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Last week I asked 'NCN Solar', a trader closely following and trading the solar space, to give us an overview of the current state of things. I talk to NCN Solar almost every morning, going over the most important developments - a great help to understanding this rapidly changing sector. His overview follows.

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I put some thoughts together here to educate you as to what is happening, and perhaps this will make it easier to capitalize on coming news in 2008. This year will continue to be choppy and unpredictable, so it's best to just be prepared for what may happen and to know how to react.

There seems to be more private equity money going into alternative energy than in any other sector. The high oil prices of the last few years as well as climate concerns, have led to a quest to reach grid parity with electric rates.

Most of the ways to play the growth in the US market involve stocks in the Solar sector. There are 2 well known technologies: (1) Thin Film, which includes First Solar (NASDAQ:FSLR), Energy Conversion Devices (NASDAQ:ENER) and many exciting private companies, and (2) Silicon, which is led by SunPower Corp (NASDAQ:SPWR), Suntech Power (NYSE:STP) and many others.

Let us take a closer look at both these groups. FSLR is the clear cost leader. They developed Thin Film CDTE technology which doesn't require the currently expensive polysilicon, and is a quick production process which FSLR has successfully copied at their other facilities. There are certain geographies, such as areas of Germany, where no other product can come close to comparing. As they increase their conversion efficiency to 12% of the sunlight to power, and continue to increase production and yields, they appear well in the lead towards grid parity, at a point which this growing market expands to incredible levels. There are a number of private companies, NanoSolar, Miasole etc. as well as ASTI and DSTI which are working on Thin Film CIGS technology in a well financed drive to reach what FSLR has accomplished. There are various challenges in scaling this technology, and it is certainly hard to know exactly how close these companies have come. The Thin Film amorphous technology is a bit difficult to understand, because the conversion efficiency achieved so far does not seem high enough to compete.

As we enter 2008, no one comes close to FSLR in terms of cost per watt. So why is there strong interest in any other stock? In the residential market, it does not appear that FSLR will be a player, and I’m not sure they are even suitable for that. Because FSLR has lower efficiency, they require more panels, which means the amount of roof space, or cost of land, can tilt the economics. There are also various geographies where perhaps the amount of sunlight or heat can work better for a silicon company. As we stand right now, the costs for silicon panel companies are much higher, but they are greatly influenced by the inflated level of polysilicon prices. The current poly demand dwarfs the supply. This affects the companies in different ways, and it is worth looking at which solar stocks have most of their polysilicon at contract rates, and which need to purchase their required poly at spot prices.

At some point, the additional supply from China will come online, and one would expect the prices to drop significantly. A company like WFR, which benefits from selling polysilicon in the market, will have to deal with the lower prices in the future, though at this time, they are doing very well. Once these prices do come down, the buyers of polysilicon, STP SPWR etc. will see their costs dropping and can become more competitive with FSLR in more locations, and can start the move towards grid parity. At this point SPWR is a technology leader with their high efficiencies, and tracking systems, and STP is a leader helped by their low cost operation and low taxes. We will see if anyone else can make the leap to the top tier.

The important thing to understand is that what is good for one solar company may not mean much for another. We recently saw FSLR blow away estimates for the quarter and guide higher. This may not mean that the silicon players will have a good quarter. But it does show what can be achieved, when your costs are low, and when you run the operation smoothly. A future drop in polysilicon prices would be a big help for a polysilicon company that buys at spot prices, but may not mean as much for a silicon company that has a great supply, and would probably be negative for FSLR because other companies will become more competitive in some markets.

What I look for in 2008 is that we will see the winners and the losers start to emerge. The same way that many tech companies did not emerge from the internet boom, many will not succeed in solar. But the ones who will, meaning the ones that achieve grid parity, or assist companies in achieving it, will be continued winners. We should begin to see more poly supply come on line before the end of the year, and a drop in poly prices will help the industry. At a certain point, the silicon players may decide they would rather not sell a panel even if there is demand, because they don’t want to pay up for poly. But that would lead to this coming drop in prices. Utility solar deals will be big news this year. FSLR has suggested that there will be multiple pilot projects for utility solar deals in the United States and a number of companies will be in the race for utility deals.

This may be helped by the expected extension of solar tax credits which should take place before the end of the year. There is bypartisan support for these credits, and once the politics get played out, it seems clear that the bill will get passed.

We may hear more about other solar technologies. EMKR is a player in CPV (Concentrated PhotoVoltaic) which has high conversion efficiency, and concentrates the sunlight on to a cell. There is also strong potential from solar thermal technology. We should also here more about the progress on Nanosolar and other new entrants. There likely will be more ups and downs then we saw in 2007, which was virtually all up. But there should be some big winners once again from some old and perhaps some new names.

I incorporated a lot of what I saw and heard in Silicon Valley into an earlier summary. Most of the companies I saw were private, and some such as Nanosolar, which has the Google founders among their investors, were very secretive and would not talk much. In terms of the public companies, SunPower (SPWR) was very optimistic and positive, Suntech (STP) was cautious and seemed to want to talk down numbers. They seem to have alot of demand, but will not pay up for poly to increase their supply. Since things are changing so quickly in the industry, its hard to really have an opinion on a company, but it is possible to identify trends.

Best regards, NCN Solar

Source: The Current State of the Solar Energy Sector