Germany to Reduce Solar Subsidies by 10% in 2009

On Dec 5 2007, the German Federal cabinet approved a new renewable energy law. Despite all of the fluffy headlines, overall support for solar energy dropped. In the current law, solar feed in tar riffs drop by 5% a year. In the new law they will drop by 9 to 10% in 2009, 7% in 2010, and 8% from 2011 onwards.

This presents us with two interesting math problems:

1) What happens to the price of a solar panel if the feed in tariff drops 5%? Now how about 10%?

The selling price of a solar module is currently around $3.8. The selling price of an entire system (end price to consumer) is somewhere around $7 depending on how big and where. The difference of ~$3.20 goes to labor, inverters, frames, etc.

If the feed in tariff drops, the end solar installation price has to drop an identical percentage to offer the same return on investment for consumer and project developers.

So with a 5% tariff reduction, the $7 install cost has to drop by 5% to $6.65 (a drop of 35 cents).

However, if the cost of labor and wires and cables and inverters all stay the same, which they generally do, then the whole 33 cents has to come from the module price: 3.80 - .35 = 3.47. This is an 8.6% drop in module prices. This, indecently, is roughly what happened between 2006 and 2007.

Now, if you consider a 10% drop, using the same math you get 70 cents which has to come out of the module prices: 3.80 - .70 = 3.10, or a 18.4% drop in module prices.


2) What happens to the gross margin of a solar manufacturer if costs drop by 10%, and selling prices drop by the above figured 18.4%?

Assume you currently have a 20% gross margin (Suntech, for example). So for each one dollar unit you sell, 20 cents is gross profit. 80 cents is costs.

Now assume the manufacturing costs (polysilicon for example) drop by 10%. Then the unit costs drop from 80 cents to 72 cents.

But if the selling price drops by 18.4%, each unit sells for 81.6 cents. This results in a profit per unit of:

81.6 - 72 = 9.6

And a gross margin of:
9.6/81.6 = 11.8%

What does this mean for the manufacturer?

If the profit per unit drops from 20 cents to 9.6 cents (more than 50% drop), the company now needs to sell twice as much product to maintain the same gross earnings. If the end market only grows by 40% to 50% (as analysts are predicting), earnings will likely drop.

15% Renewable Energy Target - what does it mean for solar PV?

There has been a tremendous amount of hoopla recently among solar analysts concerning the US energy bill's 15% renewable energy target. Will it pass? What will it mean?

Well, it now looks like it might well pass, and I personally hope it does. But while the exact details are still cloudy (at one point energy conservation was going to be counted as a renewable source, which seems like a good idea to me), one thing is fairly clear...Solar PV is left out in the cold.

First off, a quick look at the Department of Energy's 2006 electricity statistics show that we are already at almost 9.5% renewables...and that includes almost none from Solar PV. (A lot of hydropower, geothermal, some wind and landfill gas, etc.)

So, why will the next 5.5% look any different?

Barring any direct subsidy for solar panels (which there is none), it won't.

As long as the utilities can keep choosing their sources, they are going to choose the ones that are most reliable and cost effective.

But how can this be? Isn't this bill going to "bring a bonanza for solar and wind power" to use the words of the New york Times article from Dec. 1?

One presumes that a couple of NYT reporters on deadline didn't bother to research the economics of renewable energy. And yet the reporters are right, when you consider solar also means solar thermal. There are a lot of plans for new solar thermal plants in the southwest, and utilities are already signed on. Why? because compared to solar PV, large scale solar thermal plants are MUCH less expensive, and if placed in the proper environment, also more reliable.

Yet ANOTHER polysilicon plant (TSL)

Trina Solar reported today that, yes, they too will enter the polysilicon refining business, building at least 3,500 MT (metric tons) of capacity. Considering they have about $200 mil in working capital, looks like we're looking at another stock offering or some debt. I assume they need at least an additional $150 million to build the plant.

Look out REC and WFR! WFR's repeated assertions that competition will be slow in coming is starting to look really silly.

Here's a PARTIAL list of new guys entering the market in the next two years...a total of something like 100,000 MT of capacity (for comparison, the whole industry in 2007 is about 45,000 to 50,000 MT). Of course, all of the current players are doubling capacity as well.

