Is the solar bubble about to burst?

Lux Research published a report last Thursday predicting the "End of the Beginning" of the solar industry. Among their key conclusions are supply will exceed starting in 2009, and crystalline producers will be especially in trouble. I tend to disagree.

Most industry forecasts got it wrong in the past when it comes to demand forecasting. The key unknown factor over the next few years is how the market is going to behave when solar nears grid parity. It's too early to tell how price elastic the solar market is and what demand response are we going to get out of dropping average selling price (ASP). The current German feed-in tariff system has worked out very well in the past few years and offered a excellent live working example to governments around the world that are evaluating their renewable energy strategy. Some may not want to jump on the ship yet at current price level, but what if when solar electricity price drops another 50%, and conventional base load electricity price (meaning coal burning) increase 50%? A scenario that is very likely going to happen in the next few years. Guess how many countries will then rush to try catch the train? Well I guess everybody. If there is a solar bubble as such, the bubble hasn't formed yet!

What we do know for now is:

1. It costs around US$30 to produce a kilo of polysilicon.

So long term sustainable poly price should be in the low $40 range. That translates to 30cents/watt. At this rate, the crystalline producers will be able to produce module at around $1.30/w, with 25% gross margin, asp should be at around $1.65 in 3 years. At that point, module price will be a much smaller portion of the total system cost, around a third. Thin film the way it is now will have a hard time to compete since at half the efficiency, it needs twice as much of everything else - labor, land, frame, tracker, etc, to get to the same output watt.

2. On the other side, entry barriers for crystalline solar is so low that there won't be a shortage of crystalline producers to meet the demand.

So the key interesting questions for investors is, who will be the winners among the numerous crystalline producers? And what does it take to become the winner? I'm thinking maybe history of some other industries will give a clue. Take for example the PC industry, at the beginning there were also numerous PC producers. But ultimately winners like Dell emerge because they figured the secret sauce to win in a commodity like environment.

So what's the secret sauce for crystalline solar? Whichever companies can figure that out will be tomorrow's giants. And investors who can spot the winners early will be heavily rewarded.