NEW YORK (
) -- The amount of noise coming out of Germany about proposed additional solar feed-in tariff cuts is an annual rite of passage -- and period of unrest -- for solar investors. Yet there's been a major change of tone this year in the battle of the future level of installations in the solar sector's leading market.
It's a well known fact that, as was the case last year, Germany is again considering additional feed-in tariff cuts in 2011. Also on the table is a potential hard cap on solar installations, though some solar experts, including Jefferies analyst Jesse Pichel, have stated categorically that a cap in Germany in 2011 won't occur.
Recent developments point to a hard cap being unlikely to occur but not because talk of a cap has turned out to be a "boy who cried wolf" scenario as it has in the past. Rather solar interests are already making big concessions about FIT cuts in 2011, and that's an indication the industry may really be afraid the political powers have the muscle to lower the boom of a hard cap if pressed on the issue.
reported last week that two key political parties that have always supported solar, the Greens and the Social Democrats (SPD), were willing to support solar FIT cuts next year. These are the parties that originally enacted the legislation to support the birth of the solar industry and the FIT in Germany.
Maybe even more telling, the German solar industry lobby, the BSW, has gone further, saying that it is willing to not just swallow a mid-year FIT cut in 2011, but move up a portion of FIT reductions scheduled for 2012 to 2011.
Carsten Koenig, the head of the BSW, told a German magazine recently that a mid-year FIT reduction of 13% in 2011 could actually be as high as 21%. Koenig's comment to a German periodical called
was reprinted this week by
As Wells Fargo analyst Sam Dubinsky wrote in a note this week to solar investors, "Political support in Germany looks to be waning."
Suddenly, it seems that solar is far from negotiating in a position of strength. This is a significant difference from the same debate as it played out in early 2010.
Christine Hersey, analyst at Wedbush Securities, wrote in an email to
"the BSW seems resigned to some changes and is likely more willing to compromise up front than in the past in order to avoid a hard cap being put in place. That is different from the discussions and comments last year."
Last year, when the German environmental minister released a plan to cut solar FITs as early as April, the push back from the solar industry was immediate and pulled no punches. The BSW, in particular, was talking about the potential loss of jobs in Germany numbering into the tens of thousands and, stoking the rhetorical flames, argued that the fate of its solar industry was hanging in the balance.
The "proverbial" death knell for solar has always been a hard cap in Germany. The solar industry has found ways in the past to stay ahead, or at least stay even, in the race to lower prices enough to offset the impact of FIT reductions, but putting a hard stop on the level of installations in Germany means an immediate loss of several gigawatts from the solar market, even a German market expected to be smaller next year.
While solar industry talks are heating up the growing markets of the United States and China, as well as secondary European markets, Germany is still positioned to be the single greatest driver of solar demand and pricing in 2011. Whether it's U.S. leader
, or the Chinese low-cost leaders,
Yingli Green Energy
, and on down through the solar sector supply chain, even a diminished Germany is still far and away the largest market for solar supply.
As noted in a recent 2011 market outlook from consultant
, solar industry growth in 2011 will again be dependent on price reductions in solar staying ahead of the level of feed-in tariff cuts, making solar project economics attractive to investors.
A 21% mid-year cut in Germany would be a significant incremental negative for the solar sector.
Yet it might just be the price that solar has to pay for a growth rate that hasn't slowed enough through the annual FIT reductions.
Last year, the BSW said that beyond the two already approved annual feed-in tariff reductions at the start of 2010 and 2011, there was no grounds for further double-digit cuts. That's clearly not the case anymore, and the BSW is not just conceding the point, but saying that 2012 FIT cuts may need to be moved up by a half-year, depending on the growth rate.
"Depending on the growth rate" is the key phrase, because detractors of the annual feed-in tariff cuts in Germany have always maintained that they don't get the job done in rationalizing growth in the solar sector. Instead, they feed a short-term demand frenzy. In 2010, this was clearly the case, with the total German market sixe expected to be well beyond original projections, and reaching new heights after the implementation of additional feed-in tariff cuts.
It's safe to say there will be press reports still to come about the political situation in Germany as it relates to solar. It's also dubious to trust any chatter coming out of the German press and from political interests until all is said and done and made into law.
For example, last year the Christian Socialist Union (CSU), representing the interests of Bavaria -- where a large solar labor force exists -- put up a big fight when the German parliament tried to push through steep FIT cuts. Even if the Greens and the SPD are relenting, the recent reports haven't showed the hand of the Christian Socialist Union, and the CSU was able to slow the process of reducing FIT cuts in 2010.
As solar investors, and the press, learned last year, the political balance can shift as quickly as solar module ASPs. The CSU was able to prevent the worst-case scenario sought by those anti-solar factions in the German government in 2010. It's safe to say that playing the game of German parliamentary "inside baseball" from the Street requires a defensive posture at the plate, ready for any on of a number of pitches.
Additionally, last year, it wasn't until after the new year began that solar stocks had their German FIT fear haircut, even though the potential for additional feed-in tariff cuts in Germany was a well-known fact at the end of 2009.
One silver-lining for solar stocks, then, is that the stocks have had a haircut headed into the holidays, and another major swing factor alongside Germany -- the risks of the European debt crisis and a further weakening of the euro -- are well known, even as the euro slouched into Christmas near the $1.30 mark.
Trading remains light in solar stocks headed into the holidays, and if anything has typified solar trading of late, it's the lack of bullish investors willing to bet the house on everything going write in 2011.
The worst-case scenario of an annual cap on solar installations in Germany in 2011 may again prove unfounded, but this time around, it's looking like that may be because solar interests are folding before putting up a fight.
It's better to lose the battle and win the war, or in the least, keep the war going rather than face sudden annihilation. After all, in the end, the solar soldier doesn't want to be capped by his enemies.
-- Written by Eric Rosenbaum from New York.
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