Solar Expects 15% to 28% Cuts in Italy - TheStreet

Solar Expects 15% to 28% Cuts in Italy

Italy is soon to join the big European nations in slashing its solar incentive schemes.
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NEW YORK (

TheStreet

) -- France and Germany are moving ahead with big cuts in solar feed-in tariffs -- and now Italy is planning to be next to slash its support for the solar industry.

On Monday, an executive from leading Italian solar module company

Kerself

told a conference call hosted by

Credit Suisse

that it expects the Italian government to announce by February feed-in tariff reductions ranging from approximately 15% to 28%.

Reductions of Italy's feed-in tariffs -- considered the most generous to the solar industry -- would not be surprising at the proposed levels, given the recent pushback from national solar feed-in tariff regimes.

France announced a 24% cut in its solar incentive scheme at the beginning of last week.

Germany has been largely responsible for a huge selloff in solar over the past two weeks, after it proposed cuts of between 15% and 25% with its feed-in tariffs.

Some solar industry

analysts have been expecting Italy to give solar a bit of a boot, so to speak.

If Italy does cut its feed-in tariffs by as much as 28%, it would be in line with the French solar slashing, as well as Germany's proposal. Remember, Germany already implemented an automatic reduction of between 9% to 11% on Jan. 1, 2010, so its additional cuts of 15% to 25% are equal -- and, in the case of farmland projects, larger -- when compared to the reports of a solar feed-in tariff cut of 25% coming in Italy.

The devil, of course, is in the details of Italy's multi-layered proposal to cut its solar feed-in tariffs, and the biggest cuts are for the biggest solar projects.

Rooftop projects in Italy of 1 megawatt to 10 megawatts in size will see feed-in tariffs cut from 43 euro cents to 31 euro cents in 2011, or a 28% cut. While that percentage reduction seems large, Italy's tariffs have been the most lucrative. What's more, after a year in which the average sales price of a solar module decreased by 40%, even the industry association proposed a reduction to 32 euro cents.

Large ground-mounted projects in Italy will also see the bigger cuts, with projects of 1MW to 10MW, and projects above 10MW, seeing feed-in tariffs decrease from 35 euro cents to 27 euro cents, or a 23% reduction.

These ground-mounted project reductions probably represent the biggest concession for the solar industry, as the industry association had proposed cuts of 14% for projects between 1MW and 10MW, and an 8% reduction for projects larger than 10MW.

One message from Italy seems to be about job growth. Big ground-mounted projects create fewer jobs than the rooftop market, and the Kerself official noted on the call that Italy wants to support solar while also stimulating local jobs.

Notably, rooftop projects of 30 kilowatts (KW) to 100KW, and 100KW to 1,000KW, will see feed-in tariffs reduced from 43 euro cents to 34 euro cents, or 21%, which is actually less than the industry association proposed.

Smaller ground mounted projects of 30KW to 100KW, or 100KW to 1,000KW, will have their solar tariffs reduced from 35 euro cents to 30 euro cents, a reduction of 14.3%, which is in line with the industry's proposal.

Of course, this was only an Italian module company speaking on a call organized by Credit Suisse, and there was no official word from the Italian government. However, Kerself is one of Italy's leading solar players and has been involved in the industry's discussions with the Italian government.

Satya Kumar, the Credit Suisse analyst who organized the call with Kerself, said even though the ground-mounted project reduction is large, ground mounted projects in Italy are probably still more attractive than in Germany. The tariff reductions will be similar, but Italy has more sunshine than Germany, and Italy's solar project equity rates of return of up to 20% have been among the biggest in the solar world. Kumar said he expects a rush to get ground-mounted projects completed ahead of the solar tariff reductions.

First Solar

(FSLR) - Get Report

is one of the biggest ground-mounted project developers in solar, though it could not be determined by press time First Solar's exposure to Italy's ground market.

An analyst that covers the European solar market said that while the upper range of the proposed cuts in Italy is steep, regulators are reacting to the big drop in module prices and the hefty returns on projects in Italy.

"This won't be as serious an impact as the Spanish hard cap, or the revision in the case of Germany. However, it would be substantial and puts the pressure on developers to push margins down and solar companies to push prices down," said Cassidy Deline, European solar analyst at Emerging Energy Research. "It won't make the companies uncompetitive, but project developers have to work backwards in finding the proper pricing levels, so it will be a leaner industry," Deline added.

As has been stated generally with the European feed-in tariff reductions, the downward pressure on price often favors the low-cost Chinese solar players like

Trina Solar

(TSL)

,

Solarfun Power

(SOLF)

and

Yingli Green Energy

(YGE)

, among others.

Kerself, which earlier this year announced a deal with Trina, reacted to the proposed cuts on the call with Credit Suisse with relative calm. The official said the cuts were in line with expectations, and there was no sign the Italian government seemed to want any other result than to support the continued growth of solar while also creating jobs.

The big unknown, according to Credit Suisse analyst Kumar, is the exact timing of the Italian feed-in tariff cuts. The Kerself official said that there will be a 14-month grace period once Italy's reaches a cap level of 1.2 GW in solar capacity. The Kerself official said he expects that cap level to be reached in the middle of 2010.

Kumar, however, said how the grace period is aligned with the 1.2GW cap being reached will be critical to equity investors. Kumar noted that in Spain, after the country announced in September of 2007 a cap on solar, it afforded a 12-month grace period. During the grace period, 2GW of solar was installed, more than twice as much capacity as the current size of Italy's total solar market.

Italy stated earlier this year that it was granting an extension on the cap until Jan. 1, 2011, regardless of the 1.2GW ceiling. The Kerself official did not make clear on the call exactly how the Italian government planned to implement the cap in relation to the grace period.

What's more, Kumar said that while solar investors have been aware that Italy was planning a cap on solar, few investors seemed aware that specific feed-in tariff reductions of these levels were going to be announced as soon as February.

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:

>>Germany to Solar: 15% Cut Not Enough

>>Italy: About to Give Solar the Boot?

>>Bring On April Solar Cut, Germany

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