While doing research for an upcoming Portfolio 2020 article and a presentation I’ll be giving at the Las Vegas MoneyShow, I read a number of articles about the prospects for the solar energy industry–none of were particularly bullish.

The industry is transitioning from first-generation thin film to second-generation technologies; the pioneers of thin-film solar like First Solar (NasdaqGS: FSLR) blazed a bold path, but the torch may be passing.

A confluence of events is beginning to hamstring the solar energy industry. In Europe, the subsidies or tax incentives many renewable energy projects received have been reduced or eliminated, as governments have focused on stabilizing their economies in the wake of the global economic maelstrom. There was a lot of overproduction last year in the expectation that demand for solar panels would recover as economies sorted themselves out. That isn’t happening.

Second, the only photovoltaics (PV) firms making money are Chinese PV makers. That’s because the Chinese government’s stimulus funds were distributed quickly and focused on helping Chinese industry. The US stimulus plan has yet to be even halfway distributed, which has hurt alternative energy projects and companies because no one can spend until the government writes the checks. Companies interested in renewable energy applied for stimulus money but had to wait to find out whether their requests were approved–that doesn’t help management budget for new project spending.

What’s more, solar energy is running into problems in the US on the consumer side. Many states use PACE (property assessed clean energy) to credit homeowners that upgrade their homes to maximize energy efficiency–ie, replacing windows, upgrading water heaters and furnaces, adding insulation, etc.

But many states require homeowners to improve their PACE score 10 to 20 percent before they’re eligible for a solar-energy credit. PV firms and residential solar installers are none too happy with this bureaucratic glitch, though no states have addressed this issue. Installing solar panels becomes less palatable when homeowners have to figure out their original PACE score, demonstrate the efficiency improvements and then contract with a solar provider. Given the hassle, many households will skip the solar energy and buy a Nissan Leaf.

Also, the first generation thin-film players worked in an environment where the goal was to make the most from polycrystalline ingots that form the substrate of the PVs. When the run started, polycrystalline ran north of $425 a kilogram on the spot market. Now, prices have dropped to roughly $55 a kilogram. This also reduces the biggest players’ competitive advantage.

And some of the newer entrants in the thin-film PV space are already producing more efficient PVs; even if these technologies are slightly more expensive (which can simply be an issue of scale), it may not matter if the product is superior. First Solar and SunPower Corp (NasdaqGS: SPWRA) may have run too far too fast for their own good.

These companies put thin-film solar technology on the map but may not have what it takes to take thin film to the next level. And this is precisely why I’m skittish about buying PV stocks of any kind. It’s like standing in quicksand.

The only PV company that I follow with any interest is Spire Corp (NasdaqGM: SPIR), which specializes in building turn-key 50 megawatt PV manufacturing lines. I like this concept because it allows a company to build a solar plant on its premises and install units as they become available. It has nothing to do with PVs but enables industry to control the supply of PVs based on current needs.

Along these lines, there’s another small company I like that specializes in building chemical vapor deposition equipment (CVD)–the key technology for building thin-film PVs and other cutting edge electronics. CVD Equipment (NasdaqCM: CVV) works with Fortune 500 companies, research labs and a growing list of cutting-edge start-ups to develop CVD equipment tailored to each customer’s specific needs. This is going to be an increasingly important sector in coming years.

I’ll examine the solar industry in more detail in a coming issue of our investment newsletter, Portfolio 2020.

Sail Away with Me

KCI’s editors have been combing the globe for their next luxury investment cruise: Any ports of call must be ripe with investment potential, of course, but they must provide a rich slice of the world’s treasures and unique insights into human luxury. And after the brutal year we just finished, who couldn’t use some luxuriant downtime learning how to prepare their portfolios for what this next decade has in store?

Save the dates: Thursday, October 21 – Monday, November 1, 2010. Explore the wonders of Turkey and the Greek Isles while learning about the newest investment strategies from KCI editors Roger Conrad, Elliott Gue, Yiannis Mostrous and Gregg Early. While you enjoy unfettered access to the finest minds in investing today, Seabourn Cruises will upgrade the way you think about luxury cruising as you are feted aboard the brand new Seabourn Odyssey. From its all-included open bar of premium liquor, wine and beer to its almost better than 1:1 staff-to-passenger ratio, you will understand why it immediately jumped to the top of the luxury cruise line ratings charts when it hit the water in 2009.

For those of you lucky enough to have sailed with this keen crew in the past, you know you are in for a meticulously planned journey into the business, investment and cultural offerings of the region. KCI in partnership with Joseph H. Conlin Travel Management is offering this journey solely to KCI subscribers and their friends. For more information and reservations, please click here.