Solar Power Plays Look to Grow with Clean Energy Act, Spanish Subsidies

Portugal is doing its part to invest in renewable energy with the dedication of a new 11-megawatt [MW] solar plant. The plant, which is located in Serpa, is one of the largest solar arrays in the world and can supply enough electricity for 8,000 households. This farm was created by a Swiss subsidiary of SunPower Corporation (SPWR), PowerLight Systems S.A. SPWR recently announced they would build another solar electric power plant in Llerena, Spain. The generating capacity of this new photovoltaic system is expected to be approximately 4.8 megawatts [MW] of peak power.

I heard that the term "conspicuous conservation" rather than "conspicuous consumption" is all the buzz now. It’s now real cool to be green and even the lawmakers are getting into the act. From souped up biodiesel cars and hybrids to smart energy buildings and companies, getting green not only is cool, it can now save you green.

I have a very interesting story to tell you about my wife’s stepfather, Ralph. Ralph is the owner of a very large food distribution company here in the Pacific Northwest supplying restaurants and stores with a large variety of Middle Eastern and Indian food products. Over two years ago he did something that was remarkable and very business saavy. Ralph decided to try to make biodiesel from the used cooking oil of the restaurants he delivered to from scratch. It was a genius move that was long and frustrating but in the end well worth it.

He learned through years of trial and error before being able to perfect his new “hobby” as he called it. He received the hundreds of gallons of cooking oil for free and turned it into the cleanest and cheapest gas for his fleet of delivery vehicles. Now he saves hundreds of thousands of dollars a year on gas costs for his business by eliminating the #1 expense for it.

This automatically trickles down to his bottom line, in a big way. This has created a positive domino effect on his business. This has enabled him to become ultra competitive on prices for prospective customers and gobble up market share. Now he wants to take it one step further and produce biodiesel with huge algae tanks and never pay for gas again. Saving green by being green is becoming very appealing. Businesses, accountants and lawmakers are now taking notice.

On Friday April 4, the U.S. Senate introduced bipartisan renewable energy tax credit legislation. U.S. Senators Maria Cantwell (D-WA) and John Ensign (R-NV) authored the new Clean Energy Stimulus Act of 2008. The bill has bipartisan support and the backers are confident they can get the 61 co-sponsers that the bill will need to pass the Senate. The bill now has 30 co-sponsers, including members of the GOP who opposed the previous bill that was voted down in December 2007 (make note the relationship between the timing of this vote down and peak prices for solar companies).

The bill extends the commercial Investment Tax Credit [ITC] for solar and fuel cell projects for eight years and removes the utility exemption. The bill also extends-in-service deadline through 2009 for the Production Tax Credit [PTC] for geothermal, wind, biomass and hydropower facilities.

The Clean Energy Stimulus Act contains provisions that would:

• Extend the energy efficient new homes credit through 2010.
• Extend the solar energy and fuel cell investment tax credit through 2016.
• Extend the Renewable Electricity Production Tax Credit’s [PTC] placed-in-service date through 2009 for facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, landfill gas, and trash combustion.
• Extend the 30% residential energy-efficient solar property credit through 2009 for purchases of qualified solar property used to generate electricity or heat water.
• Extend the 10% energy-efficient credit for existing homes through 2009.
• Extend the energy-efficient commercial buildings deduction for property placed-in-service through 2009, and increases the maximum deduction amount from the current US $1.80 to $2.25 per square foot.
• Extend the energy-efficient appliance credit for appliances produced in 2008, 2009, and 2010.
• Authorize an additional US $400 million of Clean Renewable Energy Bonds and extends authority to issue such bonds through 2009.

“Satisfying our energy needs and reducing our reliance on foreign sources is a challenge that we must meet, but that can only happen with the right incentives in place,” Sen. Ensign said. “Our bipartisan bill will help put us on a path toward energy independence with American ingenuity leading the way.”

Senator Sununu [R-NH] who opposed the last bill but now supports this bill said, “Rising energy prices place enormous financial pressure on families and businesses across New Hampshire and the nation. These renewable energy tax credits help lower this burden and represent smart investment policy for our environment.”

Rhone Resch, President of the Solar Energy Industries Association [SEIA] said, “From New Hampshire to Michigan to Oregon, this bill provides a much-needed shot in the arm for our ailing national economy. This legislation will create thousands of jobs, unleash billions in investment and prevent a major disruption in this fast-growing sector — all at a time when we need it the most.”

