Tuesday, August 31, 2010

"Solar Plays for California Subsidies" (FSLR; TSL; YGE)

Auriga's Mark Bachman is one of the best analysts in the space.
As the heard moves on in search of tasty subsidies...
From Barron's Soapbox:
Auriga USA
THE ACTIONS BY OUR legislators at the federal level have done little to spur renewable energy adoption, so we look to the states in order to drive the market. U.S. demand has largely been driven through renewable portfolio standards (RPS) where 29 states now have plans in place, while some have dabbled with their own forms of subsidy programs.

Some states use additional tax incentives while others have used pilot programs to test the adoption of feed-in-tariffs (FiT). California has been the clear leader in adopting solar energy into its portfolio of renewable-energy solutions and is now positioned for further penetration with the new subsidy program. The long-term hope is that the program is successful and that other states will adopt similar mechanisms, which could result in a massive expansion of solar installations in the U.S.

The California Public Utilities Commission (CPUC) has a proposed decision to adopt a renewable auction mechanism (RAM). The subsidy will work as a FiT, but the rates will set by an open bidding process (auction) rather than being administered by the CPUC. This is a key attribute of the program because the FiT rate will use market-rate pricing that is set by a competitive bidding process and carries the ideas that project developers can garner fair returns while ratepayers are not overly burdened by excess subsidies.
The program is scoped at 1,000 megawatts over two years; we figure 500 megawatts in both 2011 and 2012. Solar projects are limited to 20 megawatts or less and the electricity will be delivered to one of California's three primary investor-owned utilities (IOUs) through standardized must-take contracts. Auctions will take place roughly every 180 days, and each auction will allocate 250 megawatts to each of the three IOUs.

Just as subsidy cuts are always negative headlines for the solar group, the introduction of new subsidy program is a positive indicator, thus we are encouraged by this news. To put some perspective around this news, the announcement from California far outweighs the recent subsidy cuts in France as we see little to no impact from the subsidy cuts (internal rates of return are still attractive) while the U.S. could add another 1,000 megawatts of shipments by 2012. We further note that this is a proposed decision, but that a final ruling could come in just 30 days.

Lastly, while the new RAM provides a means for new subsidization, solar projects are still susceptible to permitting, financing and not-in-my-backyard woes. All said, as the California Solar Initiative is winding down, the RAM provides a new avenue for growth.
Several solar companies could benefit from the RAM. In our view, we find several companies that could benefit either through increased modules sales, or through their respective project development businesses.

First Solar (ticker: FSLR) (rated at Buy): Best positioned out of the group because of its captive module supply and significant project development business (acquisitions of Turner Renewable Energy, Optisolar, NextLight). But more importantly, we believe the company can deliver the lowest cost-per-kilowatt-hour solution and garner the highest project returns.

Yingli Green Energy Holding (YGE) (rated at Buy): We see Yingli as the stealthiest play in the group. Yingli's U.S. operations have been quietly establishing a beachhead here in the states and could surprise the market with significant module sales into the U.S. for projects covered by the RAM. Yingli's low-cost products should produce very competitive bids.

Trina Solar (TSL) (rated at Buy): Trina has just started to penetrate the U.S. market, but plans to ship several hundred megawatts into this market by 2012. The recent 45-megawatt supply announcement with Southern California Edison is an indication of its cost-competitive solutions.

MEMC Electronic Materials (WFR) (not rated): Through its acquisition of SunEdsion, MEMC could prove to be competitive with low-cost modules from China. The 20 megawatts restriction looks to play into MEMC's (SunEdison) strength.

Suntech Power Holdings (STP) (rated at Hold): Suntech has been a market leader in terms of shipments in the U.S., so it has a well-established position here already. In addition, the acquisition of EI Solutions and Suntech's focus on being a module supplier, rather than a project developer, should enable the company to be a player in some of these projects.

SunPower (SPWRA) (rated at Hold): Always a dark horse in this race because of its project development skills. We still see the broken cost-model as a disadvantage, but the company can always source more Serengeti modules from India in order to compete on a cost-per-kilowatt-hour basis.

-- Mark W. Bachman
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