Note: these are NOT the only people who have announced plans to enter the polysilicon biz...just the ones that I figure have the highest chance to succeed. A notable omission is HOKU....read in to that as you like....

Korea
DC Chemical
KCC
Komex

North America
AE Polysilicon, Pennsylvania

Europe
Isofoton et al.
SOL holding AG - Silicium de Provence SAS
Crystal Systems
Nitol, SiPro, other Russia/FSU
Silicon Energy, Spain (Isofoton JV)
PV Silicon Forschungs- und Produktions AG, subsidiary of PV Crystalox Solar
SolarWorld/Degussa joint venture (JSSI)
HyCore (Belgian specialty materials group Umicore SA and Norwegian oil group Hydro ASA)

India
MASDAR (Abu Dhabi Future Energy Company)

China
Sichuan Xinguang
JPID (Jiangsu Photovoltaic Industry Development Co)
Shunda (China)
Daqo Group (China)
Dalu
Henan Xuntianyu Technology
Fuyuan Silicon and Shanghai Solar Technology
LDK
ReneSola/Henan
Shanghai Aerospace Automobile Electromechanical
Tongwei (Si'chuan Yong’xiang)
Trina Solar

Australia
Prime Solar, Australia

Japan
Japan Solar Silicon (Chisso)

Taiwan
Chinese Petroleum Corporation (Taiwan)
Lee Chang Yung (LCY) Chemical Industry
Asia Silicon
Solartech energy & Mosel-Vitelic

Metallurgical producers
Dow Corning
Elkem
JFE Steel
SolarValue
SolarWorld/Scheuten joint venture
Bécancour Silicon (Timminco)

RWI: Inefficient solar promotion costs consumers billions

This is a Google translated version of an article that appeared in the German news today:


From German newspaper: Berliner Zeitung

The promotion of solar energy provides companies huge revenue. But the benefit is doubtful

19.11.2007
Economy-Page 15
Jakob Schlandt

BERLIN. German Environment Minister Sigmar Gabriel is difficult to tame when it comes to the German solar energy industry. The promotion of the Renewable Energy Act (EEG) Gabriel hailed as a "success story for climate protection, energy supply and jobs."

There's just one snag: The Germany promotion of photovoltaics is highly questionable and economically, the consumer in the next dozen years is on the hook for many billions - even given the rising cost of electricity.
That is the conclusion of the Rheinisch-Westfälisches Institute for Economic Research (RWI) in a paper that will be published in January. A team headed by the chief of the Environmental Research Division, Manuel Frondel, has calculated how high the costs for consumers are from the current Renewable Energy Act alone for photovoltaic.

First Solar millionaire

The numbers are enormous: By the end of this year, there will be enough installed PV systems to require 20 billion euros in irrevocable payments over 20 years to the photovoltaic operators in addition to what would be required by the normal price of electricity, even considering inflation.
But this is just the beginning. Under the current subsidy, RWI estimates 2010 obligations to be over 28 billion, and by the year 2020 the gigantic sum of 57 billion. "These are the assumptions for the study to be more careful," says Frondel. The enormously high remuneration, introduced 2004, has led to an unprecedented boom. By the end of 2006, around 200000 plants were in operation in Germany, about seven times as many as currently 2003. Now a good half of the global photovoltaic capacity in an often cloudy country with weak sunlight - even in Spain about 50 percent more can come from the same PV cells.

This is not because of the environmental consciousness of the Germans, but simply financial incentives. Give 20 years of set fixed rate prices, the construction of a solar power plant is currently an almost riskless investment, with a neat return on equity of eight to ten percent rate the industry estimates.

But truly fantastic margins are generated elsewhere: at the manufacturers of the equipment. Given the almost impossible to breastfeeding by the EEG-fired demand, the production costs of the sale price uncoupled-the company can require as much as the law can.

Solo since the beginning of the year Solar shares rose on average by almost 96 percent. The companies strotzen before self-awareness and raise profit forecasts further. Q-cells example, the German market leader and the world's number two in solar cell production, will in 2007 turn a profit of 120 million euros with 800 million-euro revenue. Within two years sales doubling is a typical forecast in the industry.

Already there are the first Sonnenmilliardäre: Frank Asbeck, chief of the Bonn SolarWorld AG, holds a quarter of the company. And that is on the stock market at around 4.5 billion euros.

