Don't Count on Spain for Solar Success

The rapid rise in solar PV stocks (SunPower (SPWR), Suntech (STP), JA Solar (JASO), etc.) this year has been attributed to many things, from $100 oil to global warming euphoria. But in reality, the success of these stocks has been driven by just one thing...Spain.

First a little background. Think back to winter/early spring 2007. Solar PV manufacturers were in a rut; sales were sluggish, ASPs dropped 10% quarter over quarter, and inventories were skyrocketing. Many companies were brushing it off as "seasonality," but it was clear there was something wrong. Too much growth too fast, particularly by the Chinese firms, had begun to steal the profitability from everyone. The industry needed a quick fix, and fast.

And then came Spain.

Despite setting an official target of 371 mw by 2010, the new Spanish environmental "Royal Decree" set no actual timetable for installations, while offering an eye popping €.42 per KwH for large scale installations. (In far less sunny Germany large scale installations receive €.38.) This allowed an investment return of over 10% for 20 years, guaranteed by the government, and so the GOLD RUSH began. By the time of this post (6 months later), the entire 371 MW appears to have been installed or under construction. And Spain even raised their target to 1200 MW by 2010.

Solar PV revenues started to boom again, and investors reacted with nothing short of euphoria, predicting that a solar revolution is just getting started.

So what's the problem?

Well, the demand from Spain came on so quickly that it jarred the system; it sucked up inventory, and made even some questionable manufacturers financially viable. But in retrospect, it wasn't the size of the demand (~300 MW, a fraction of what goes in to Germany each year) that mattered, it was the speed...6 months.

BUT IT'S JUST THE BEGINNING, the analysts say!

That's where they're wrong.

First off, the Spanish Government, while raising their target out of necessity, has now admitted their policy was too generous, and they plan to fix it, although perhaps not until next fall.

So, sure, Spanish installations could grow again next year if the government really does wait until next September to reduce the tariff...the jury is still out on that.

But then what? Can it really keep growing after that? Not likely.

Spain is a much smaller country than Germany; it simply can't justify paying a billion Euros a year in subsidy for solar panels, especially when their climate is perfect for much cheaper large scale solar thermal plants.

And other EU countries like Italy and Greece are surely going to learn from Spain's mistake rather than repeat it.

Plus, the European economy is slowing, which could change everything.

So, anyone who is buying inflated shares of solar PV stocks on hopes that Spain will be the next Germany could be in for a rude awakening. In fact, since Germany is planning on reducing their solar subsidy starting in 2009, and the US does not appear to want to join the fray, it could turn out that 2008 is not the start, but the end of the solar revolution.

Disclosure: Author holds a short position in some of the above-mentioned securities.

Comments

[JoeJoe:]

There's some good info in there but some distracting information too. I think you've drawn many unjustified conclusions. Your statistics on Spain are neat but it's silly to say Spain is the primary cause of PV's prominence. PV was doing well a year ago as evidenced by the rising panel prices.

There is nothing frightening about Germany and Spain reducing their subsidy programs. Besides subsidies, it's good to see the price of PV finally coming down because this is important to the future health of this industry. I think it shows there's some competition going on and not just lazy subsidy taking. If the prices continue to trend down this should entice more customers and so by the time Germany starts stepping down subsidies the PV industry should be preprepared by a broader and more competitive market. Let the strong survive.

As far as shorting goes I highly recommend it. There are some fat cows out there that are going to get slaughtered. For now it seems the cows are only going to get fatter but I've got my eye on a few I'd like to gut.

2007 Nov 19 02:33 PM

[JoeJoe:]

There's some good info in there but some distracting information too. I think you've drawn many unjustified conclusions. Your statistics on Spain are neat but it's silly to say Spain is the primary cause of PV's prominence. PV was doing well a year ago as evidenced by the rising panel prices.

There is nothing frightening about Germany and Spain reducing their subsidy programs. Besides subsidies, it's good to see the price of PV finally coming down because this is important to the future health of this industry. I think it shows there's some competition going on and not just lazy subsidy taking. If the prices continue to trend down this should entice more customers and so by the time Germany starts stepping down subsidies the PV industry should be preprepared by a broader and more competitive market. Let the strong survive.

