Monday, March 19, 2012

Germany Clubs Solar With New Feed-In Tariff Rates

For weeks there have been rumblings that Germany was going to cut its solar feed-in tariff, justifiably so after the country saw 3 GW of solar hit the market in December alone. What wasn't known was exactly what those cuts would look like.

Yesterday, the new rates were released, and they will take effect on March 9. They are as follows:

Project Size
Feed-In Tariff Rate
Under 10 kW 0.195 euro/kWhr
10 kW to 1 MW 0.165 euro/kWhr
1 MW to 10 MW 0.135 euro/kWhr
Over 10 MW No feed-in tariff rate

This is a 20% to 30% cut from the previous feed-in tariff rate, in line with rumors, but investors still seemed surprised, as they crushed solar stocks yesterday.

What's interesting to note is how this compares to retail electricity rates. According to Eurostat, Germany paid an average electricity rate of 0.2294 euro per kWhr in 2009. That's higher than the new feed-in tariff rates I've shown above. That means that net metering becomes an economically viable solution for homeowners versus the feed-in tariff.

The question now becomes: How much solar can Germany install without the use of a feed-in tariff?
What this means

What Germany has done is cut the legs out from under the utility-scale and medium-size solar development market. Companies like First Solar (NAS: FSLR) have thrived in this market, building large-scale solar plants. Now the market will shift to rooftop solar, which favors higher-efficiency modules.
SunPower leads the efficiency pack, but is focusing more heavily on the U.S. residential and commercial market, along with its project development unit, than Germany. It would be reasonable to think that higher-efficiency Chinese manufacturers like Canadian Solar (NAS: CSIQ) and Trina Solar will benefit most from the move to more residential installations, but the scale of residential solar installations in Germany will be important to keep an eye on. Canadian Solar, in particular, gets a majority of sales from Germany, so the market reaction is critical.

How much will this hurt?

The question on investors' minds is: How big will the impact be? In 2011, Germany installed 7.5 GW of solar power and that may be slashed in 2012. China, India, and the U.S. will pick up some of the slack, but manufacturers keep building supply and the worldwide market likely won't keep up without a strong Germany. If anything is going to push lower-tier manufacturers into bankruptcy, this could be it.

I would keep an eye on LDK Solar (NYS: LDK) , JA Solar (NAS: JASO) , and ReneSola (NYS: SOL) for further signs of weakness that could push them over the edge. Each posted negative gross margins in the third quarter of 2011, and further weakness in Germany could spell trouble. These are third-tier suppliers who count on other manufacturers for polysilicon and cell demand and need high worldwide demand to sell their own modules.

Foolish bottom line

The news out of Germany yesterday wasn't good for solar stocks, but it may push us closer to consolidation and more failed manufacturers. What the industry could really use right now is lower supply, and that's only going to happen if some companies fail.

I'm not expecting the German market to fall apart, but this will be our first test of how consumers react after grid parity is reached.

The next year will be painful for some companies; that's why I will be sticking with those that have the best modules and strongest balance sheets. That's SunPower in the U.S., which has much of its production tied up in power plant developments, and Trina Solar in China. These two companies should emerge as winners as this solar battle plays out.


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