A few thoughts on solar’s near-term prospects

Ah, what a difference a few weeks can make… For solar energy enthusiasts like us, there has been both good and bad news. Massive volatility in the market has left no sector of the economy untouched. Banks put the kybosh on lending. Otherwise-healthy companies found it harder and harder to raise funds by issuing debt. And, when panic hit the stock market, the value of companies’ equity dropped like a rock. Combined with a worsening outlook for the U.S. economy, these events clearly constitute the bad news.

The good news came (believe it or not) from Washington. Lawmakers finally voted to extend federal tax credits that make it more affordable to purchase renewable energy technologies like solar panels and solar water heaters. Beyond the financial benefits brought to individuals, the new legislation brings a degree of much needed certainty to the marketplace. For the past few years, solar technology firms have had to use guesswork when forecasting future demand. Now, with the eight-year extension, the industry can breathe a little easier knowing what will be available to their customers–both residential and commercial.

All things considered, how do recent events square with the future prospects of the solar industry? And what does this mean for consumers? Well, it’s far from clear–and I’m far from being an expert. (I won’t let this won’t keep me from offering a few short observations, however.)

First, solar currently makes financial sense only when it’s combined with some sort of incentive, like government rebates or tax breaks. Should the current economic downturn evolve into a prolonged recession, there’s a chance that state lawmakers would feel justified in cutting current incentive programs. This would of course reduce demand and hurt sales–an bad outcome for consumers and firms alike.

Second, the link between the price of oil and the demand for solar energy is murky at best. In broad terms, this is because very little of U.S. electricity demand is met by oil. Thus, arguments that a dip in the price of oil might reduce the incentive to pursue alternatives are, in my opinion, a little shaky. In simplest terms, oil and solar panels are not substitutes–at least not yet–so regardless of where the price of oil goes, investors and researchers will still be looking to develop the cheapest and most efficient solar technologies. Given where oil prices are heading, this is a check in favor of solar.

Third, in many ways the near-term prospects for the solar industry come back to the purchasing habits of the consumer. It’s no secret that we Americans don’t shy away from debt. It’s also no secret that solar panels are expensive. Given the on-going fallout from years of loose lending practices, it seems that the era of cheap money and easy credit may be over. In this light, it’s unclear whether U.S. consumers will be able and willing to take out a loan for a pricey PV array in the coming year or so.

Finally, I simply want to note that we strongly believe the long-term prospects for solar manufacturers and solar consumers are bright. Yes, there will be hiccups in demand and bouts of consolidation and failure in the market. At the end of the day, however, firms and individuals will still need to borrow–and solar energy will continue to improve to the point where it provides a good rate of return with relatively low risk. Thus, we believe that ultimately the proposition of energy that is clean, efficicent and affordable will win out.