NEW YORK (

TheStreet

) - Shares of

First Solar

(FSLR) - Get Report

and

SunPower

( SPWRA) both rose by more than 4% on Friday on optimism about the potential passage of legislation that would lead to increased solar power deployment in California.

UBS Investment Research released a report on Friday saying the California Governor Jerry Brown has the political power brokers lined up to finally pass a law to increase California's renewable energy portfolio standard (RPS) to 33% from 20%. The 33% RPS has failed a number of times, and an executive order signed by former Governor Schwarzenneger as short-term replacement for the stalled legislation expired at the end of his term.

The rise in solar stocks wasn't limited to the U.S. solar companies however. Chinese solar cell vendor

JA Solar

(JASO)

was also up close to 4% on Friday, as was Chinese solar module company

Yingli Green Energy

(YGE)

, which has been expanding in the U.S.

But it's the big U.S. companies like First Solar and SunPower that receive the most immediate trading link to expanded renewable energy legislation in the West, due to their acquisitions of big solar project pipelines. However, all the Chinese module makers, including Yingli,

Trina Solar

(TSL)

, and

Suntech Power

(STP)

are increasing their focus on the U.S. market, too, and that's been in the news of late.

Suntech just announced that it won a 150 megawatt project from Sempra Energy in Arizona, a project that many solar watchers had expected was in First Solar's back pocket. China's

LDK Solar

(LDK)

recently purchased a 30% stake in a U.S. solar project developer, the first acquisition of a U.S. solar project company since Suntech bought EI Solutions in 2008.

>>China Wins a Big U.S. Solar Deal

There's a reason why any sign of increased solar demand in the United States could trigger bullish trading in solar stocks, regardless of the debate between the big U.S. project pipeline companies and the increased exposure in the U.S for the Chinese solar module vendors.

The largest market for solar, Germany, is slated for a significant decline in 2011. Germany's key replacement as a growth driver for solar, Italy, remains subject to potential political changes that could slow the growth of solar power after a huge run for the country's solar installations in 2010.

>>Italy: a De Facto Cap on Large-Scale Solar?

As a result, hopes have been pinned on the U.S. as a big driver of global solar demand in 2011 and beyond. Many analysts who cover the sector think the U.S. will be a big market in 2011, but even so it won't come close to making up the difference between a decline in Germany and potential slowdown in Italy. Most projections for the U.S. market are for a size of 2 gigawatts in 2011, and analysts say even with a 3GW market in Italy in 2011, there is still reason to believe that 2011 will not be a growth year for the industry, but more likely flat to slightly down in total installations.

Three analysts contacted by

TheStreet

on Friday said that the UBS report on the California RPS being upped to 33% seemed the only likely trigger for a rally in solar on Friday. Hosni Mubarak's resignation as Egyptian President didn't lead to a rise in the price of crude oil on Friday, the price actually declined by 2%.

>>Egypt and Oil Prices: What's the Next Trade?

The Egyptian political crisis has been a trigger for solar stocks to move higher, but that is linked to the upward trend in the price of oil, and solar stocks like First Solar have already booked hefty recent gains amid the Middle East unrest. First Solar received three downgrades in the past week as a result of its rally, too, from analysts citing valuation and a lack of short-term catalysts for the shares, and in one case, a fear about sector overcapacity in 2011.

Theodore O'Neill, analyst at Wunderlich Securities, recently upgraded his very bearish thesis on First Solar to a price target of $125, up from $90, saying that oil prices would put a floor on First Solar shares, and notably as the First Solar bulls said it was time to ease off the gas, so it seems less convincing that Egypt alone would have been the mover for solar stocks to end the week.

Putting to the side the situation in Europe for solar companies and the Middle East oil price-solar trading link, the important question is,

Does the report of a likely increase in the California renewable portfolio standard to 33% merit a spike in solar shares?

After all, there are many critics of the solar-oil price trade who say it lacks any logic, even though the trading charts clearly show that it exists in the investor psychology. Is it investor psychology or real opportunity with the 33% RPS that could have driven solar shares higher on Friday?

>>Should Solar Stocks Trade on Oil Prices?

The most telling stat to the negative in answering this question -- among the admittedly larger positive about a higher percentage of renewable energy in California -- is that utilities in California have already contracted renewable energy projects at a level that represents the 33% standard, even without it being law (as the California Public Utilities Commission

CPUC chart above shows).

UBS stated in its report that, "We view a 33% RPS significantly positive for the leading solar module manufacturers, who have already been a significant participant of the prior 20% RPS program."

