This too will pass

Earlier this week, the Globe and Mail described the tribulations facing several players in the solar photovoltaic (PV) industry (Solar power boom hits a wall, November 6, 2011). Cited in the article were the insolvency of Arise Technologies Corporation’s German subsidiary, the bankruptcy of US solar panel manufacturer Solyndra LLC, and the difficulties that Automation Tooling Systems Inc. has faced with its Photowatt division.

The article solicited nearly 200 reader comments. Most of these either decried the practice of feed-in tariff (FIT) programs as corporate welfare for the solar industry, or scoffed at the possibility that solar energy could be economic. When the issue of the Solyndra bankruptcy is discussed in the US, the banter goes in a similar direction, but worse so given that the policies of the Obama administration assigned half a billion dollars in loan guarantees to the company.

What do these tales of corporate woe really tell us?

One fallacy is that the solar industry as a whole is in deep trouble. The Canadian heartland of the industry is Ontario, thanks to the provisions of that province’s Green Energy and Economy Act (GEA). The opposition Conservative party took aim at the GEA in the lead-up to last month’s provincial election, casting a pall of uncertainty over the future of the program. When the ruling Liberal party secured only a minority government, it did little to allay industry concerns. Another blow was the regulator’s decision to grant Hydro One a reprieve from the GEA-mandated time limits for processing of FIT and MicroFIT applications; the Hydro One backlog has reduced the flow of new solar installations to a trickle. Finally, the in-progress FIT program review will likely reduce the rates OPA pays for electricity; this will render marginal projects uneconomic. How many remains to be seen.

This triple whammy – political uncertainty, the connection backlog, and the imminent reduction in rates paid to solar energy producers – has taken its toll on the industry in Ontario. Beyond the province, the picture is not all sweetness and light either. Worldwide, too many manufacturers have rushed to build capacity for PV cell and panel fabrication, and now there is a glut on the market. Prices for solar cells have fallen precipitously over the past year. Again, players that are on the edge of profitability are being pushed out of business.

If you’re an investor, this should give you pause. It is hard to tell which players will emerge intact from the current production glut. That is the key message of the article, but most readers appear to have missed it. The fact that a few players are struggling does not mean that the entire industry is doomed.

In the 1980s, electronics makers of every stripe rushed into the personal computer market. Stores were flooded with mutually incompatible machines from Texas Instruments, Coleco, Commodore, Radio Shack, and many others. Few could have predicted that in the end, only two platforms would survive: Mac and Wintel. The Coleco Adam and its ilk were relegated to the rubbish heap of history, many companies were bought or went bankrupt, and it was a nightmarish time for investors – but the industry as a whole not only survived, but boomed.

Another fallacy is that solar energy is not economic. It is true, in fact – in the same way that it’s true that my daughters aren’t earning any money. They’re still in high school, so it’s absurd to expect them to be earning their keep. But in a few years (I fervently hope) they will be on their own, thriving, and no longer dependent on me to support them.

Feed-In Tariff programs which stimulate investment in solar energy are the same way. The rate is high to start, all kinds of people decide to install solar panels to take advantage of the investment opportunity, and many competitors enter the market to meet that demand. The industry moves up the learning curve, and costs are driven down. Then the authorities can reduce the FIT accordingly. Some companies will be unable to stay profitable at the reduced rate, and they will struggle or fail. Others will find ways to improve efficiency and remain competitive. All the while the price per watt will continue to fall. Before long, solar will eclipse other entrenched sources of energy, and the FIT will be eliminated altogether. That trajectory is already built into FIT programs in Ontario, Germany, and Spain.

In some parts of the world, the sun has already taken its inevitable place as king of energy sources. Where the price of electricity is high, or the solar resource is abundant, or there is no existing grid infrastructure to supply artificially cheap fossil fuel or nuclear power, solar is already the best choice. No FIT required.

A final fallacy is that it is somehow wrong and corrupt to redistribute taxpayer dollars to one favoured industry. If that industry were harming the public, that logic would be sound – and, in fact, public harm is precisely the reality for the Alberta oil sands. Favourable tax treatment, lax enforcement of laws governing pollution of groundwater and rivers, and most of all the fact that the price of fossil fuels does not reflect societal harm they inflict (more frequent and damaging extreme weather conditions, coastal inundations, crop failure, and desertification), all amount to subsidies to this industry.

All Canadians (indeed, all people the world over) are currently subsidizing companies like Syncrude while they earn record profits and contribute directly to public harm. Ontarians are also subsidizing companies like Arise and Photowatt which struggle to turn a profit while they are busy building a clean, sustainable future for us all.

The solar industry is facing struggles. Solar energy is more expensive than non-renewable alternatives. Through FIT programs, solar energy companies are being subsidized.

For now.

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