Italy and Germany Subsidy News a Potential Negative for Solar Stocks

by: Rash Menaria

On January 25th, Italy’s state energy management agency, the GSE, announced that the cumulative installed solar capacity could have reached 7GW at the end of 2010, compared to 1.14GW at the end of 2009. It implies that Italy installed ~6GW of solar capacity in 2010.

Furthermore, GSE believes that the country may have already installed another 1GW of systems in January of 2011, reaching the 2020 target of 8GW almost a decade early. Separately, Bloomberg reported that a panel of experts advised the Merkel government to cap the German subsidies to 1GW per annum (“Merkel Environment Panel Seeks 1-Gigawatt Solar Subsidy Cap,” Bloomberg, 1/26/11).

Italian News Impact: The Italian news increases the risk of additional subsidy cuts/annual caps in the Italian solar market. As the Italian government looks at the cost of 7 gigawatts of installations — $32 billion, or 2%, of Italy’s GDP — the government’s reaction to this revelation could be swift. Given that Italy’s terms for supporting installations is that they were to have been completed by December of 2010, it's likely that there would be no government support for additional new installations this year.

German News Impact: With respect to German subsidies, the Bloomberg article suggests that this is only a recommendation. But the article once again raises the question with respect to the longer term sustainable policy outlook in Germany (2012 and beyond).

How are stocks likely to react? Concerns about subsidy changes in Italy could drive an additional increase in 1H11 installations. However, the 2H11 subsidy overhang could keep valuation multiples and share prices under pressure.

There is a near-term downside risk to the solar stocks. Specifically, stocks with exposure to the cell market (JA Solar Holdings (NASDAQ:JASO)), China Sunergy (NASDAQ:CSUN)) and to the spot market (LDK Solar Company (NYSE:LDK)), and high exposure to Italy (Power-One (NASDAQ:PWER), Energy Conversion Devices (NASDAQ:ENER), and Evergreen Solar (ESLR)) may underperform going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.