UBS singled out First Solar, and mentioned a 250MW project that the company announced this week with Southern California Edison. It didn't mention the recent Suntech win, or the fact that many of the Chinese module makers are increasingly successful in the U.S, or even more importantly, the fact that the utilities developing many of these projects already have the contracts signed, so there is no significant incremental opportunity for solar companies in terms of module sales. UBS rates First Solar a buy. UBS was not among the three Street firms -- Auriga Securities, Kaufman Brothers, and Morgan Stanley -- that downgraded First Solar to a hold last week.

UBS noted in its report that as much as 30% to 33% of projects currently under contract will fail, possibly implying that there will be incremental opportunity for solar module vendors, because the current contracts are not set in stone. The CPUC data does estimate a 30% failure rate. Yet that's not the case for RPS projects included in the CPUC data through 2012. For these projects, CPUC expects greater than 90% to be completed. This means that any solar investor betting that there is a near-term opportunity in solar shares as a result of an increased RPS is not looking at the relevant CPUC data set. The 33% RPS standard is already fully contracted for projects with a 90% or greater chance of completion by 2012.

This argument has been made by Wedbush Securities analyst Christine Hersey in the past, and she made it again on Friday, stating that the CPUC data does not support a view that there is an immediate and big opportunity for photovoltaic solar companies even with a 33% RPS passed into law.

Additionally, the 33% standard is for "renewable energy", and that's not synonymous with solar, the Wedbush analyst pointed out. UBS didn't mask this fact in its report, but it did highlight the opportunity for solar companies specifically.

"Renewable energy" is the key phrase, not solar photovoltaic.

In fact, a big part of Governor Jerry Brown's push has been to ensure that the RPS standard of 33% is diversified among renewable energy sources, including biofuels and wind, and even solar thermal, which is much less economically viable today that photovoltaic solar. Yet the legislation in California states that solar thermal will be supported, even if it is not as economically viable as other sources of renewable energy.

The legislation also states that it will support distributed generation projects, even if they are not as economically viable as other renewable energy projects under the 33% RPS, if they "merit targeted assistance." Governor Jerry Brown has been vocal about distributed generation projects located close to the area of energy use, as opposed to the kind of large-scale solar projects in the desert that have to be fed into the grid from afar. So this is another detail that needs to be considered before drawing a straight line from a 33% RPS to solar module companies, and the U.S. solar companies that have amassed pipelines of enormous desert projects.

From a political standpoint, the fact the Governor Jerry Brown supports a 33% RPS is nothing new. Governor Schwarzenneger supported it too. UBS didn't name any sources in reaching the conclusion that the bill would be passed by March, only saying the "key CA political leaders" had indicated this to be the case. UBS bases the March time line on the fact that from the time a bill is introduced, it has 45 days to be passed, or else it must be re-submitted. The bill was introduced on Feb. 1.

It may in fact be true that things are looking good for the 33% RPS, and Governor Brown has made it a priority. However,

TheStreet

spoke with an insider in the office of one of the California State Senators who is sponsoring the legislation, and the insider said that to think the legislation can pass by March is asking a lot for what has been a controversial piece of legislation debated for several years now. UBS focused on resolution in a long running dispute with labor unions over the interstate commerce clause and how that is factored into the legislation. Yet the California Senate insider says that the major utility companies in the state remain a huge political interest group, as do a group of non-utility energy companies called energy service providers (ESPs).

"A March timeline is the best of all possible worlds. A more realistic timeline is at least 90 days," the California senate insider stated. Beyond that, the insider said that it's not uncommon for deadlines to pass and bills forced down the road of re-introduction and then finally, amended several times to meet the needs of special interests. As an example, the California Senate insider noted that the current legislation and recently revised CPUC standards are not exactly lined up in regards to another important part of the renewable energy legislation, renewable energy credits (RECs).

The legislative staffer added that for "anyone who believes we can run this bill through a special session without changing anything, it's wishful thinking. There is always the clamoring of special interests and it adds all kinds of variables and time." The California Senate staffer said that even 90 days would be a major accomplishment given that this bill has failed in the past and the current bill is not substantially different. An agreement between political power brokers, though, which UBS claims has occurred, could be the difference.

One solar analyst who wasn't authorized to speak without compliance approval chalked up Friday's bullish trade to the UBS report, and said that even if it's not a slam dunk for solar companies, and even if Governor Brown has been "pro this legislation forever," it gives the industry a little more visibility on California, and that's reason for optimism, even if a more circumspect reason for a specific trading spike.

He also noted that solar companies trade at very inexpensive multiples relative to the market -- with the exception of First Solar -- and so positive news on a key market during a time of global uncertainty is likely to give rise to some bullish trading.

-- Written by Eric Rosenbaum from New York.

RELATED STORIES:

>>Congress Wants $900 Million in Clean Energy Budget Cuts

>>China Wins a Big U.S. Solar Deal

>>Should Solar Stocks Trade on Oil Prices?

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