Thursday, February 18, 2010

Solar stocks oversold?

Solar stocks have had a rough month. Some of the biggest names that I follow have sold off 20-30%, despite the fact that year over year comparisons should be turning quite positive for the group in Q1-Q2 2010.

The industry is likely to grow by 30% (in GW installed, if not $) this year to reach ~8GW globally (+/- 0.5GW) so the selloff seems rather overdone. And I blame this at least in part on the solar analysts running around without a clue.

Yes there is some uncertainty how the industry will cope with a one off ~15% reduction (25% for open field/solar farms) in German subsidies beginning in July 2010 (according to the latest reports). But compared to the ~50% reduction in panel prices we saw last year--which incidentally spurred the uptick in installations in Germany, such that Germany now feels the subsidy is too generous--adjusting to 15% subsidy decline seems quite manageable. Not painless, but manageable.

For one thing, the 15% cut (maximum*) will be spread across the entire supply chain, not just panel manufacturers. *I say maximum for the following reason: Assume that by magic on July 1 the installed cost the developer pays were to fall by 15% to match the decline in the subsidy, there would be no change in the (massive) rate of growth of German installations.

This is a fairly simple point but many analysts (who should know better!) are screwing it up. I've seen analysts say that panel prices must fall 30% or more to close the gap. This analyst has obviously learned that solar panel make up ~1/2 the cost of a solar install and decided that if you assume everything else is fixed, the only way to make the equation balance is to reduce solar panel prices by 2x the subsidy decline. *Bonehead* I can only assume this analyst used to be part of the brain trust that assumed housing prices can only go up.

Just yesterday Zacks put out a note stating that starting April 1 German subsidies paid to solar will fall by 50% (in 2011). (I don't fault them for getting the date wrong--its actually July 1--since the German ministry in charge has done a god-awful job communicating the "when".) But really... a 15% cut in April or July (or even the 25% cut for open field installs) + another 10% cut (scheduled to occur on Jan 1 2011) does not equal a 50% cut! Shame on Zacks!

The cut is significant, but lets be serious here.

If we are going to examine the cuts to the German subsidy, let us also mention the coincident ~5 eurocent/kwh increase to consumers that use the PV electricity they generate. Assuming you were installing a medium or large size system and then using the electricity on your premises (as most commercial installations would), you could even be better off under the new regime. Only the smallest installations get the top subsidy rate in Germany. I don't know the relative size of the various segment in the German PV market, so I don't know what the overall effect will be, but I think it is worth being aware of.