Solar in 2010: Better or Worse?

Is the solar industry heading into a recovery in 2010? Or will the oversupply of solar modules that helped make 2009 such a challenging year for most solar companies drag on another year? As the new year approaches, the outlook seems as unclear as ever.

On Monday, the bull camp won over a few more converts. JA Solar (s jaso) raised its guidance for the fourth quarter of 2009, expecting solar shipments to exceed 210 megawatts, compared with its previous estimate of shipments between 170 megawatts and 200 megawatts, thanks to “robust orders” from new and existing customers.

For all of 2010, JA said shipments would increase more than 60 percent to between 750 megawatts and 800 megawatts. JA Solar’s stock, which rose 16 percent during market hours (before the announcement), was up another 6 percent in after hours trading to $5.64.

Also boarding the bullish bandwagon is institutional investor Hugh Simon, who co-manages the Dreyfus Greater China Investment Fund (which has gained 118 percent this year). Simon told Bloomberg News that continued stimulus spending by the Chinese government on clean energy would push up Chinese solar stocks such as Suntech Power (s stp).

Chinese solar makers, supported by stimulus spending, have been winners in the brutal game of slashing solar costs. Suntech’s stock is up 49 percent so far in 2009, while Yingli Green Energy is up (s yge) 152 percent and Trina Solar (s tse) has risen 439 percent.

And last week, Shawn Kravetz, whose firm Esplanade Capital manages a solar-focused fund, said many mainstream investors don’t understand the solar sector and aren’t aware that many companies are profitable. In an interview with Reuters, Kravetz called solar “a meaningful market that can grow ten or 100-fold with companies trading at single digits.”

Experienced solar investors who have endured the past year of module overproduction, scarce credit, slack demand and plunging prices might be skeptical. After all, before the prices of solar stocks plunged, many were surging irrationally as the road to solar riches proved longer and rockier than expected.

So with big investors feeling bullish and companies like JA Solar ramping up production, does that mean the good times are back? Maybe not. If demand among cautious consumers, credit-hungry consumers and deficit-burdened governments doesn’t match increased production, the solar glut could continue.

Paul Lemming, an analyst at Soleil Securities, estimates that the amount of polysilicon for sale will increase by 70 percent as companies add new capacity. But he doesn’t see supply and demand coming into balance before 2011, meaning prices could fall even further. Polysilicon prices on the spot market have fallen to around $55 per kilogram, and Lemming sees them falling to around $35 per kilogram.

In short, the outlook for solar remains as volatile and uncertain as ever. A stronger economy could spur the demand for solar goods. But the solar industry is proving to be a highly cyclical one, where progress comes in fits and starts, and there could be more hard times before solar finally delivers on its mainstream promise.

Image courtesy of NREL.