Gregory Wetstone, Senior Director of Governmental and Public Affairs for the American Wind Energy Association [AWEA] said, “We commend Senators Cantwell and Ensign for their leadership in crafting a bipartisan approach to the urgently needed extension of renewable energy tax incentives that are scheduled to expire at the end of this year. More than 116,000 jobs and US $19 billion in investment in new, clean energy sources like wind and solar power hang in the balance awaiting Congress’s decision on this critical issue.”

This overhang is partly the reason for the sharp correction in solar shares earlier this year. The failed Clean Energy Bill in 2007 removed expectations of higher growth and lowered future earnings of the solar sector. Now this new bill has renewed hopes of passage and reacceleration of those future earnings. The vehicle for the package has not yet been announced, though some have speculated that it may be attached to the upcoming Housing Bill. The $6 billion bill should be expected to pass within the next 2 months due to the time constarints of the current bill expiring by the end of this year.

Now how to make money on this. UBS said that this provision would make solar energy attractive to utilities trying to meet state renewable energy mandates. The bill would allow utilities to participate in the 30% tax credit for the first time. FSLR does not sell into the volatile consumer market, choosing instead to focus on industrial and utility customers. Jim Cramer recently touted FSLR saying, “FSLR relies on its proprietary thin-film technology that is less expensive to manufacture and has efficiency ratings that are rapidly approaching that of its silicone-based competition. First Solar doesn’t need government subsidies to be profitable.” He also sees “years and years of growth for First Solar, it is the single best way to play green energy.”

On April 3rd Reuters reported that FSLR’s CEO said they were holding multiple discussions on projects with U.S. utilities and brushed off concerns of tellurium supply saying they were “adequate” to drive future growth. He sees “lots of discussions” in the next 1-2 years on sites for new plants and is considering locations around the globe for new plans, including the Middle East.

SG Cowen reported that the following solar stocks have the most exposure to the U.S. market:

Energy Conversion Devices (ENER), Evergreen Solar (ESLR), Suntech (STP), and First Solar (FSLR).

The firm believes that the proposed utility tax credit, combined with Socal Edison’s large solar program, could significantly enlarge the U.S. solar market.

Citigroup was less optimistic saying that even though the U.S. government will extend solar tax credits by the end of the month with a new bill before the Senate, they believe speculation of a near-term passage of the bill was overly optimistic.

On March 28th, Calyon reiterated Buy ratings on FSLR and SPWR due to utility exposure. They said U.S. utilities are turning to solar, which is a large opportunity. The same day Canaccord Adams said they believed FSLR’s management and business model are among the best of any PV company and that their execution has led to strong profitability plus a successful, aggressive capacity ramp. Their price target is $325.

The strong push on utility companies shows on March 11th, when Pacific Crest noted that New Jersey has enacted a plan that more than doubles existing penalties on utilities that fail to meet the state renewable portfolio standard solar mandate. They believe these new rules will slightly benefit Sun-Power (SPWR), which derives over 40% of its sales from the U.S. market, and possibly First Solar (FSLR) in out years as the new rules expand into the U.S. market.

But this is a global solar party and others are joining. Do you know which country is the number two solar market in the world? Spain. On March 10th, Citigroup noted that the incumbent party win in the Spanish election was a significant positive. Citigroup expects the reelection of the Socialist Party will result in more favorable solar tariff policies post the current policy’s expiration on September 30, 2008.

Citigroup views Suntech Power (STP) as the most important beneficiary of favorable Spanish solar policies and also believes Yingli Green Energy (YGE) should benefit as the company derives over 50% of revenues from Spain. On April 3rd during the Photon Solar Conference in Munich, Germany, Piper Jaffray added Buy-rated J.A. Solar Holdings (JASO), Canadian Solar (CSIQ) , and Yingli Green Energy (YGE) to its Alpha List. “Data points from Munich on day 3 confirm healthy and stable pricing trends worldwide and module undersupply,” analyst Jesse Pichel wrote to clients.

More importantly in a recent development, Pichel said a leaked royal decree circulated in Spain earlier indicates a proposal for a higher cap and subsidies, and if accurate, “this proposal is a significant positive for the group as it eliminates an overhang and implies strong growth and pricing for modules worldwide. It is important to note that the last royal decree was leaked in an identical fashion,” the analyst said.

