The Solar Energy Has Strong Future
Friday, June 18, 2010 11:56 AM

The Solar Energy Industries Association (SEIA) released its 2009 US Solar Industry Year in Review, finding 2009 to be another year of strong growth despite the economic recession. A combination of policies, new business models, and declining prices drove expansion in 2009; and growth is expected to continue during 2010.
Overall US solar electric capacity, including both photovoltaic and concentrating solar power installations, increased by 37% in 2009. According to the SEIA, this was driven primarily by strong demand in the residential and utility-scale markets, state and federal policy advances and declining technology prices. As a result, total solar industry revenue reached $4 billion, a 36% increase on that reported in 2008.
According to the SEIA's findings, the solar industry contributed to the overall economy by adding 17,000 new jobs from coast to coast. The solar industry today employs 46,000 US workers and supports an additional 33,000 jobs in other sectors.
According to SEIA's report, photovoltaic installations (grid-connected) grew by 38% and solar water heating rose by 10%, although solar pool heating growth was 10% less than in 2008, reflecting the decline in construction and housing markets.
The concentrating solar power (CSP) sector had three new plants come online in 2009, taking cumulative CSP capacity in the US to 432 MW, with a development pipeline totaling more than 10,000 MW.
Residential grid-tied PV solar installations showed particularly strong growth, doubling from 78 MW to 156 MW, while non-residential grid-tied PV solar installations grew 2% less than in 2008. The utility market saw notable growth, with utilities tripling their rate of grid-tied PV capacity additions from 22 MW to 66 MW. The total utility-scale pipeline (across all solar technologies) reached 17 GW, enough to power 3.4 million homes.
The U.S. solar industry is continuing to regain momentum in both the residential and commercial market, with a number of companies reporting gains overseas and in the domestic market.  One recent example comes from a Reuters report on Norcross, GA-based Suniva, which has reportedly sold out its products through 2010 and is planning to triple its exports in the next five years.  The wire service added that the company is also expected to build a 400-megawatt plant in Saginaw County, Michigan, with an eye on generating electricity there by 2011.  Americans are going to see more and more solar energy generated in the next several years, with dozens of projects under construction or being planned throughout the Southwest. Other parts of the country that do not get as steady a supply of sunlight are also increasingly embarking on their own solar projects. Some states are even home to projects that will re-invent old landfills as solar energy plants.  Elsewhere, a number of other companies have showed that they have serious potential for long-term growth with or without the various tax credits that have been provided under the government stimulus bill.
A 30%+ CAGR in solar installations is expected over the coming three years as module prices continue to fall and new markets open up; however, growth will remain choppy during periods when subsidy schemes are adjusted in key markets. Frequent supply/demand imbalances should continue in the industry; but decline in average selling prices will be moderate. Companies that are best positioned will be cost leaders and have strong balance sheet to weather continued boom and bust cycles.
Solar is relevant in subsidized markets with attractive feed-in tariffs and where regulations mandate renewable energy, especially when there is a specific solar carve out. Low-cost, established technologies that are bankable are favourable. Investors often under appreciate the importance of bankability, a critical success factor for each company. Vertical integration into downstream installation and energy markets is balance sheet-intensive, but provides a valuable level of visibility into future demand for large companies. Development pipelines can be expensive and include many early-stage projects with low likelihood of completion — diversification across a large portfolio is a major advantage.
The biggest incremental growth will be in the US utility-scale market, with an expected 2.7 GW of installations in 2012, up from 500 MW in 2009.  

Solar has a strong future for three reasons:

The installed base is miniscule at 0.15% of global electricity generation. Getting to 5% of global electricity supply by 2020 would require between 500 and 750 GW of new installations (assuming capacity factors range from 15-20%).
Dedicated subsidies: In many countries, solar benefits from dedicated subsidies and renewable energy requirements.
Solar is coincident with peak demand, relatively predictable, and can be installed as distributed generation in any scale, from 1 KW residential systems to 250 MW utility-scale installations — enabling competition with traditional generation and with end-user electricity rates.
The true economics of solar are driven by government policies and subsidies and by companies' ability to drive costs down. Long term, as the cost of solar becomes more competitive with traditional sources of electricity generation, solar will be positively correlated to natural gas prices, as solar's direct competitor is a natural gas peaking plant.

Stocks To Look Out For

First Solar (FSLR)
FSLR move downstream provides it with increased revenue visibility and makes it by far the biggest player in the US utility-scale solar market, with announced contracts of 1.4GW that represent ~50% of total announced contracts. There is less risk to FSLR's module ASPs than the market is pricing in. The market tends to focus on cost differential between FSLR' ASPs and Chinese c-Si ASPs, but often fail to take into account the lower financing costs that banks will often charge developers to finance FSLR modules. As a result, we believe that FSLR module ASPs will come in ahead of market expectations. Since its IPO in November 2006, FSLR has been able to command a significant valuation premium to its solar peers.
Evergreen Solar (ESLR)
Although the company will make progress to bring its costs of production down, Evergreen's current cost structure remains too high to compete effectively with larger producers. The company could be cost competitive with large Chinese producers if it is able to successfully execute transfer of manufacturing to China. Euro/$ FX remains a near-term headwind. Expect limited upside, but also believe that recent underperformance has left the stock with limited downside.
Energy Conversion Devices (ENER)
Energy Conversion Devices is operating at negative gross margins and will have difficulty lowering costs to compete. Balance sheet risks and shrinking cash could make project development more difficult and banks less willing to lend. Management has little visibility into sales volumes or shipment timing, and has offered no guidance. See no path to profitability, hence remaining UW on this stock.


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