Solar Stocks: Will ARRA Funding Shake Up the Sector?

New tax credits, grants and loan guarantees through the American Recovery and Investment Act (ARRA), administered through the Department of Energy, can only be used for solar projects in the United States. With the global revenue mix of public solar module manufacturers, will it even have much of an effect on valuations, especially short-term?

Recently, a NY private equity firm contacted me with this very question for three solar stocks in their portfolio: Evergreen Solar (ESLR), Trina Solar (TSL) and Solarfun (SOLF).

The US market for solar modules remains the smallest, but most likely fastest growing, country market out of total global revenue for ESLR, TSL and SOLF. US revenue as a percentage of global revenue is highest as of Q2 2009 for ESLR at 24%, and still relatively small for both SOLF and TSL at 1 – 2%.

In this context, the short-term impact of new US Government financing mechanisms may accelerate new downstream solar projects for which the portfolio companies are suppliers. Fellow Seeking Alpha contributor Kelvin Schulle, pointed this out here.

However, in a broader context, as mentioned the US represents a small percentage of overall revenue. Interestingly, the portfolio companies are using diverse financing techniques for projects that will supply their non-US markets, including the US Ex-Im Bank and Chinese government. And some non-US banks are being used for customer financing in the US.

As mentioned in this summer’s Renewable Energy Finance Forum (REFF) – Wall Street, renewable energy deal cap structures are evolving. A typical deal may be 55% debt, 30% US Gov. grant and 15% equity. Overall, US dealflow of solar projects should ramp in 2010.

Specifically, there were some interesting comments surrounding the growth of US markets and the effects of ARRA financing during the second quarter conference calls. The transcripts on Seeking Alpha are linked below.

Of the three portfolio companies, Evergreen Solar has the largest US presence, growing sequentially from Q1 to Q2 from 20% to 24%. The call suggested pent-up demand on commercial and utility scale projects that would benefit from guidance on the DOE Loan Guarantee and Treasury Grant Programs issued in August.

Trina Solar currently has a small US presence but sees the US as an “emerging” and its fastest growing global market accounting for as much as 15 – 20% of global revenue in Q4. TSL noted an increase in US module orders financed by state and city solar programs in California and Florida.

For Solarfun, as of Q2, percentage of global revenue in the US is small, maybe around 1%, but expected to ramp in Q3 and Q4. A recent sales office opened in California and alliances formed with US strategic partners.

Stay tuned. The Novogradac Financing Renewable Energy Conference will meet in Washington, D.C. November 11th and 12th and will convene solar developers and financiers and should provide some valuable insights.

Disclosure: Author owns share in the Claymore/MAC Global Solar Energy Index ETF (TAN), which has holdings in ESLR, TSL and SOLF.

Comments

[tessant:]

can i post this on solarfeeds? great article. please email me to discuss...sweitzman at gmail
thanks

Nov 09 09:22 PM

[SCPV:]

ARRA = American Recovery and Investment Act?
I think you meant Reinvestment.

Greetings.

Nov 15 08:49 PM