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Brave New Solar, or Grave New Solar?

Stocks in this article: FSLR JASO YGE TSL STP CSIQ SOLF

Gordon Johnson, an analyst at Hapoalim Securities well-known for his bearish outlook on most photovoltaic players, believes that the recent political turn against solar is setting up the industry to be the next ethanol. "People assume you have to have photovoltaic solar, but that's not the case," Johnson said.

Johnson's point is not that investment in renewable energy will slow, but that the solar industry that has grown up on lucrative feed-in tariffs may not be entrenched enough within the global economy to ensure its survival.

"The cheapest renewable energy technology that emerges will be the most preferred, and right now, solar photovoltaic energy is the most expensive," Johnson said. Solar has received the most attention because it is one of the easiest forms of alternative energy to get up and running quickly, with low costs to build solar plants and low barriers to entry.

As a result, government feed-in tariffs and the capital markets have created a feedback loop that has incentivized solar into a less-than-perfect cycle. "The solar companies are not being incentivized by the feed-in tariffs to improve technology, but just to increase capacity," Johnson argued.

What's more, if big solar has to return to the days of ramping up research and development to create much more efficient photovoltaic technology, that means quarter after quarter of losses -- almost back to the days of being start-ups. "With current rates for solar electricity 6% to 8% more than conventional electricity generation costs, any solar innovation means going back into losing money every year," Johnson added.

FBR's Hosseini, admittedly also further to the bearish end of the solar analyst spectrum than many of his peers, also sees major problems for the solar industry if innovation is the key. "This industry is not high-tech, and not high-growth. It is a commodity industry, unit-driven and with declining average sales prices," Hosseini said.

If solar firms are forced to innovate, it could be a process that takes at least three to five years, and that would be during a period of declining returns from lower tariff regimes and accumulating losses from investments in research and development.

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