Solar Looks to U.S. to Ease Euro Woes

Solar stocks have plunged by more than 30% in the past month as the euro weakened. Does the U.S. solar market have what it takes to bail out the drowning solar stocks?
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SAN JOSE (

TheStreet

) -- With the euro's depreciation continuing to exact a heavy toll on the share prices of solar companies, the industries' major players -- and China's module makers in particular -- are increasingly looking toward the U.S. as a potential bandage.

There's irony in this. The reason so much solar product has flooded Europe is that the solar subsidies in Germany and Italy, among other European countries, have been too lucrative to allow module makers to look elsewhere.

Yet with Germany set to make a one-time cut to solar subsidies in July -- and annual subsidy reductions in Germany and Italy set for the beginning of 2011 -- a major euro slide did not come at a good time for the industry.

"The U.S. market would not be better had the euro not plummeted," said Wells Fargo Securities analyst Sam Dubinsky.

To make up for the euro's weakness, Chinese solar module makers are trying to pass on price increases of 5% to 10%, according to new research from Wells Fargo.

However, once the feed-in tariff reductions begin in Germany it will become increasingly difficult for solar module makers to pass along short-term price increases in Europe. "Installers who want to finish projects have to pay up for modules now," Dubinksy said.

Barring a rebound in the euro -- and with the macroeconomic situation in Europe still looking troublesome -- the current moves by Chinese module makers to implement price increases are like "Band-Aids on bullet wounds," Dubinsky said.

In a research note issued this week, he also gave warning. "Headwinds are not abating," Dubinsky wrote. "With the euro continuing to fall and European subsidy cuts likely to prompt renewed ASP pressure through 2011, price hikes look like a temporary solution."

Meanwhile, the U.S. market's average solar module sale price has been stable at $1.65 to $1.80 per watt, according to Wells Fargo data.

The seven leading solar module makers saw their stocks, in aggregate, fall 30% over the previous month as the euro's slide took its toll, the investment bank

Collins Stewart

noted in a report Tuesday.

Trina Solar

(TSL)

shares dipped the second-most, with a decline of 34.7%;

Suntech Power

(STP)

shares declined 33.6%; and

Yingli Green Energy

(YGE)

shares dropped by 28%.

"Whoever has more exposure to the U.S. market could, in theory at least, make more money," the Wells Fargo's Dubinsky said.

There are indications that some of the Chinese module makers have been making recent strides in the U.S. bellwether solar market of California, even though they've really had only one eye on the market.

Year-to-date, Suntech Power has won 18% of the applications for solar projects in California, as ranked by the California Solar Initiative, the central database for the state's solar market, which is run by the California Public Utilities Commission. The level of megawatts awarded to Suntech in 2010, through the end of April, was up 135% from the 2009 level, according to an analysis of the CSI data performed by Auriga Securities.

Trina Solar, China's leading low-cost solar manufacturer, went from barely on the California solar map to a breakout month in April. In the first quarter, Trina represented 2% of total applications. Judging by April's numbers, Trina's share will jump to 16% for the second quarter, according to CSI data.

Auriga Securities was cautious on the Trina emergence, though, saying that April was an "exceptional" month and still too early to call a trend. Overall, the spikes in the numbers for most of the Chinese solar module makers are coming off very low baseline levels.

Other analysts caution that, as a general rule, "trends" can be overstated when the CSI data is analyzed using time periods shorter than a year.

More striking is that March and April of 2010 were both record months for solar applications in California. The 151 megawatts of applications in April, a new record, were more than double the 65 MW of solar-project applications in March, according to the CSI data.

The emergence of the Chinese companies as part of the California surge also has implications for the long-time leader in California,

SunPower

(SPWRA)

, which faces

increasing lower cost competition

in California, where it has long had the best brand recognition.

SunPower is facing challenges

in its overall cost structure and with its dealer network.

Trina Solar and Japan's

Sharp

(SHCAY)

were both ahead of SunPower in solar applications year-to-date, through the end of April.

Yingli and

Kyocera

(KYO)

were right on SunPower's heels in terms of total solar project applications, yet their growth rates were well ahead of SunPower's 58% expansion -- the SunPower growth rate of 58% was down from a growth rate of 95% in 2009.

One reason for the sudden surge in California could be the looming expiration of cash grants from the Treasury Department that have served as a ballast for U.S. solar projects since the recession began. Tax-equity investors who had acted as bread-and-butter funding for U.S. solar projects dried up once those investors, primarily banks, no longer had profits on which to base tax equity investments.

The cash grants expire at year-end, and it's unclear whether those tax-equity investors are ready to return in full swing to fund solar projects. It's also not clear how well a proposed tax rebate from the Internal Revenue Service will work as a replacement for the expiring cash grant.

As for the old knock against Chinese solar manufacturing -- that it's products are of lower quality -- one California solar installer in

SunPower's premier dealer program

, NextEnergy, has indicated that it's switching more of its module buying to low-cost Chinese solar modules.

NextEnergy's CEO, Randy Kauffman, says he's made several trips to China "to convince my eyes that they are exercising on the same quality." He's now convinced that they are, he says.

Christine Hersey, an analyst at Wedbush Securities, said that while most Chinese solar module makers have set up operations in the U.S., they haven't made a big push into the market yet because of the erstwhile boom in Europe (where solar subsidies, of course, are now set to decline). "It gets really interesting when they bring real inventory here," Hersey said.

The industry has long looked to the U.S. -- alongside China and India --as major growth markets for solar as European subsidies decline. Unlike India, though -- which has a national feed-in tariff and is planning to award as much as 1 gigawatt of solar projects this summer -- the U.S. lacks a national feed-in tariff program to spur solar sales.

China, meanwhile, continues to work at putting a national feed-in tariff in place to support solar, but implementation has been a moving target.

First Solar

(FSLR) - Get Report

executives are in China right now working with a U.S. trade delegation to try to push forward the feed-in subsidy program there. First Solar's huge 2 GW solar project in Inner Mongolia has already been delayed based on the slow-boat to a Chinese national feed-in tariff.

The Wells Fargo analyst was cautious. He noted that it was a stronger euro that helped to pull the solar industry back from the brink, even though right now it's "robbing" solar companies.

"We face six to 12 months of declining subsidies and, longer-term, a European macroeconomic situation that could bring down a lot of industries. If the solar industry hits a correction, some installers in the U.S. will be in good shape as more solar modules come to the U.S., but the bottom line does not change: you can't pay a lot for solar stocks in a declining subsidy environment."

-Reported by Eric Rosenbaum in New York.

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