) because there simply is no market than can replace the 2-gigawatt (33% of the 2008 global total) reduction in demand from Spain.

The downturn in demand highlights another serious issue that was clearly emerging last year: The industry presently has far too much supply. During the solar boom of the last few years, demand consistently outstripped supply, and essentially every solar panel produced was sold. Solar companies could increase sales as quickly as they could expand production, all the while at very profitable levels. Not surprisingly, new entrants flooded in, and existing companies expanded rapidly, with the whole industry planning as if high double-digit growth were set to continue indefinitely.

Stephen Simko does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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