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Rough Summer Ahead For Solar Industry

Posted on Thursday, Jun 10th 2010

The solar market is preparing for a tough summer. Despite growth in demand, the industry is worried about the feed-in tariff cuts to be imposed by Germany, the world’s biggest solar energy market, from July 1. Following the Greek economic crisis, governments across the continent are cutting subsidies and expenses to manage their budgets. Benefits being given to the renewable energy projects are being trimmed back to keep spending in check. The Italian solar industry expects that country’s government support for renewable energy projects to be reduced by 25% or more in the coming quarter. Spain is also talking of reducing feed-in tariff levels. The falling euro is making matters worse: Input wafer prices and cell prices are increasing while the euro-dominated module sale prices are depreciating, thus impacting reported margins. China remains a strong competitive factor; according to a Pew research report, China is the leader in clean energy investments with $34.6 billion, and the United States follows far behind with $18.6 billion in public and private investments. The Chinese government is still deciding on feed-in tariffs, and many expect the decision to come by next summer, making it difficult for foreign players to invest in China. Meanwhile, Chinese players are continuing to flood the market with lower-priced options, causing worry among local U.S. players.

Despite the concerns, First Solar’s (NASDAQ:FSLR) Q1 revenues grew 36% to $568 million compared with $540.6 million expected by the market. EPS grew marginally to $2.00 from $1.99 a year ago.

During the quarter, the company recorded 47% growth in production to 322 megawatts. It reached an annual capacity per line of 55.7 megawatts with a projected capacity of 2.1 gigawatts by the end of 2012. Conversion efficiency continued to improve and was 11.1% for the quarter. Cost per watt also continued to fall and declined 13% over the year to $0.81.

Despite the economic troubles, First Solar projects the solar industry to grow at an annualized rate of 30% to 2012. It projects 2010 demand to be nearly 9.9 gigawatts and is thus increasing capacity to cater to this growing demand. The company is building a new manufacturing plant with an annual capacity of producing 220 megawatts of solar panels. The delay in the Chinese government’s decision on feed-in tariffs has affected First Solar’s Chinese manufacturing plant. However, the company is working with federal and provincial agencies to help speed up the process.

First Solar is also growing inorganically and recently announced the acquisition of Next Light Power for $285 million. Next Light Power comes with over 570 megawatts of solar power contracts with Pacific Gas & Electric and NV Energy. Additionally, it has 530 megawatts of photovoltaic power projects under development. Next Light had the second- largest utility scale photovoltaic project pipeline after First Solar. With the acquisition, First Solar has ensured its dominance of the U.S. utility-scale project space.

The company projects revenues of $2.6 billion–$2.7 billion for the year with EPS of $6.80–$7.30. While the revenues were in line with the market expectations, they exceeded the market’s earnings target of $6.23.

The stock is trading at $103.07 with a market capitalization of $8.79 billion. It is significantly lower than a year ago, when it was trading at a high of $187.50.

Another key player, SunPower (NASDAQ:SWPRB), managed to beat Q1 revenue managed expectations, but EPS fell short. Revenues for the quarter grew from $212 million a year ago to $347 million and exceeded the market’s projected $346 million. Earnings grew from a loss of $0.09 per share a year ago to earnings of $0.05 a share but were still significantly lower than the market’s projected earnings of $0.08 a share. SunPower blamed the lower margins on seasonality, delayed projects and “unabsorbed costs related to deferred revenue as a result of the company’s acquisition of SunRay Renewable Ventures.”

SunPower is focusing on Italy and recently managed to get €44.5 million in funding to expand the country’s first solar power park. It expects to complete the 85-megawatt Montalto di Castro park by the end of this year. But, with the Italian government also thinking of subsidy cuts, SunPower will need to look to alternate markets. In my opinion, Europe will be very problematic for the Solar players in the near term. For fiscal 2009, SunPower reported over 53% revenues from Europe. The company needs to reorient its portfolio to weigh heavier toward other regions. Markets such India, where the government has initiated discussions on feed-in tariffs, offer good opportunities to do so.

Many analysts are concerned about SunPower’s ability to succeed in an industry with significant pressures on margins. With Chinese players entering the residential market with lower priced offerings, reports indicate that SunPower is losing market share. Auriga Securities analyst Mark Bachman estimated that the number of megawatts SunPower won in solar project applications “grew 58% year-to-date over 2009. But the market as a whole surged 95%.”

But SunPower is trying to shift focus from the residential and commercial segment to the development of utility-scale solar project developments. As part of this focus, it recently launched the SunPower Oasis Power Plant, a modular solar power block that scales from 1 megawatt distributed installations to large central station power plants. The power block provides “a fully integrated, cost-effective way to rapidly deploy utility-scale solar, streamlining the development and construction process. ”

The company is also continuing to partner with other players in the industry and recently tied up with AU Optronics, a Taiwan-based global manufacturer of thin-film transistor liquid crystal displays. The $700 million equally shared joint venture will own and operate a 1.4 gigawatt solar cell fabrication facility under construction in Malaysia. SunPower is looking to increase its solar cell production capacity at significantly lower costs through this joint venture.

For fiscal 2010, the company projects revenues of $2.0 billion–$2.25 billion with EPS of $1.25–$1.65.  For the second quarter, projected revenues are $380 million–$420 million with EPS of $0.05–$0.12.

The stock is trading at $9.95 with a market capitalization of $418.23 million. Earlier last month, it touched a 52-week low of $10.11. As blogger Michael Kanellos rightly says, “Solar has just begun. If SunPower continues on its path, it could have a long runway ahead of it”.

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great post, detailing market analysis of top solar power companies. Lot of details of how solar market is running in different countries.

Jebaraj Samuel Friday, June 11, 2010 at 12:46 AM PT