FRANKFURT Many of the world's solar energy companies could fail or fall into the arms of stronger rivals as the financial crisis raises borrowing costs and as solar module prices fall.
Any such shake-out would in turn precipitate consolidation in the industry, which has for years been attracting heavy investment and government subsidies that have driven supply ahead of demand.
"In our view, too much solar capacity has been added relative to demand, and will lead to oversupply," Goldman Sachs analysts wrote, adding that the consequences would drive module prices down by about 15 percent next year.
Oversupply and an easing of demand as economies slow will help the cost of photovoltaic solar energy fall in line with the cost of conventional electricity -- so-called "grid parity" -- which will ultimately give the sector a boost, but not before many companies have fallen by the wayside.
A toxic mix of tight credit and falling prices will make it especially perilous for those solar companies with weak cash flows and high debt.
"On a global average, three out of four (solar energy) companies will not make it," said Robert Schramm, analyst at Germany's Commerzbank.
Commerzbank said the impact of tougher financing conditions would affect returns seven times more than would module prices. It puts next year's financing needs for global photovoltaic projects at 33 billion euros, of which 20 billion would need debt financing.
But all indications pointed to a near halt in debt financing for large-scale solar power parks outside Germany, Commerzbank added, which would last until at least the second quarter of 2009.
WINNERS AND LOSERS
U.S. solar panel maker Evergreen Solar, for example, warned in October that if credit markets did not improve in the next nine months, it would not be able to fund a $400 million production facility it needs to deliver on its 2010 contracts.
Evergreen Solar operates a joint venture with Norway's Renewable Energy Corp (REC), one of the world's top polysilicon manufacturers, and Germany's Q-Cells, the world's largest solar cell maker.
"We think that about 10 percent of the companies may fall victim to the current financial crisis -- most of them in Asia," Credit Suisse analyst Karsten Iltgen wrote in a note.
Thomas Weisel Partners has downgraded China-based solar cell makers Suntech Power Holdings Co Ltd and JA Solar in light of waning demand due to the credit crisis.
So where should equity investment in the sector go?
Goldman Sachs says shares in equipment makers with strong market share, technology leadership and take-over potential could be winners, including Switzerland's Meyer Burger and Germany's Roth & Rau, on which it has "buy" ratings.
Credit Suisse's Iltgen also favors Roth & Rau, which makes machines used for the production of solar cells, and notes the company's low valuation and strong cash position.
Roth & Rau shares trade at a discount to Meyer Burger as well as German rivals Centrotherm and Manz Automation.
But Hans-Otto Truemper, managing director of Grossboetzl, Schmitz & Partner, which has 1.8 billion euros of assets under management, still thinks the timing is not ideal.
"If you look at the current energy costs -- oil prices have practically more than halved -- then the competitiveness of solar and wind power needs to be called into question," he said.
"However, I see opportunities in the sector," he added. "And in the long term, there is no way around it."
(Editing by Will Waterman)