Does Spain's Experience Indicate that Solar's Day of Reckoning Here?

The world of alternative energy projects these days has a very few interesting ideas related to things like ethanol, wind, geothermal, algae and other technologies that could provide real solutions to some of the energy problems that we face. Nevertheless, at the venture capital symposium, the halls are full of investors and entrepreneurs who are focused primarily on solar opportunities. And, solar stocks are trading at valuations that would make a 1999 internet stock investor blush. First Solar (FSLR), the leading manufacturer of solar components, trading at approximately 12x revenue, in spite of a recent and dramatic pullback (remember Inktomi?).

Against this backdrop, I read this article in today's New York Times, entitled "Solar Power Learns Lessons in Spanish Sun" with great interest. The article describes how Spain over-incentivized the solar industry through feed-in tariffs to make solar production competitive with other sources in 2006 and 2007. This in turn led to too much investment in the solar industry, and the government's withdrawal of such direct subsidies resulted in a bust in the industry post-2008.

Like in Spain, solar energy is not current competitive with other sources of energy in the US. And, like in Spain a couple of years ago, US government policy today is heavily directed towards encouraging the proliferation of solar energy. In the US, however, instead of feed-in tariffs, the main source of government incentives are directed through the Investment Recovery and Reconciliation Act of 2009 Section 1603 which provides direct credits to investments in the solar industry to the tune of as much as 30% of the total investment. Solar is also promoted in some US states and municipalities through other incentive programs including buyer-oriented incentives to purchase solar-generated power.

Investors and solar industry entrepreneurs who I encounter seem to rely on the hope that photovoltaic systems produced in China will enable solar to "one day" become cost effective or to reach "grid parity" where costs of production are below those at which it is sold onto the grid (i.e., below those of alternatives). Many of these investors however also recognize that advances in competing technologies, the increasing abundance of cheap natural gas, and economies of scale in other alternative energy technologies (that will seemingly never exist for solar) may make grid parity for solar a pipe dream. In their haste to invest in solar, some investors even proffer the argument that grid parity is not necessary for solar to have an application, ignoring the reality that virtually everything is on the grid in the US (unlike in Israel or Italy) and the market for solar equipment to power emergency phones of the highway may be real, but it is very, very small.

Questions about the cost structure of solar produce very real policy questions about the legitimacy of US government incentives to fund solar. The New York Times article refers to "hastily opened plants [in Spain that] offered no hope of being cost-competitive with conventional power, being poorly designed or located where sunshine was inadequate." While US incentives may be different in form, if solar is not competitive in terms of a core value proposition, these incentives will ultimately lead to over-investment, just as they did in Spain. Then, they will lead to a bust, just as they did in Spain.

It is a shame that in the US we cannot learn from the experiences of others, but are going to need to manufacture our own bubble.