) -- A draft of the legislation to be introduced in German parliament to slash support for solar has been quoted in press reports this week -- the first time the actual draft legislation has surfaced -- and it has raised some important questions about the never-ending debate over solar sector oversupply.
As far as the solar slashing by the German government goes, the solar company taking the biggest direct hit so far this week as a result of the draft legislation was
Investors were already concerned about First Solar after its earnings report from last Thursday showed a margin deterioration that was more extensive than some investors had expected.
While it is a well known fact that First Solar's margin profile is on a declining trend as its systems-based (i.e. lower margin) business increases as part of its margin mix, the 9.4% drop in the fourth quarter exacted a toll on its shares on Friday. The declining trend has not relented this week after the news from Germany.
On Feb. 17, the day before the First Solar earnings, First Solar shares had closed above $124, the shares' highest level in a month.
On Tuesday, First Solar shares closed at $105.78, after the third-consecutive day during which First Solar trading was above five million shares -- versus an average daily volume of three million shares.
On Wednesday in the early afternoon, First Solar shares were again down, albeit only by 1%, though, shares fell below the $105 mark.
To put the latest pressure on First Solar into perspective, the Tuesday closing price for First Solar shares of $105.78 was the lowest closing price for First Solar since March of last year.
Oddly enough, it didn't seem like First Solar was going to bear the brunt of the wrath of the German government's draft legislation to change its existing feed-in tariffs (FIT) when a
article first appeared on Monday.
first omitted the fact that the ground-based solar project business on farmland -- where First Solar has 40%-60% of its ground-based business -- was even going to be included in the German FIT cuts. Bloomberg left ground-mount solar out of its article, and the intra-day First Solar stock chart from Monday shows a huge spike in First Solar shares -- a gain of close to $5 in its share price to a level above $115.
It was a short-lived, and erroneous, share rally for First Solar. Bloomberg updated its article to include what the German draft proposal had to say about the ground-based farmland solar projects where First Solar is the biggest player. What's more, the draft legislation indicated the German government was removing 100% of its support for solar projects on farmland. After that update, First Solar shares dove again, and the shares have not recovered since.
In previous political back and forth in Germany over the FIT cuts, the proposals had suggested a 25% cut for farmland projects, still the biggest of all the FIT reductions, but a far cry from a complete eradication of the market.
The solar analyst team at Hapoalim Securities -- a First Solar bear well before this week began -- believes that the 25% cut to farmland solar, in effect, would have made the market the most unattractive in Germany, anyway. Still, Hapoalim Securities analyst Gordon Johnson said, "If there is no FIT, there is no farmland solar."
The real question for solar investors -- whether there is a supply-demand imbalance -- doesn't change as a result of the farmland in Germany laying fallow as far as its crop of solar. However, it does add a negative data point for solar bears who believe that the mass capacity expansion by solar companies is a problem for the sector. First Solar, the biggest solar company, will now be looking even more so to push its panels into markets that are already crowded.
Christine Hersey, analyst at Wedbush Securities, said the German government was making the right move in discontinuing the use of prime farmland for solar projects, and pushing ground-based solar to contaminated land like Brownfield sites.
For contaminated land projects, the FIT draft legislation proposes only an 11% FIT reduction. While that's much less than the 25% originally slated for ground-based solar, this minor concession pales in comparison to the eradication of farmland projects, according to analysts looking at the larger evaluation of market opportunities. For ground-based projects that are neither on contaminated land or farmland, the FIT reduction will be 15%.
Developing on contaminated land incurs costs associated with remediation, and Hersey said even though those costs are not always significant, the mere fact there there are remediation costs makes it logical to assume that a company like First Solar would have previously focused on farmland projects to the exclusion of contaminated land projects.
The Wedbush analyst estimates that based on overall First Solar revenue guidance of $2.8 billion, the farmland solar may represent $168 million of the revenue pie. While that's only 25% of the 40% to 60% of the ground-based business that First Solar has in Germany, it is still a significant chunk of revenue that First Solar will have to make up elsewhere, and at a time of increasing pricing pressure and industry oversupply.
As First Solar steers more of its supply to the rooftop solar market as a result of the farmland market being eradicated, this will serve to exacerbate the oversupply already expected in Germany.
First Solar had an implied average sales price of $1.60 per watt in the fourth quarter of 2009, and First Solar guidance for 2010 implies an average sales price of $1.50 to $1.60.
"To assume that pricing will hold up, even with these German FIT cuts and the elimination of an entire market segment in Germany, on top of the fact that every solar company says they are expanding capacity, is a big assumption, and I don't think you can say today if it is realistic," Wedbush's Hersey said.
-- Reported by Eric Rosenbaum in New York.
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