This high market value is quite understandable: "The EEG-Novelle 2004 led to a strong stimulation of demand by the solar industry nationally guaranteed returns," says RWI-Wissenschaftler Frondel.

The Federal Association of Solar economy interpreted the huge profits and sales growth differently. "Of course, the promotion of solar energy is not getting to zero", defended CEO Carsten Körnig the EEG-Vergütung. They increase the chances of German companies enormously, in a market of the future a good position to conquer. " "In Germany, the solar industry, the car industry, even as some major industry to replace. Now, we should not in the middle of the lane to the foot of gas." The companies would also not yield billion commodity, but in research and growth investing.

But the vision of the great future of the EEG unleashed by the German solar industry will be questioned by RWI. "With the extremely generous allowances are so comfortable conditions that German companies hardly the tough competition abroad suspend," says Frondel. In addition, a large portion of the equipment manufactured abroad. The market leader is currently Japan, and the expansion plans in China, Norway and the United States far exceed the projects of German manufacturers.

It is only that the German EEG gives world photovoltaic industry a huge boost – the industry is funded but almost solely by the German electricity customers. Sinn Voller, said the researchers, would be part of the money in research and development to invest up to the fact as cheap photovoltaics can be offered that make massive expansion worthwhile.

Conclusion

Also, the employment impact falls under the RWI-Berechnungen given the enormous purchasing power losses for the poor population. And not once in climate protection is the photovoltaic currently compete. The carbon dioxide reductions are extremely expensive, requiring more than 800 euros to be paid to displace one ton.

The conclusion of economist Frondel drops scathingly: "The EEG is a very inefficient form of support, it could also cost madness to say."
The Federal Ministry of Environment are not ignoring the escalating costs. They plan to reduce payments due to the Act from 2009, and then afterword and then by seven to eight percent per annum. This should be a one-time reduction of one cent. In December, the proposal well be acted on in the Federal Cabinet. But even still the Gabriel plans would pay approximately 40 cents per kilowatt-hour in 2010, and the profit margin of manufacturers would be expected in view of their cost cuts even further increase.
To the already existing billion cost at least limit, advises the RWI to be a much stronger annual reduction with a strong tee-off. "There must be a clear signal, that it could not go," says Frondel.


20 years Price Guarantee

Graphics: Billing: The Renewable Energy Act (EEG) has a nice feature for politicians: It costs the state nothing. The billions for the promotion erneuerbarere energies are in the electricity bills of consumers hidden. Who is a solar system builds up on the roof, the current 20 years at guaranteed prices in the electricity network launch. For small house roof systems are currently just under 50 cents, nearly ten times the wholesale market price for electricity. The power companies the costs may be on the bill of the consumer beat.

More weekend fun: SPWR insider sales.

Hey...I don't begrudge anyone their paycheck. But when you consider Sunpower is running cash flow negative, and still has an accumuated defict of $28 million, maybe their managament could show just a little bit of restraint?

Here's a little taste:

CEO Tom Werner

Date	Shares Sold	Option Expiration Price	Sale Price	Proceeds
11/13/2007	30000	3.3	117.1998	$3,416,994
10/9/2007	30000	3.3	88.0756	$2,543,268
9/11/2007	30000	3.3	72.2304	$2,067,912
8/14/2007	30000	3.3	71.6334	$2,050,002
7/10/2007	30000	3.3	67.1663	$1,915,989
6/12/2007	30000	3.3	53.4664	$1,504,992
5/8/2007	15007	0.5	56.2455	$836,573
5/8/2007	14993	3.3	56.2455	$793,812
4/10/2007	39178	0.5	48.9546	$1,898,354
4/10/2007	90,822	0.5	50.1527	$4,509,558
1/16/2007	80000	0.5	42.3493	$3,347,944
			Total:	$24,885,397

