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Guest Blog: Shining a Light on Global Solar Growth

Global solar power | Shining a Light on Global Solar Growth Morningstar

During 2009's fourth quarter, the solar industry was just recovering from the brutal declines in silicon and module average selling prices, or ASPs. Companies and analysts were predicting 2009 global installations would be flat at six gigawatts (GW). At the same time, the more optimistic projections for 2010 were largely falling in the range of between nine and 11 GW.

However, as installation data for the fourth quarter began to be publicized in early 2010, it became clear that the end of 2009 saw demand spike to far higher levels than almost anyone anticipated. The prime example of this was Germany, the world's largest solar market, which installed 1.46 GW in the month of December alone, or 38% of the total capacity (3.8 GW) it brought online last year. German capacity additions wound up doubling last year, and the country wound up accounting for 53% of installations worldwide.

As a result, when the German government announced a special subsidy cut to occur in July of this year to cool installation activity, concern surfaced that demand would be pulled into the first half of the year, with weakness emerging in Germany after the subsidy cuts, and with it, the resumption of module pricing declines. With the second quarter's solar results now in, it is abundantly clear that demand has remained relatively robust in Germany post-subsidy cuts, and will remain so for the rest of 2010. Additionally, attractive project internal rates of return in other countries have fueled strong installation growth elsewhere all year long. Examples would include Belgium, the Czech Republic, France, and Italy, all of which boast double-digit returns. Every major solar market seems poised to post annual growth rates of at least 50% this year. Reflecting these trends, we have updated our 2010 installations estimate to 13.6 GW, 88% above the 7.2 GW installed in 2009. Germany will again account for half of the global market, with 6.7 GW of installations occurring this year.

Global Solar Power

2011 Demand and Pricing Projections
With a slowdown prior the end of 2010 becoming highly unlikely, the focus is shifting to 2011. Multiple variables will come into play that could materially impact global demand levels as well as market pricing for modules (these, along with a company's cost structure, are the three major variables that move solar stocks).
On the demand side, subsidy reductions will be occurring in several key European markets. In Germany, subsidies will decline by an additional 10% on January 1. Cuts are also set to occur in other major markets such as Italy, where four separate reductions that will lower tariffs 25% by the end of 2011, and in the Czech Republic, where the government is still debating specifics. As a result, the high returns project investors are currently enjoying will come under pressure, unless a corresponding decline in the pricing of solar projects occurs. This implies that both system installers and module makers will have to reduce pricing to maintain strong demand. Furthermore, the industry has not only been bringing production capacity on line all year, but companies have recently been increasing their expansion plans in response to current demand levels. Even if demand remains robust in 2011, there is risk that supply will overshoot demand, creating pressure on module pricing.

With these considerations in mind, we expect ASP declines to resume in the first quarter of 2011 after being flat for the last six months. However, the magnitude of ASP declines is likely to vary significantly by company. The industry's cost leaders, First Solar (FSLR), Trina Solar (TSL), and Yingli Green Energy (YGE) all are currently selling their modules below spot pricing, due to signing customer contracts before it was evident how strong solar demand would be in 2010. Though these companies are missing out on profits in the current period, their margins will be less impacted from 2011 spot pricing declines.

On the other side of the spectrum are the higher-cost manufacturers in Europe. These companies, such as Renewable Energy Corp and Solarworld SWV, have long sold their modules at a premium to their low-cost counterparts, largely since a perception remains in solar that modules made in Europe are of superior quality, especially compared to Chinese-made product. This may have been the case five years ago, but it certainly is not anymore for tier-one Chinese modules. Reports are emerging that this "European premium" has started to erode in response to the lower project returns now available in Germany.

Global Solar Power
Global Solar power

For low-cost module manufacturers - which represent the majority of our coverage list - we are projecting 2011 ASP declines of 10-13%. For Renewable Energy Corp, our lone producer from Europe, we have updated our ASP projections, and now are forecasting ASP declines of 20%. We continue to view the pricing premiums that European manufacturers enjoy as unsustainable, and believe these will disappear completely within a few years' time.

By Stephen Simko

Stephen Simko is a Senior Equity Analyst with Morningstar.

This blog was first published on Morningstar.

Tags: energy , fund management , global markets , manufacturing , solar power , stocks and shares , sustainable energy
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