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News Highlights; Solar Update; Wind Update; Market Commentary

Issue 71: June 2010

Status of Solar Industry & Stocks

Although you'd never know it from the solar sector's stock performance, solar grew dramatically in 2009 worldwide and is having a strong 2010.

In 2009, about 7300 MW of solar PV was installed, up 20% from 2008, for a total of 6.43 GW - enough to supply electricity for 5.5 million households each year. Also, 127 MW of solar thermal plants came online, bringing the world total to 613 MW. Solar meets about 1% of electricity demand in Germany and over 2% in Spain.

The PV industry generated $38 billion in global revenues in 2009, while raising over $13.5 billion in equity and debt, up 8% on the prior year. European countries accounted for 4.75 GW, or 74% of world demand; the US was third largest, growing 36% to 485 MW.

With few exceptions, solar stocks have been on a roller coaster the past year. The sector dropped 21% in May after a single digit decline in April. Investor interest cratered as the Euro currency crisis unfolded, adding to the volatility over the past year because of anticipated subsidy cuts in Germany and Spain.

We've written about the huge influx of solar firms - there are now over 190 cell and module makers, making consolidation inevitable for weaker players. The silver lining is that overcapacity and intense competition creates downward pressure on prices, which is accelerating grid parity for the cost of solar to the 2013 timeframe in many markets.

Pike Research forecasts that worldwide solar demand, driven by lower costs and greater availability of credit, will increase to 10.1 GW in 2010, an increase of almost 43% year-over-year, and to 19 GW by 2013, a 25% compound annual growth rate (CAGR) from 2010. Germany will continue to see steady growth, but the biggest markets will be the US and China. The most important differentiators for successful solar companies will be: (1) low cost per watt, (2) module efficiency, and (3) moving down the supply chain to provide "one-stop shopping."

Situation in Europe

Germany has been planning to reduce its historic feed-in subsidies 15% on July 1, but that doesn't look like it's happening. Any delay or reduction in subsidy cuts should be a significant catalyst for solar stocks. 

On June 4, Germany's upper house of parliament blocked the proposal to cut subsidies 15% and is instead pushing for a 10% cut later in the year.  German states banded together to curb the cuts to save jobs and on concerns about future investment in the sector. The amended bill now goes to a reconciliation committee which meets in July, pushing off the cut at least until September.

Installations are surging ahead of the cut as people capitalize on government benefits before the rebates decline, and there should be another bump in Q3 anticipation of a 2011 cut. Germany could account for over 40% of the solar market in 2010, installing 7-8 GW (a 78% increase), according to Ardour Capital. Their global forecast for the year is 11.5 GW, with 5 GW in Germany. The boom should continue into 2011 when Germany will have a massive 9.5 GW installed, making fears of a collapsing market there unfounded.

Spain's National Energy Commission is still debating how much to reduce feed-in tariff rates, but it could be as much as 45%. Since Spain accounts for just 2% of global PV installations, the outcome isn't expected to have a material effect on the global solar market. 

Uncertainty about feed-in cuts in Italy and France for 2011 could also spur strong demand in 2010, mirroring Germany's situation. Other European countries are prime markets for growth, along with the US and China.

China is expected to be the largest solar market by 2015 although the country is re-thinking its feed-in law. China has invested over $1 billion in solar and wants to prevent the market from over-heating. Suntech (STP), China's largest solar PV manufacturer, estimates domestic sales will account for only 5% of 2010 sales, whereas 85% will be in Europe and North America.

Ardour Capital expects the US market to double in 2010, adding about 1 GW of new capacity, and projects capacity to grow from 2 GW in 2009 to a blockbuster 11 GW by 2015. Strong demand should keep prices from declining further this year, another concern for investors.

Solar Stocks

While selling could continue in the near term, investors may want to allocate some long term capital to stocks that are now at historically low levels. Stocks will rebound as economies recover and oil prices rise.

Beneficiaries would be module manufacturers First Solar (FSLR), Trina Solar (TSL) and SolarWorld (SWV.DE), which we've been recommending for the past year. SAG Solarstrom (SAG.DE) stands out on the developer side and Power-One (PWER) is leading on inverters.

Based in China, Trina stands out because of its strong balance sheet, low cost structure, high efficiency panels and strong presence in China and the US. Trina nearly quadrupled shipments in the first quarter, and forecasts strong growth through 2010, particularly in the US.

Trina has grown 15+% a year for the past six years. It makes the second-most efficient PV cell (after SunPower) for just $0.78 per watt, among the lowest cost in the industry. This has resulted in significant profits with margins over 30%. First Solar is the only solar company with lower costs because it uses recycled cadmium telluride for its thin film cells instead of silicon.

Although Trina did 90% of its business in Germany and Spain in 2009, it's quickly diversifying into the US, China and other emerging markets. About 30% of sales will be in Germany this year. German subsidies allow Trina to cut prices even more and while the decline of the Euro is worrisome, the company can compete even in a tough market. When the European market stabilizes and they further diversify, their prospects are very bright.

First Solar, the world's largest solar firm, remains best-in-class in 2010 and is benefiting from an improving industry outlook. Manufacturing process improvements and recent price stabilization have helped preserve its strong margins despite dramatic cost competition from Chinese players.

The company is doubling its capacity in Germany, from 223 MW to 446 MW by late 2011. The expansion is valued at $250 million in revenue and brings its total capacity from 1.3 GW today to 2.1 GW in 2012. The announcement demonstrates the strength of the German solar market, and although about half First Solar's sales will remain in Germany, it's also expanding into the US, France and China. For more on First Solar, see the SB20 profile in issue 64.

Ardour Capital believes First Solar is most insulated from the Euro in the solar group because of its low cost structure and that Chinese firms generally are most at risk. 

SolarWorld, with its top brand, is the best positioned solar company in the coveted German rooftop market. Its strong balance sheet and vertically integrated facilities in Germany and the US differentiate it form its peers.

Solar plant developer SAG Solarstrom is Ardour Capital's top pick among the European companies. SAG reported record profits in 2009 and proposed its first dividend. It has the lowest exposure to the Euro - international sales grew 60% year-over-year by making strong inroads in the robust Czech Republic market.

Inverters are in short supply right now and Power-One is selling them as fast as they can build them. They're increasing capacity to 3 GW by the end of this year - this should be a break-out year for them.

Research firm Canaccord Adams came out of a meeting with solar industry representatives this month feeling "incrementally positive on the solar sector." After talking with installers, developers and wholesalers they see the rest of 2010 shaping up better than anticipated. Every module maker says they're sold out for the year and developers seem to have access to financing and aren't delayed scheduled projects.  

European institutional investor demand for completed projects remains very strong, not only at today's abnormally high rates of return, but even at reduced returns implied by subsidy cuts, given the stability of a PV project's fixed income stream relative to other European fixed income investments at this time.

Prices for modules are up over the last quarter and given the strong demand and sold out supply, may rise further in the third quarter. Tier-1 Chinese modules are increasingly becoming undistinguishable from top European suppliers in terms of bankability and module quality. Foreign exchange is still a major risk for solar firms, but some have been able to re-negotiate agreements from Euro to US dollars.


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