The Solar Mystery Market of 2011 Is...?

(Solar 2011 outlook story with updated charts, German, China data)
NEW YORK ( TheStreet) -- There has to be a solar mystery market in 2011, doesn't there?

For the bullish solar argument to play out, the expected slowdown in core European markets, including Germany and France, has to be offset by growth in other countries. As 2010 demonstrated, predictability of solar demand remains a work in progress. Germany went from being a projected 4GW market in 2010 to an actual 8GW market, and solar demand remained healthy throughout the year, fueling the ire of solar bulls who say the solar bears have cried wolf once too often already.

The solar industry's ability to accurately forecast demand remains a work-in-progress. "Oversupply is an old argument and it's used every year, and every year it's wrong," says Auriga Securities analyst Mark Bachman. "We convince ourselves that demand will fall off a cliff every year, but go back to the start of 2010, when predictions were for a solar market of 6.5 GW."

However, the lack of predictability is a double-edged sword for the solar sector. Demand elasticity has proven the bears wrong in years like 2010, but the same feed-in tariff structure that creates short-term booms embeds uncertainty year-in and year-out for solar companies and investors. Record capacity in 2010 has not put the issue to rest either.

To put demand elasticity into perspective, it's a fine line between planned subsidy cuts leading to short-term demand growth and subsidy cuts getting ahead of cost reductions in solar. Demand at the cost of profitability is not a winning formula.

Credit Suisse -- which has predicted sector oversupply in 2011 -- estimates a total solar cell capacity among the major cell producers of 25 gigawatts in 2011. Credit Suisse expects actual demand to be 14 gigawatts. Credit Suisse is far from the most bearish about over demand. Other solar analysts expect capacity to hit 30 gigawatts by mid-year 2011.

Take the Czech Republic, which had such rapid growth in 2010 that it put a hard stop on new solar installations for 2011. The Czech Republic went from being part of the solution in 2010 to part of the problem for 2011.

The latest data from Germany showed a big slowdown in October solar installations, to the level of 340 megawatts. Whether the stall in German growth is a good thing for global solar demand, or is a sign that Germany is slowing down too quickly for solar demand equation to be solved, will linger as an issue through the first quarter of 2011.

It could just be that December 2010 turns out to be a huge month in Germany, before the annual digression in FIT rates, which happened in 2009. On the other hand, the slowdown could be a sign that the most recent FIT cuts in Germany are having their intended impact on Germany's solar growth rate, and that could mean less political repercussions in 2011.

The German question is one of the more pressing issues for solar in 2011 and it can't be answered today.

For solar experts, even those supportive of the major capacity ramps going on across all of the major solar companies, and who don't expect a massive oversupply scenario next year, conceding that a solar mystery market has to arise seems to be an annual rite of passage, and guessing game.

The solar market prognosticators seem convinced of at least a few trends as a new year begins.

Even as core European markets continue to be the poster-children for the uncertainty in solar demand, Italy will be a strong market for solar installers, at least through the first half of the year. Italy could, in fact, be the short-term boom market of 2011, with fear of feed-in tariff cuts or an annual cap leading to an even stronger pace of solar installations than being projected.

To say that the U.S. might be the biggest growth market for solar in 2011, or that China may boom, though, is not to answer the question of the incremental difference-makers in solar demand if Germany and the rest of Europe fall off by several gigawatts.

Take, for example, the 2 gigawatts that First Solar has talked up in the Mongolian Ordos project. Of the 2 GW, a total of 30 megawatts will be installed, and only as a test phase, in 2011.

With systematic risk to Europe's financial system to linger in 2011, solar could use a buffer of stability from outside the EU zone and outside the expected growth markets like the U.S. and China.

"The existing big markets in solar can't cut it anymore," said Lux Research analyst Jason Eckstein. "They can't lead to growth levels solar component manufacturers and project developers want. A lot of these companies set up sales offices in the Czech Republic, and now they are empty," Eckstein said.

Which market is going to be the solar white knight in 2011?

What follows are four less-hyped trends across solar demand regions that are poised to shape global solar growth next year, and in the years to come...

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