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A Silver Lining in Declining Solar Prices

Quarterly earnings numbers are out for many publicly-traded solar manufacturing companies, and you'd be forgiven for thinking the solar industry is in trouble. Why? Because the global price of solar panels is falling and putting pressure on profit margins — and that spells bad news for manufacturers' earnings.

This is a reminder that what is good for a market isn't necessarily good for all market participants. Declining prices mean only those with the lowest manufacturing costs (and business models that work on much thinner margins) will earn the profits necessary to survive. Those that can't will fall by the wayside.

The recent news about Solyndra is a case in point. Solyndra had a compelling technology when solar modules cost $3.25/Watt. But the technology didn’t prove out in a world where costs are rapidly approaching $1/Watt. This is the Darwinian process by which markets reward innovation and starve stagnation. And it is this process that will ultimately deliver cost-effective solutions to climate change.

A 70 percent decline in solar panel prices over the last 24 months has many in the industry forecasting a brutal shakeout ahead. I'd argue that this picture misses an important point. It's myopic to focus solely on earnings of one segment of the industry. There's a silver lining for the world in declining solar prices: cheaper solar power.

The less solar power costs, the more favorably it compares to conventional power, and the more attractive it becomes to utilities and energy users around the globe. Utility-scale solar power can now be delivered in California at prices well below $100/MWh ($0.10/kWh) less than most other peak generators, even those running on low-cost natural gas. Lower solar module costs also stimulate demand from consumer markets where the cost of solar compares very favorably to retail electric rates.

Bottom line: declining prices mean ever growing demand for solar power. That means an ever bigger role for solar in our generating mix and an increasing impact addressing climate change.

Many may see today's handwringing about solar stocks as an indication we need to go back to past policies of rich direct subsidies for solar. The reality is "the way things used to be" isn't a viable option. Government appetite for direct solar subsidies is waning and the industry must make the transition to electricity market demand.

That's not necessarily a bad thing. Just as there's a silver lining to declining module prices, there's also an important upside to the broader changes happening in our industry: the companies that emerge successfully from our shifting subsidy landscape will be the very companies that help usher us into an era of grid parity, where solar competes on equal footing with gas, coal, and other traditional power sources.

But that's only if we play our cards right, both as an industry and as a nation. As I've written before, changes to key policies — specifically, those that impact how projects are financed — are critical to developing a strong and competitive solar PV market. Ultimately, the leaders that overcome today's crisis will be those that can tap the full potential of competitive demand, capturing massive scale as solar becomes a part of the mainstream energy supply.

This post originally ran on National Geographic's The Great Energy Challenge Blog curated by Planet Forward, and was republished with permission. 

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