Saturday, January 4, 2014

Germany's Solar Boom isn't Done

Germany used a system of strong subsidizes to become one of the world's leading solar markets. Now utilities are raising prices to help counteract rising costs. The upside for solar manufacturers is that raising prices encourages consumers to buy solar capacity for personal consumption. Falling subsidies have made many solar manufacturers put their attention outside of Germany, but the nation's solar boom is far from over.

The numbers
Looking at data from the first half of 2013, Germany's electricity is quite expensive at €0.1493 per kWh before taxes. In 2011 Germany's feed-in-tariff passed below retail electricity prices, and right now its current rate of €0.0974 per kWh to €0.1407 per kWh is below market rates. Recent estimates of German PV installations have projected a cost of €0.12 per kWh to €0.16 per kWh. As inflation continues to drive the retail cost of electricity upward, solar will become more attractive.

How much growth is left?
Solar is cheap as long as the sun is shining, but storage technology is prohibitively expensive. Even with thermal solar systems the levelized cost of energy (LCOE) is far above conventional fuels. The high cost of storage means that PV solar's market is effectively limited to the middle of the day when the sun is shining.

German utilities commonly plan for 5.6 gigawatts (GW) of midday solar production compared to 46.5 GW of traditional midday production. Overall there is still significant room for solar to grow.

Which companies are most affected by Germany?
SunPower (NASDAQ: SPWR) is a big solar manufacture based in the U.S., and a strong German market could give an additional boost to the firm's profits. In SunPower's guidance for 2013 Europe, the Middle East, and Africa are expected to provide around 23% of recognized megawatts (MW). In the coming years there is the potential for this number to rise as SunPower's products are very efficient and designed for dense rooftop markets.

In Q3 2013 SunPower was able to pump out net income from continuing operations of $87.38 million compared to Q2's net income from continuing operations of $4.26 million. Even without Germany, SunPower has growing profits and is one of the strongest solar plays.

First Solar (NASDAQ: FSLR) has traditionally focused on large utility customers. It sees most of its opportunity in North America and Latin America with Germany providing a very small piece of the pie. Given that a significant portion of Germany's future solar growth will come from small consumers who want to produce electricity for personal consumption, firms with very efficient panels will probably see more success than First Solar.

First Solar's recent deal with GE improves the solar manufacturer's long-term prospects thanks to stronger R&D potential. Thanks to recent deals like NextEra's 250 MW plant in California, First Solar continues to bring in new utility projects. To a degree the company has the luxury of ignoring Germany due to its strong profit margin of 12.2% and established relationships.

Yingli Green Energy (NYSE: YGE) is a Chinese manufacture with major balance sheet issues. Germany is quite important for this company's future. Management expects Germany to provide around 21.6% of Yingli's shipments for 2013. A strong German market will help the company maintain sales, but the fate of the firm is unclear.

Yingli has a debt problem with a total debt-to-equity ratio of 11.59. Based on Q2 2013's numbers it has $1.384 billion in long term debt on its balance sheet. Given the company's operating losses in recent quarters, the possibility of bankruptcy should not be ignored.

Regardless of how Germany and Europe fare, LDK Solar (NYSE: LDK) is in a sorry state. Like many other Chinese manufacturers it is struggling from overcapacity and massive losses. In Q2 2013 LDK Solar posted a gross loss of $53.8 million; only a slight improvement from its Q1 2013 gross loss of $59.5 million. Its balance sheet is not much better. LDK Solar has just $831 million in total current assets against $4.436 billion in total current liabilities.

LDK Solar has fundamental issues that will not be solved overnight. Given its debt load and losses, it is best to ignore the firm for now.

Final thoughts
Germany's retail electricity prices continue to rise and unsubsidized solar is becoming more attractive. The nation provides precious sales to Yingli, though the firm's debt is still a major issue. SunPower may also benefit from German growth thanks to its experience in the rooftop market.

First Solar is a strong company, but its focus on utility-scale projects will limit its ability to participate in the next phase of Germany's solar boom. LDK Solar's balance sheet problems are so big that it is unrealistic to paint Germany as its potential savior.


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