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Suntech, a Chinese company that as recently as 2011 was the world’s largest producer of solar panels, is teetering on the edge of bankruptcy. It’s running low on cash, owes bond investors half a billion dollars (which it failed to pay Friday), and is saddled with payments on billions of dollars in loans as it struggles to make money in a market flooded with its product.

If Suntech fails and shuts down its factories, that might not be a bad thing. Some industry experts say that hundreds of solar companies need to fail to help bring the supply of solar panels back in line with demand. That would slow the fall in prices and, as demand recovers, allow companies to justify buying new equipment and introducing the innovations that will ultimately be needed for solar power to compete with fossil fuels.

But there’s a good chance that Suntech, and many other companies in China, will be bailed out by local governments, which would delay the much-needed reduction in production capacity. Worldwide, solar companies have the capacity to manufacture between 60 and 70 gigawatts’ worth of solar panels a year, but demand in 2013 is only expected to be about 30 gigawatts.

The worldwide glut of solar panels—which has lasted nearly two years—is partly the result of big government-backed investments in factories in China, where two-thirds of solar panel production capacity is located. The surplus has been good news for consumers and installers, because it’s helped drive a precipitous drop in solar panel prices. They’ve dropped 60 percent since the beginning of 2011, according to GTM Research. Solar panels sold for $4 per watt eight years ago. Now it’s common to buy them at 78 cents per watt, says Jenny Chase, an analyst at Bloomberg New Energy Finance.

But the rapid decline in prices has been hard for solar manufacturers. As prices have dropped, they have been able to lower costs because the price of materials has been falling and they’ve made incremental imprvements to existing manufacturing equipment. But in many cases costs haven’t fallen fast enough for companies to keep up with the falling prices for their panels, eliminating profits and making it difficult to invest in the new equipment needed to keep reducing costs.

Although the Chinese government supported the rapid growth in solar manufacturing capacity, it now says the current situation is unsustainable and recommends allowing the least competitive companies to fail. “Beijing knows that you cannot have 500 module makers in China, which is what you currently have,” Chase says. The story is not necessarily the same for local governments, which want to keep companies open to avoid losing thousands of jobs.

The situation has delayed the commercialization of advanced technology that would have required new manufacturing equipment. For example, Suntech has been promising for years to scale up production of its Pluto solar cells, which are based on designs from the University of New South Wales that set new records for efficiency and can generate significantly more electricity than conventional ones (see “The Chinese Solar Machine”). But that technology has been put on hold.

The oversupply of cheap solar panels has been particularly difficult for startups and other companies with novel technologies. They’ve had to cancel plans to build factories because of a lack of demand. GE has developed its own alternative to conventional silicon solar panels, but last year it announced that it had to put its factory on hold until the market improves (see “GE Stalls Solar Factory Construction”). Even companies founded specifically to help conventional silicon solar manufacturers lower costs are struggling because no one is buying new equipment, and some of them have gone out of business as a result.

The recovery of the solar market will depend in part on how fast companies are allowed to fail. It will also depend on expansion of the worldwide market. The drop in solar panel prices is opening up new markets as solar power starts to look competitive with conventional sources in many places—especially countries like Chile, where sunlight is abundant and electricity prices are high. But it’s not clear how fast those markets can grow.

To be sure, the failure of Suntech and other solar companies could have serious downsides. Yet it’s also true that the companies left standing would be more likely to acquire technology and push it forward—if it seems promising. Chase says the best way to determine who has the best technology is to let the market decide, and that means allowing companies to fail.

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Credit: Qilai Shen | In Pictures | Corbis | APImages

Tagged: Business, Energy, renewable energy, solar panels, Suntech, bankruptcy

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