German Solar Data Debate: Oktoberfest or Famine?

(Solar stock, German solar demand story, updated for German solar industry data)

NEW YORK ( TheStreet) -- The latest data from Germany's solar installations database recorded 340.5 megawatts of solar installs in October, a decline of 151MW from the September level of 492MW -- which itself was seen as weak -- and a steep decline from the record month of June.

Solar bears immediately jumped on the latest data as a sign that doom is, as usual, descending on the solar sector, and Germany will fall off so quickly and steeply that prices will crater in solar in the first quarter.

Maybe, but then, again, there's more than one way to skin a German solar database.

While the German October data on solar installations is notable for its weakness, it doesn't necessarily follow that it spells doom for solar.

Doom is certainly one, but only one, possible read-through of the 340.5 MW installed in Germany in October.

So let's start with the negative: If German demand is falling off faster than expected, then first-quarter numbers -- and first-quarter guidance given with fourth quarter earnings in the February to March period -- could be anemic.

If there was a negative read-through from the German October data, it wasn't apparent in solar trading on Monday, though, when all solar stocks followed the general market trend higher. Solar trading was mixed on Tuesday morning at the opening bell, but didn't show the kind of trading pattern that resembles fear and trembling from investors.

First Solar ( FSLR) and Trina Solar ( TSL), the two leading low-cost module players, were down in trading on Tuesday. Trina was the biggest loser in solar, down 3%, though trading was average. JA Solar ( JASO), arguably in the position of being squeezed well ahead of the low-cost module makers, if cell pricing goes over a cliff in a hurry -- and cell pricing has been falling of late -- was up on Tuesday morning. Solar inverter company Power-One ( PWER), which has a huge presence in Germany and has been at the forefront of bearish trading about oversupply in 2011 and a slowdown in Europe, was up by more than 4% on Tuesday morning.

It can't be denied that 340MW is pretty light for October, but it's not a stretch to make the argument that this is exactly what the mid-year 2010 feed-in tariff cuts were supposed to accomplish in Germany. If the feed-in tariff cuts have worked to slow the growth in Germany's solar market, the risk of major feed-in tariff cuts, or a hard cap on solar in 2011, may have to be taken down a notch on the doom and gloom scale ahead of 2011 political debate in Germany.

In recent German political maneuvering, it looked as if solar interests in Germany were willing to swallow a 21% mid-year cut in 2011 to avoid a worse situation, in which rapid growth leads Germany politicians to install a hard cap on solar installations.

Several solar analysts read the latest data as an indication that the mid-year cuts from 2010 are working, and that means less impetus for draconian measures to slow solar in 2011 from Germany's parliament.

In the least, it means that the total level of installations to occur in 2010 may not hit the 7 gigawatts to 8 gigawatts which many feared would lead German politicians to take another hard look at how to slow the growth of solar.

Dan Ries, analyst at Collins Stewart, said 340MW is "a little light", and that it looks as if Germany's level of solar installations in the second half of 2010 will be lower than the first half and possibly in the range of 3GW.

In terms of simple solar math, this may indicate Germany not taking as much volume as feared in the second half of the year -- which is a knee-jerk disappointment-- however, Italy may have just taken more volume and, in the end, the volume between the two dominating solar markets remains little changed -- for example, ending the year with 9GW of the total 15GW global market, as opposed to 10GW. The optimist can also argue that if Germany has slowed down more than expected but solar companies are still selling out, the rest of the world is doing better in terms of soaking up solar demand.

One gigawatt of installations is no small matter of accounting for solar. Also, the recent price checks and evidence of deterioration in the cell market pricing evince general weakness for sellers that defy unimpeded demand for solar product in the fourth quarter. Yet weakness in cell pricing quoting Taiwanese suppliers doesn't necessarily translate into weakness for a First Solar or Trina, already in the lead position among module vendors. In any event, it's been a fact for some time already that solar will have to grow outside of Germany and Italy in 2011 to continue to see all of its capacity absorbed.

