'Solar-coaster' hits as sun sets on federal subsidies

— -- The booming U.S. solar industry faces a potential tipping point — what some call a "solar-coaster" — as the sun starts to set on billions in federal subsidies.

Can it make it on its own? Can it compete with China, which U.S. officials say spent $33 billion in 2010 alone on solar loans?

Energy Secretary Steven Chu posed these questions Saturday, one day after finalizing the last federal loan guarantees via a controversial program that gave a half-billion-dollar loan to newly bankrupt solar panel manufacturer Solyndra.

"Where do we go from here?" Chu asked at the closing ceremony of the Solar Decathlon, a biennial U.S.-sponsored collegiate contest to build the world's best solar house. He said the United States is at "a crossroads" and must decide whether to "sit on the sidelines and fall behind" or "play to win the clean-energy race."

Chu said Americans invented solar cells, wind turbines and lithium ion batteries, but added: "We are no longer the leading manufacturer … we are working to recapture that lead."

The U.S. solar industry, though decades old, didn't begin booming until about five years ago as federal subsidies became available and Silicon Valley venture capitalists began pumping in cash and creating a sort of Solar Valley.

It now employs more than 100,000 Americans, twice as many as in 2009, and has become the country's fastest-growing energy sector, says Rhone Resch of the Solar Energy Industries Association, an industry group. He says solar panel installations were up 69% at the end of June, compared with a year prior.

Still, the industry produces less than 1% of U.S. electricity and has lost global market share to China in the last decade. Even backers say the collapse of Fremont, Calif.-based Solyndra, now being probed by House Republicans including California Rep. Darrell Issa, won't help.

"It is reasonable to predict that we could have the collapse of the entire solar panel manufacturing business in America," Issa, chairman of the House Oversight and Government Reform Committee, said at a House hearing last month as he cited China's ascendance.

Not so fast, says energy historian Daniel Yergin, author of the newly released The Quest: Energy Security and the Remaking of the Modern World. He says the Chinese bring "a relentless competitive advantage in manufacturing," but the U.S.' tech savvy is vital in the swiftly changing solar market.

Even with subsidies decreasing, he doesn't expect the solar industry to wither as it did in the 1980s when he says it entered the "Valley of Death." Today, he says, "This is really global business. … This is not game over."

Solyndra's collapse does not portend doom but rather reflects "the industry's success in lowering costs," says Jonathan Bass of SolarCity, a solar installer. He says Solyndra's unique tube-shaped solar panels did not rely on silicon, an advantage when silicon prices were high. When those prices plummeted, Solyndra could no longer compete.

Bass and others in the industry say it's a good thing that panel prices have fallen 30% since the beginning of 2010, because it makes solar more affordable and expands markets.

Yet it could trigger a painful consolidation. "There's going to be a lot more bankruptcies in this sector, reminiscent of the Internet bubble bursting," predicts Jesse Pichel, a clean tech analyst with Jefferies & Co. "And that's ultimately a very healthy thing for the development of the industry."

Political headwinds

The solar industry faces numerous challenges, including a possible political scandal.

GOP lawmakers question whether Solyndra's $535 million loan guarantee in 2009 — the first issued via a stimulus-funded Department of Energy loan program — was fast-tracked because of political ties. One of the company's biggest investors is a foundation controlled by Democratic fundraiser George Kaiser.

They've also questioned Chu's decision to restructure Solyndra's loan earlier this year when the company showed signs of financial distress and seized on the fact that the restructured loan calls for private investors to be paid back ahead of taxpayers.

Joshua Freed, who directs the clean-energy program at the moderate Democratic think tank Third Way, says GOP outrage has been disproportional to the size of Solyndra's loss.

He says if the U.S. government backs away from the solar industry, it would depart from a long tradition of government-private partnership that's helped launch the Internet, semi-conductors and satellite communications.

The U.S. government has no business subsidizing the industry, says David Kreutzer, an energy economist at the Heritage Foundation. "Solyndra is a crystal-clear lesson for what happens when the government tries to be a venture capitalist," he says, adding that the U.S. has managed to dominate the cellphone market without subsidies.