As far as shorting goes I highly recommend it. There are some fat cows out there that are going to get slaughtered. For now it seems the cows are only going to get fatter but I've got my eye on a few I'd like to gut.

2007 Nov 19 02:33 PM

[The_Preacher:]

"So, anyone who is buying inflated shares of solar PV stocks on hopes that Spain will be the next Germany could be in for a rude awakening."

If one buy stocks on hopes like this, than he truly deserve to lose money.

"In fact, since Germany is planning on reducing their solar subsidy starting in 2009, and the US does not appear to want to join the fray"

First of all, let me comment the "subsidies" matter. US won't join?
Correct if I'm wrong, 2008 is US presidential elections year. With "green" going mainstream, politicians from boths sides will likely doing a lot of promises on environmental issues to attract electors. Correct me again If i'm wrong, but isn't USA still out of Kyoto protocol (a shame!!) because of blindness of your current president? My take? Democrats will win. And you know what that would mean for environmental policies. Even if democrats won't win, I think we're gonna see a greener America in the next few years. Subsidies on renewables will be just one of the many changes. Doesn't matter if it will be now or next year, but it will. Lower Germany and Spain subsidies? No problem, I think. Even if today UE said they're worried they couldn't reach the 20% target from renewables by 2020. EU states are just too slow implementing UE directives on clean energies.

Of course if one is buying on such hopes, government to "drug" markets with "free-money" for solar companies, is surely one of many "blind" short-sighted investors chasing fast money who'll lose money on the next "bubble". Because, yes, many solar stocks around are overpriced, some are real bubbles (FLSR at 220$?? C'mon you're joking me). But that doesn't mean the whole sector has to be thrown away.

"it could turn out that 2008 is not the start, but the end of the solar revolution."

Well, if had the chance to write a full article, I would explain and show you in details, why this sentence is a bad mistake. Too many people around speaks of solar & renewables without knowing "the facts" behind, theories & sciences. It's not surprisingly. You guys analyze all from a financial (often short term) point of view. But you're missing the big picture. Analysts now say "BUY", but, i guess, in a couple of months, they'll say SELL. That will be the very moment to accumulate and hold for the years to come. The solar revolution has already started, years ago. 2008 is just a milestone.

2007 Nov 19 06:07 PM

[michael sha...:]

I guess even a broken clock is right twice a day. Perhaps if you keep decrying solar long enough you will be too. Real investors look for growing markets and China has made a commitment to Solar that will provide all the growth their companies need without Spain by 2010. With rising energy costs and pollution, and an emerging market like China as the wind beneath it's sales, your position seems fairly weak. I took the time to read your website...pretty biased stuff there. I guess everyone needs a niche and yours appears to be defying logic. We'll see how it works out for you.

2007 Nov 20 10:09 AM

[Vince Sanchez:]

I invite all of you to read this fresh article, at:
www.renewableenergyacc...

Opportunities for Solar PV energy is worldwide not only on fast growing regions like Spain and Germany

here is a relevant statement from Dr. Flavin, President of WorldWatch Institute:
"Worldwatch Institute President, Christopher Flavin, drives home the impact China may have on the world. "How this story ends up may have as large an impact on the world's future as it does on China's. If China is able to scale up its renewable energy technologies to the levels needed to have an impact domestically, and if it is able to achieve the low prices needed to succeed in the local market (known in manufacturing circles as the "China price"), it may be virtually inevitable that these same technologies will soon be adopted on a massive scale around the globe."

2007 Nov 21 08:39 PM

[Canbyte:]

Probably time to short these stocks. China RMB (yuan) going to start appreciating rapidly, USD to fall, oil going to take a breather (like gold), Germany & Spain subsidies killed by their success (their taxpayers can't afford it), rural Chinese can't afford this stuff any more than I can (suspect that is true for most of the pumpers here too). All this means that people are coming to their senses about these cells which after all are not very efficient but are very expensive. While the Preacher may be right, he may have to wait for the development of nano solar or some such thing for the next leg of this bull market and it is therefore doubtful that any of these stocks will be the next leader. In the meantime, all these stocks are priced in USD and therefore subject to large decline unless they can appreciate faster than USD declines.

2008 May 27 10:45 PM