This is Part 2 of a two-part interview with JPMorgan Chase analyst Christopher Blansett, who is advising JPMorgan clients to stay away from solar stocks and invest in wind energy in the next two years. TheStreet spoke with Blansett about the significant change in the JPMorgan thematic approach to renewable energy investing. In Part 1 of the interview, the JPMorgan analyst laid out the case for wind. In Part 2, Blansett goes into the reasons why he has become more skeptical about the solar outlook.

TheStreet: The solar industry is striving for grid parity. Is inexpensive solar foreseeable?

Blansett: Unless feed-in tariffs expand meaningfully and on a global basis, I don't see a positive outlook for solar in the immediate future. And even a feed-in tariff (FIT) in the U.S., for example, wouldn't fix the core issue of solar being uncompetitive from a price perspective. If you look at the feed-in tariff in Germany, it makes solar eight times more expensive. Just going to a FIT doesn't fix the problem.

Spain and Germany have realized that they put subsidies in place that they will be paying for, for a long time. In the U.S., I think it is fair to say we don't have the social willpower to subsidize solar at over 100% of the cost of electricity, which is what Europe does.

All the talk about grid parity is overdone. There were assumptions being made about the price of natural gas and the incremental cost of electricity production on the conventional side that have not panned out yet and, as a result, are not supporting more support for expensive renewable energy. Ultimately, utilities and utility commissions think about one thing, pricing, and it is only when and if we have more expensive natural gas that both solar and wind become much more attractive.

You tell me where you think natural gas prices are going in the next five years and I'll tell you whether solar will exist in five years. The common wisdom five years ago was that natural gas would become much more expensive and reset the viewpoint on fossil fuels driving the cost of electricity. What happens to natural gas prices in the next five years will have the single largest impact on the outlook for renewable energy.

TheStreet: One ongoing issue for solar is its intermittent generation of energy and potential problems integrating intermittent energy with the grid. Wind suffers from the same intermittency issue, so isn't it as big a headwind for more adoption of wind energy?

Blansett: There is also a lot of talk about wind not blowing at optimal times for the grid, being early morning or late evening biased, but at these penetration levels, it is not detrimental. We would need quite a lot of wind power before the grid would need to be concerned. Some individual states are already over 10% of wind and they are able to deal with it. They had to adjust their operating procedures but only at an incremental cost over the conventional cost of electricity.

We could go to 20% wind power nationally before intermittency would be a problem and based on the current U.S. subsidy scheme, we may never even reach that level.

TheStreet: You only cover U.S. solar stocks. Does your negative outlook on solar not extend to the Asian-based solar players that many street analysts think will win the solar wars as European subsidies come down?

Blansett: It's true that I am picking from a basket of U.S. stocks only. However, my thesis about the reduced prospects for solar stocks applies to all solar companies.

In a few years, what solar modules won't be made in some low cost Asian region, whether the headquarters of the company are in the U.S. or Asia?

In the near term, these Chinese solar players have a cost advantage, but there is no long-term advantage for them in performance or pricing.

On the wind-turbine side, there is not as great a threat from Asian players. Unlike solar, wind turbines are more complicated to manufacture and the wind industry has a long history of issues with new turbine design. I think it unlikely that over the timeframe that we are recommending investors focus on wind -- between 2010 and 2012 -- that a new foreign turbine maker could make significant inroads into the market with a disruptive technology.

TheStreet: Interestingly, you are less negative on Evergreen Solar (ESLR) than First Solar (FSLR - Get Report). Some think that Evergreen faces the risk of bankruptcy. Why are you neutral on Evergreen while moving to an underperform on First Solar?

Blansett: The discussion about low-cost manufacturing is one reason why we downgraded Evergreen Solar to neutral, whereas we downgraded First Solar and Energy Conversion Devices to underperform.

Evergreen has been late in making the transition to a low-cost manufacturing region, however, of all the solar companies we cover, their cost structure has the potential to change to the greatest degree, and yet Evergreen stock is trading as if it were about to go bankrupt.

An Evergreen bankruptcy is a risk given their current balance sheet, but we don't think it will happen if they can make it through the next year. We believe there is validity in their technology and if they can successfully make the transition to China-based manufacturing of cells and modules, their technology is as good as any solar company's technology. The poor balance sheet doesn't help during the period of transition, but we do think Evergreen will come through it and investors will add equity back into the company.

Unless subsidies elsewhere in the world pick up meaningfully, it will be tough for U.S. solar companies, with gross margins only able to reach 15% and high single-digit operating margins being the norm.

First Solar has a good balance sheet and it is the least likely solar company to disappear from that perspective. Many investors think of First Solar as the premier stock in the sector and it is a good company, but we think there is a lot more potential downside based on earnings power and the street only estimating a 10% decline in average sales price in 2010. We think the ASP decline will be closer to 20%.

Energy Conversion has an interesting opportunity in the building integrated photovoltaic market (BIPV), but that market has been modest so far.

It's fair to say that for Evergreen the next 12 months are the most critical in its life, because if it doesn't make the transition to China manufacturing smoothly, it won't exist.

TheStreet: Evergreen is moving manufacturing to China, as you note. Yet there is growing unease in Washington D.C. -- led by New York Senator Charles Schumer -- about funding for alternative energy companies that don't create U.S. job growth. What's your take on the pressure being applied to alternative energy companies from Washington D.C.?

Blansett: What industry doesn't have a problem with loss of jobs to China? China is a low-cost manufacturing locale for a variety of structural reasons, from lower tax rates and lower labor costs to better subsidies. It all adds up, and it doesn't matter if it is technology or alternative energy, or cars. The lack of consistent policy from Washington D.C. has been the biggest inhibitor to growth in U.S. alternative energy.

If you are a foreign alternative energy company or a U.S. company, how do you find the confidence to build a manufacturing plant here when the subsidies could be pulled in a few years? In Europe, there have been stable wind subsidies for 20 years.

Also, the sheer scale of components in wind is very large compared to solar, and that trend is continuing. Wind markets, at least to some degree, have to be domestically supplied because it is difficult and expensive to ship overseas 50 to 60 foot segments of wind towers that can weigh 200,000 pounds.

On the other hand, you can fill solar modules into shipping containers and it's not that expensive. So from a jobs-creation perspective, wind has more opportunity because its components can't be exported cost effectively.

Right now we have approximately 90% of wind towers broken down into segments that are manufactured domestically. Approximately 50% to 75% of wind blades are made domestically. As other wind energy components become larger in size, the domestic manufacturing trend should remain hard to export.

Click here for Part 1: Why Wind Is a Better Buy Than Solar.

-- Reported by Eric Rosenbaum in New York.


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