Apr 28, 2012 05:54 PM

Hazards of Sun-Worshiping

First Solar, a U.S.-based company that is the world's largest maker of solar thin-film panels, saw its stock hit a record low on April 27. The stock is down 87 percent in the past 12 months. Its thin-film cells compete against more traditional polysilicon-based solar. But with polysilicon prices crashing, First Solar is getting crushed, despite manufacturing cutbacks and laying off workers.

The solar industry is booming yet many of its leading manufacturers have never been in worse financial shape. Last year, global solar spending jumped by 36 percent to US$ 136 billion, according to Bloomberg New Energy Finance. But this is a financially troubled industry, one whose problems seem to mount by the week.

This is at best a time of profitless prosperity for solar manufacturers, with strong sales balanced by heavy losses and deep-rooted financial difficulties. This is certainly the case in China, where the solar industry exemplifies both the promise and the perils of China's state-directed investment policies.

A period of extraordinary investment has caused prices of everything from polysilicon to finished solar panels to fall. Falling prices have spurred a boom in sales but ushered in a period of financial distress. In a best-case scenario, the losers will be winnowed out and the survivors would emerge as global leaders in a dynamic industry. But if China's bankers and bureaucrats decide to keep coddling the weak players by rolling over loans, the result will be expensive for China. An industry filled with weak players will be unlikely to fund the sorts of investments needed for continued technological progress.

The story behind this apparent paradox tells a lot about China's approach to clean energy. Tens of billions of dollars have been lent by China's banks to help China develop a leading global position in solar. A big increase in the Chinese manufacturing capacity for polysilicon, a key solar panel ingredient, and solar panel manufacturing capacity, has pushed down prices.

China's ambition to own the global solar market is no secret. China already makes more than half of all the solar panels in the world. Solar installations in China grew six-fold last year.

How much are these solar ambitions costing China? And can the country's vaunted industrial policy make the sorts of tough decisions needed to make a stronger industry?

According to published data sourced to Mercom Capital Group, China Development Bank promised US$ 31.8 billion to five solar companies in 2010 alone. The US$ 31.8 billion in credits made up the top five debt deals in the world for the solar industry that year. In short, there's a lot at stake for China in general and for China Development Bank, in particular.

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