Is Time Running Out for Solar? - TheStreet

Is Time Running Out for Solar?

Time and time again, solar investors are reacting to positive solar company earnings with uncertainty -- and recent solar data shows that it is time itself that the solar industry lacks a good handle on.
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NEW YORK (TheStreet) --PowerPoint slides can often look awful pretty, without conveying much in the way of useful information.

PowerPoint's "power" to look good, while showing little, is an effect that noted PowerPoint critic, graphic-design expert and professor emeritus at Yale University, Edward Tufte, is famous for making plain. Tufte has shined a light on PowerPoint slides that were used by NASA to make poor decisions about the space shuttle program, and has gone so far as to compare PowerPoint slides with Soviet-era message obfuscation.

Are recent solar industry slides showing how the solar industry will evolve without government subsidies a case in point of this contradiction -- a case in PowerPoint, one could say?

Indeed, First Solar is on the right track in its slides

two of which will be analyzed in this article about solar needing to transition from the subsidy-supported markets to sustainable markets. Analysts say that First Solar has been talking about this shift for longer than many other solar companies.

However, what should be most noted by investors in our first First Solar slide

above -- in addition to the steady climb towards sustainable markets plotted out in full color -- is the fact that the usual timeline that would appear on the X axis is not part of the slide.

Is this a case of a timeline being impossible to predict for the climb by solar to sustainable markets? If so, since solar investors should know by now that the solar industry is at a critical juncture, does this First Solar chart have any relevance?

The First Solar chart has relevance in as much as it gets to one of the most pressing questions for solar companies and solar investors today: ambition versus reality in the form of a ticking clock, and investor uncertainty that can't be calmed by a chart to solar sustainability that lacks any timeline.

First Solar has its argument to make about the economics as solar moves toward sustainable markets, regardless of when First Solar and solar investors eventually arrive to that day.

In First Solar's earnings report last week, First Solar pointed investors to the presentation that included these slides. Still, as with the first slide, showing the steady climb towards sustainable markets, the second slide

above, detailing what First Solar judges to be beneficial economics, again lacks a timeline.

In the end, this may be a case that doesn't exemplify First Solar's massaging of PowerPoint, but rather, the true level of uncertainty that is surrounding solar currently. Maybe, for a host of reasons, it is impossible to chart the path to sustainable markets as anything other than a colorful, timeline-less, PowerPoint slide.

Even with First Solar base costs, timeline to efficiency is not exactly what investors have hoped for. First Solar also noted as part of its earnings release that it aims to reduce its per watt cost to between 40 and 50 cents, by 2014. In the fourth quarter, First Solar reduced its cost to 84 cents per watt. The problem is not the cost reduction ambition, or a lack of analyst faith that First Solar can achieve these efficiencies.

Christine Hersey, a Wedbush Securities analyst who recently downgraded First Solar, said while it is nice to know that First Solar sees a cost per watt below 50 cents by 2014, investors are more worried about 2010 and 2011. What's more, given that First Solar has noted in the past that the reduction in cost per watt will be linear, investors can't expect a big reduction in the foreseeable future -- namely, that "constraint" period smack dab in the middle of the First Solar chart.

This time-to-more-efficiency issue has been apparent in many of the recent solar earnings.

Evergreen Solar

(ESLR)

and

Energy Conversion Devices

(ENER)

both pointed to technology efficiency ambitions, but, much like First Solar,

neither Energy Conversion Devices nor Evergreen Solar provided any timeline for reaching their ambitions.

China's

JA Solar

(JASO)

noted in its earnings a drive to a higher efficiency cell -- but again, while analyst don't doubt that JA Solar is headed in this direction, the question is 'When will the statement become reality?"

Barclays Capital, for its part, thinks that 2011 will be the true inflection point for solar.

Granted, perhaps the solar companies are being responsible by not promising what they can't deliver by a specific date. Barclays Capital, on the other hand, this week offered a specific timeline for when solar will no longer be able to rely on the boom-and-bust of the subsidized market returns.

Of course, let's not forget that the solar industry is really no more than half a decade old in terms of public companies and major national tariff schemes to support solar. And many of these Chinese solar companies were, for the most part, still ramping up production in the years leading right up to the Spanish market cap on solar and the financial crash. With the growth they experienced with the lucrative feed-in tariff schemes, there was little need, and maybe limited ability, to focus on R&D.

JA Solar says its next-generation mono-crystalline silicon PV cells will go into pilot production in mid-year 2010, with large-scale volume production anticipated by year-end 2010.

Barclays expects that 2011 will be the true inflection point for solar, as the types of elastic demand markets fomented by once-lucrative tariff schemes from countries like Spain and Germany give way to long-term economic markets driven by large-scale solar projects.

Solar companies and analyst have talked about the U.S. and China being a big part of the replacement demand story as Germany limits growth, yet these markets are more heavily geared towards large-scale solar, with a longer sales cycle and lower rates of return. Barclays estimates that the percentage of demand from elastic high rate of return markets will decrease from 55% in 2010 to 10% in 2011.

Elastic demand, of course, is a temporary fix, as solar investors are seeing this quarter, as strong fourth-quarter earnings reports from First Solar and

Trina Solar

(TSL)

have failed to win out over fears of an uncertain future.

Barclays' point, notably, is not about the uncertain second half 2010 outlook, but what will happen in 2011 given a lack of certainty that the long-term economic markets of the U.S. and China will develop on an expedited schedule. There are fears that solar firms don't have the time to stop a

multi-quarter period of earnings deterioration in the second half of 2010, due to the Germany FIT reduction.

Barclays fears that the time to renewed earnings power from the growth of U.S. and China will take longer than solar companies would hope.

Time after time, timing seems to be everything in solar.

-- Reported by Eric Rosenbaum in New York.

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