CFO Emmanuel "Million Dollar Manny" Hernandez

Date	Shares Sold	Option Expiration Price	Sale Price	Proceeds
10/25/2007	25000	3.3	110.4231	$2,678,078
9/25/2007	10000	3.3	79.8208	$765,208
9/25/2007	15000	3.3	80.3446	$1,155,669
8/27/2007	25000	3.3	63.1781	$1,496,953
7/25/2007	25000	3.3	68.0216	$1,618,040
6/25/2007	25000	3.3	64.7678	$1,536,695
6/5/2007	97814	3.3	55	$5,056,984
5/31/2007	2,186	3.3	55	$113,016
5/25/2007	75000	3.3	52.5752	$3,695,640
5/22/2007	20000	3.3	53.0339	$994,678
4/24/2007	20000	3.3	56.9495	$1,072,990
4/16/2007	50000	3.3	55.0089	$2,585,445
3/27/2007	20000	3.3	43.005	$794,100
2/27/2007	20000	3.3	43.7859	$809,718
1/29/2007	13024	3.3	45.5836	$550,70
1/30/2007	86976	3.3	45.0193	$3,628,578
1/23/2007	20000	3.3	42.1029	$776,058
			Total:	$29,328,550

Spain...the Solar Mirage.

The rapid rise in solar PV stocks (SPWR, STP, JASO, etc.) this year has been attributed to many things, from $100 oil to global warming euphoria. But in reality, the success of these stocks has been driven by just one thing...Spain.

First a little background. Think back to winter/early spring 2007. Solar PV manufacturers were in a rut...sales were sluggish, ASPs dropped 10% quarter over quarter, and inventories were skyrocketing. Many companies were brushing it off as "seasonality," but it was clear there was something wrong. Too much growth too fast, particularly by the Chinese firms, had begun to steal the profitability from everyone. The industry needed a quick fix, and fast.

And then came Spain.

Despite setting an official target of 371 mw by 2010, the new Spanish environmental "Royal Decree" set no actual timetable for installations, while offering an eye popping €.42 per KwH for large scale installations (In far less sunny Germany large scale installations receive €.38 in 2007). This allowed an investment return of over 10% for 20 years, guaranteed by the government, and so the GOLD RUSH began. By the time of this post (6 months later), the entire 371 MW appears to have been installed or under construction. And Spain even raised their target to 1200 MW by 2010.

Solar PV revenues started to boom again, and investors reacted with nothing short of euphoria, predicting that a solar revolution is just getting started.

So what's the problem?

Well, the demand from Spain came on so quickly it jarred the system...it sucked up inventory, and made even some questionable manufacturers financially viable. But in retrospect, it wasn't the size of the demand (~300 MW, a fraction of what goes in to Germany each year) that mattered, it was the speed...6 months.

BUT IT'S JUST THE BEGINNING, the analysts say!

That's where they're wrong.

First off, the Spanish Government, while raising their target out of necessity, has now admitted their policy was too generous, and they plan to fix it, although perhaps not until next fall.

So, sure, Spanish installations could grow again next year if the government really does wait until next September to reduce the tariff...the jury is still out on that.

But then what? Can it really keep growing after that? Not likely.

Spain is a much smaller country than Germany, it simply can't justify paying a billion Euros a year in subsidy for solar panels, especially when their climate is perfect for much cheaper large scale solar thermal plants.

And other EU countries like Italy and Greece are surely going to learn from Spain's mistake rather than repeat it.

Plus, the European economy is slowing, which could change everything.

So, anyone who is buying inflated shares of solar PV stocks on hopes that Spain will be the next Germany could be in for a rude awakening. In fact, since Germany is planning on reducing their solar subsidy starting in 2009, and the US does not appear to want to join the fray, it could turn out that 2008 is not the start, but the end of the solar revolution.

Germany Solar vs. Wind

A week or so ago the German Enviroment Ministry released their annual report. Naturally, it's in German, but with the help of Google Translate I was able to pick out a few interesting tidbits.

No surprises here...solar comes out looking like a poor investment compared to wind. But even I was surpised at how striking the comparison is. No wonder the Germans are "adjusting" their subsidy dollars away from solar starting in 2009.

	Wind	Solar
Billion Euros paid (feed in tariff)	€2.7	€1.2
GwH electricity produced	30,710	2,220
CO2 Million MT prevented	26.5	1.5
Euros needed to save one tonne of CO2 (adjusted*)	€22	€600

*For the adjusted figure we "credit" back to the subsidy a base rate for wholesale electricity of .07 Euros per KwH, and retail electricity of .15 Euros per KwH.