Jesse Pichel, analyst at Jefferies, takes the most bullish view of the German data, saying it clearly indicates that last year's feed-in tariffs worked to slow Germany. Pichel wrote in a note on Tuesday morning that while political debates about rationalizing the growth and size of the German solar market have intensified in recent weeks, and many solar experts continue to forecast an 8GW market in 2010 for Germany, the October installation data leads to a more conservative estimate of 7GW.

Collins Stewart is estimating roughly 6.8GW in 2010 from Germany.

Hapoalim Securities analyst Aaron Chew, who tends to the more bearish side of the solar analysis, is predicting 6.5GW from Germany in 2010. Chew concedes that the latest data does ratchet down the risk of major pushback against solar in 2011, however, it far from eliminates the risk of feed-in tariff cuts.

"While we believe the 4Q10 slowdown in Germany may quell some fears throughout the market that German regulators may be give stronger consideration to either (a) implementing an annual cap to the total amount of PV installations that would qualify for FiT incentive payments, or (b) another mid-year cut to further reduce the FiT premium in 3Q11 akin to what occurred in 2010, we believe installation demand is still running well ahead of German regulators' targets and that the likelihood of a mid-year cut in 2011 remains strong," the analyst wrote on Tuesday morning.

The Hapoalim analyst notes that the implicit target of the German feed-in-tariff program is between 3GW and 4GW of annual installations -- some contend the German government would be OK with even 5GW -- in any case, still much lower than the revised forecasts from analysts of 6.5GW to 7GW in 2010. Additionally, the Hapoalim analyst doesn't see the political rhetoric dying out at any level of installations. "Rising costs of the feed-in-tariff program to ratepayers will keep the topic of a mid-year cut or outright cap fresh in the minds of German lawmakers in 1Q11," Chew wrote on Tuesday.

A wrinkle in the revised estimates for German solar demand now below the 7GW level, and based on the October weakness, came courtesy of a major German solar lobby group, BSW.

The BSW released a report estimating that total German solar installations in 2010 will reach between 7GW and 8GW, which seems to fly in the face of the October data. BSW could know something that others don't know about December being a huge month, or it might just be making some assumptions about year-end revisions and one last installation bump. The German solar lobby could argue that the October number will be revised higher, as the September installations data was revised higher. It also may be assuming a big month in December, as December has been in prior years ahead of annual subsidy reductions.

Jefferies analyst Jesse Pichel does not expect this December to reflect the historical pattern, and several other solar analysts agreed that it seems less likely December 2010 will be a huge month for installations in Germany.

"Some think that December will be revised higher for catch-up of projects connected to the grid, but we don't think this will occur as it did in 2009 because 1) most of the ground projects were installed earlier given the FIT cuts, 2) the entire market was first-half loaded, giving ample time to record as grid connected, and 3) there was a lot of snow in Nov/Dec in Germany," the analyst wrote in an email to TheStreet, summarizing his most recent research note on the German market.

If December turns out to be another 1GW month in Germany, the political debate in Germany is sure to continue in 2011.

This BSW estimate brings up the last big point to consider in the latest debate about Germany's solar market. The October number is nowhere near as important as the December number. October could show a big slowdown in installations, and then by December, another huge month could occur, causing the lowered forecasts for total installations to head back up again to the 7GW to 8GW level.

The October data may indicate that Germany has slowed and that trend will continue through the end of the year, but that's a claim that won't be proven until the December numbers are on the books.

Collins Stewart Ries cautions investors from reading too much into the October data and says another German bubble month in December is not out of the question. The analyst says it happened last year, too. The difference last year was that October looked like a huge month, until December proved to be even huger in solar installations. Therefore, even though there remains the potential for a huge month in December, it would have to defy as opposed to continue the trend from this October's numbers.

Ries says that last October was the biggest month of the year, at the point the data was reported, but December turned out to be three times as strong in solar installations. Every year in Germany the annual digression in feed-in tariff cuts occurs in January.

In the end, the October solar installation data from Germany raises more questions than it alone can answer.

-- Written by Eric Rosenbaum from New York.


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