In Europe where subsidies are slowing down, he says the solar industry is starting to collapse. He expects the same for the U.S. industry except in niche markets where grid power is not readily accessible.

Solar company officials say their work may be curtailed but not stopped, because DOE's loan-guarantee program ended Friday. The department awarded up to $13.6 billion in federal backing for 17 large solar projects — $7.6 billion of which was finalized last month. So far, Solyndra is the only U.S.-backed company to seek bankruptcy.

"We plan to move ahead anyway … but we probably won't be able to do projects in as many states as with the loan guarantee," says Bass, spokesman for San Mateo, Calif.-based SolarCity. His company received a conditional DOE commitment last month for a $344 million loan guarantee to install solar panels on 160,000 military homes, but the guarantee wasn't finalized before Friday's deadline.

"The industry's growth occurred long before that program," says Resch, industry spokesman. He notes the U.S. government will continue to provide 30% tax credits for commercial and residential solar projects through 2016.

Treasury, manufacturing hurdles

What worries many in the industry is the looming end this December of a U.S. Treasury Department program that allows businesses to get cash grants in lieu of a tax credit.

"That's the single greatest factor in the solar industry's growth in the last two years," Resch says, adding it's easier for companies to finance projects with grants rather than credits. He says there are only minor administrative costs.

"A lot of people will be out of work unless the 1603 Treasury program is extended," he says. Without it, he says the industry may stop growing and even contract.

No one knows exactly how the end of the DOE and Treasury programs will affect the industry, says Marc Ulrich of Southern California Edison, which buys more renewable power than any other U.S. utility.

"That's where the solar-coaster comes in," Ulrich says. He expects the U.S. solar industry will retain much of its "attractiveness" globally but adds: "There will be a shake-up … and consolidation."

Arno Harris, CEO of Recurrent Energy, a developer of ultility-scale solar power projects, agrees. Without the Treasury program, he says investors may only be willing to support mature projects, and the industry's momentum may be at risk.

He cites another challenge. While falling prices are good for the industry, he says they make it more difficult for U.S. manufacturers to compete with the Chinese. His company buys panels mostly from Chinese suppliers because of their volume and low prices.

Industry analyst Greg Sheppard, of the IHS iSuppli research company, says U.S. panel manufacturers "absolutely" can compete, because panel price is not the only factor. Also important, he says, are quality, reliability and transportation costs. He says some U.S. manufacturers, having survived in the ultra-competitive semiconductor market, are very innovative.

An example is Solaria, which has at least 32 patents covering the company's technology. "You keep innovating the product and submitting new patents," says company CEO Dan Shugar.

He says his panels cost less than many Chinese ones, partly because they produce the same amount of power while using 60% less silicon-cell material. As a result, he's expanding his Fremont, Calif., facility.

Sunshine's promise

Other solar manufacturers are expanding, too. In October, Chinese-owned Suntech opened a manufacturing facility in Goodyear, Ariz., and California-based Stion announced earlier this year that it would build one in Hattiesburg, Miss.

Colorado-based Abound Solar received a $400 million loan guarantee in December to expand its factory in Longmont, Colo., and open one in Tipton, Ind.

First Solar, which received $2.1 billion in DOE loan guarantees Friday for two solar power plants in California, opened a new panel factory in Mesa, Ariz., in August.

The Tempe, Ariz.-based company can now make panels that produce electricity at 14 cents to 16 cents per kilowatt, says spokesman Alan Bernheimer. The average electricity cost to U.S. homeowners last year was 11.6 cents per kilowatt, according to DOE data.

By 2014, regardless of federal support, First Solar expects to drop that price to 10 cents to 12 cents per kilowatt.

"At that point, there's tremendous amount of interest," Bernheimer says. He says solar can be used not only to power homes but also plants that desalinate water, increasingly scarce in many parts of the world.

He says demand for solar power is growing, partly because more U.S. states are requiring that utilities derive part of their electricity from renewable sources. California law requires that a third of such power come from renewables by 2020.

The U.S. has yet another factor in its favor, he says, noting that solar panels in Arizona can produce twice as much power as those in Germany simply because they get more sun.

"You need helpful public policy, but you also need sunshine," Bernheimer says. "We have sunshine and demand."