Solar Failures Rising

Those who wish death upon the solar industry are about to be given a gift.

According to a New York Times investigation, reports of defective solar panels are starting to rise — just as the industry is on the cusp of significant adoption and expansion.

Energy analyst Todd Woody points out that no one is exactly certain how pervasive the problem is, writing:

There are no industry-wide figures about defective solar panels. And when defects are discovered, confidentiality agreements often keep the manufacturer’s identity secret, making accountability in the industry all the more difficult.

Here’s the problem…

In an effort to cut costs, solar cell and panel manufacturers — as well as chemical companies that provide specialized materials for the industry — have been cutting corners. As a result, quality control may have been suffering.

And unfortunately, the extent of these cost-cutting measures may not be fully realized for another year or two, as the lion’s share of new solar installations were rolled out in 2012.

In other words, any potential defects tend to take a few years to be noticed.

For instance, a solar power system on a warehouse in California has recently been discovered to have faulty coatings on its panels. This has resulted in hundreds of thousands of dollars in lost revenues. Certainly not the kind of PR the solar industry is looking for…

But because of confidentiality agreements, the public has no idea as to who provided these coatings.

Of course, I would actually argue that the coatings found on solar panels today will be as relevant as the typewriter in another year or two…

The truth is while conventional coatings have been used primarily as a protective measure, new coatings coming out of U.S. labs are now also providing increases in efficiency.

Certainly you’ve read about those new “black solar” coatings that actually boost the amount of power generated by solar power systems. Black solar is actually the next generation in coating technology.

Quality Control

While faulty coatings have been to blame on some projects, overall, it looks like cell and panel manufacturers have been skimping on quality control, too.

But due to confidentiality agreements and the dozens of panel and cell manufacturers that supply the industry, it’s hard to pin down the responsible parties.

Most analysts with whom I have spoken believe the lion’s share of defective cells and panels are coming from China, as China isn’t particularly known for quality or transparency. But I’m not so certain you can cast that wide of a net.

I’m not saying that most of these defective materials aren’t coming from China. After all, the odds alone favor such an argument. The majority of the world’s cell and panel suppliers are based in China.

But I wouldn’t be so quick to assume guilt by Chinese association on this one…

The Race to Grid Parity

SolarCity (NASDAQ: SCTY), a quality solar installer and leasing company, is not an organization that is likely to gloss over quality concerns. Run by the same guy who runs Tesla (NASDAQ: TSLA), Elon Musk, the company has proven to be a major force in the solar sector.

SolarCity actually uses a couple of Chinese manufacturers, including Yingli (NYSE: YGE), which has actually had a small number of defective modules returned. We’re talking 15 of the nearly 3 million that now call the United States home. As well, YGE offers insurance policies to its customers and runs a separate testing facility in the United States, where quality control tends to be a bit more stringent than in China.

Of course, it should be noted that U.S. manufacturers have also had their fair share of defective modules. But for the sake of clarification, the major U.S. manufacturers don’t actually manufacture everything domestically. For instance, SunPower (NASDAQ: SPWR) runs a manufacturing facility in the Philippines.

In any event, it’ll be interesting to see how this plays out over the next year or two. I do believe we will see more defective systems, and this will likely be the final nail in the coffin for those manufacturers that are already teetering on the edge of the abyss.

You can cut costs all you want. But at the end of the day, you get what you pay for.

I believe it was Benjamin Franklin who once said, “The bitterness of poor quality remains long after the sweetness of low price is forgotten.”

So, will defective solar panels hurt the industry? Absolutely. But it won’t be enough to stop its amazing ride to grid parity.

As long as the problem doesn’t persist, this bump in the road will be miles behind us in no time at all.

That being said, I wouldn’t be too quick to jump on any solar manufacturers any time soon. If you want to play the solar sector, stick with SolarCity.

To a new way of life and a new generation of wealth…

Jeff Siegel Signature