Calyon Securities analyst Kelly Dougherty seconded those thoughts with her bullish view, saying that the much anticipated clarity on Spanish feed-in tariff “removes much of the uncertainty for 2009 and is hugely bullish for the sector.” The firm reiterated its buy ratings on First Solar (FSLR) , Sunpower Corp. (SPWR) , Evergreen Solar (ESLR) , and Energy Conversion Devices Inc. (ENER).

Italy is now getting into the act and their solar market is developing similar to Spain’s. Piper expects strong PV demand in Italy through 2011 after speaking with leading solar supply chain companies in the country. They believe SunPower (SPWR), FirstSolar (FSLR), and Yingli (YGE) as best leveraged to Italy currently. India and China are getting into the act as well with an Indian company signing an agreement with LDK recently. the contract was a ten-year contract to supply multicrystalline solar wafers to India-based Moser Baer Photo Voltaic Ltd., a subsidiary of Moser Baer India Ltd. LDK said it would deliver 640 megawatt of multicrystalline solar wafers commencing in mid-2008 through 2017. China has a booming solar industry with many new startups and veterans trading on the U.S. stock market.

Looking at the industry, eight solar stocks are short sale restricted: SPWR, LDK, SOLF, TSL, CSUN, CSIQ, ASTI and AKNS.

One of the best investment or trading strategies could be to find the companies with the most overlap globally. The three names that seem to have the most overlap and best growth going forward would have to be SPWR (short sale restricted too), FSLR and STP with YGE and JASO close behind.

Disclosure: Long

Comments

[Piggybank:]

What about the frikkin European solar company's, shouldn't they profit from the Spain case for ex. ? Renesola maybe? Q-cells or REC?

It seems that to SeekingAlpha and so many sites that promote solars, European solar company's simply do not exist!

2008 Apr 06 04:52 PM

[User 174009:]

What does short sale restricted mean? Isn't the short interest extremely high on all of these names?

2008 Apr 06 09:21 PM

[Jack Yetiv:]

As one can gather from my previous articles on this space, I am quite bullish on solar, and I think all the names mentioned above will benefit.

However, caution is probably in order here since most of the solars have run up between 30-40% in the past 2-3 weeks. These stocks are very volatile and are famous for running hard--and then retreating hard. Given how much the DOW and Nas have climbed recently, these indices may also be due for a breather.

However, on a pullback of 10-20%, several of the solars mentioned above may be good buys. Personally, I think that at a forward PE (against 2008 projected income) of about 100:1, FSLR is overpriced (note what happened to AAPL and GOOG on a minor stumble), and I think other names in this space present equal if not better upside, with lower downside risk. But I know lots of people disagree with me.

Jack Yetiv

2008 Apr 07 12:36 AM

[jdspain:]

about time federal and state gov start collecting taxes on this home made bio diesel. these people use the same roads we do and its their responsibility to pay these taxes to maintain these roads.

2008 Apr 07 01:34 AM

[Thomas888:]

Iam bullish on the solar sector going forward into the future,there still is those who dought solars future clean energy possibilies and opportunites.Solar energy seems to me to be the best clean energy way to go. Solars energy source of supply, the Sun is unlimited ,so supply will always be there where ever the sun is shining through.

2008 Apr 07 01:25 PM

[triznix:]

heh, yeah, let's start taxing used vegetable oil. These damn hippies are the reason our roads are in such bad shape.

2008 Apr 07 05:48 PM

[wsigler:]

I ask the same as USER174009: What does "short-sale restricted" mean? To my knowledge, there is no SEC reg that prevents short sales on a stock - no matter how large the current short position is and no matter how long a stock has been on "the list" (of short positions that brokers have failed to deliver)....

2008 Apr 08 12:24 PM

[joea637:]

Hello, can anyone help? I see that JASO(JA Solar) has a market cap of 3.some Billion. However, they just did a stock split of 3/1. I do not beleive they have accounted for this yet in their market cap. Should it not be 9.some billion. I have looked for updated information, but cannot seem to find it anywhere. And as far as ADR's(american depository shares)-I would assume these companies also have stocks trading in their own country. How can we find out how much, and if they do- does this not make these ADR stocks extremely oversubscribed and expensive?

2008 Apr 15 01:01 PM