Solar stocks are the worst performers again, despite the Fukushima hype and extremely generous tariff support. The solar sector (January to June) is down 10% versus the renewables sector down 5.8%, and some of the most abrupt moves in solar go from -33% to -56%. The reason why the sector continues to collapse like a falling knife is that it has not proven how they can make any money unless there is dreamtime-like expansion. We tend to believe that tariffs that support volume growth but cut prices more rapidly will benefit the industry (and equities) as a whole more, but hurt higher cost participants sooner. It is wrong. Because the sector starts from overcapacity and excessive cost and even with costs falling 39%, and subsidies that guarantee on average €180/MWh they still lose money.
Developers in regional markets in some cases would prefer capacity caps with higher tariffs, thus enjoying the spoils of overcapacity-driven solar ASP (average selling price) pressures from their suppliers. The Asian manufacturers have zero discipline in capex or growth, they need only a 3-month price signal and they further expand, which virtuously keeps driving down the cost. Something like 10GW of new manufacturing capacity (40%) is coming online during 2011, while demand (global) is expected to rise about 15% at best.
The big 'if' is if Italy imposes an annual 2-GW/yr cap on installations; if they do, most of the marginal players in Asia will have nowhere to put their last 20% of production and we have a rapid fall in prices, margins and profits which then will lead to the proverbial 'boom/bust'. But before then, we would expect margins to compress by 50% or more in some cases in the food chain, as we saw in wind--could see stocks fall 20-40% over the summer.
If the industry were logical and wanted to lower the cost of solar – what should it do? If you assume 1600 kWh/kW capacity factor, €35c/kWh FiT (Italy), and assume that the installations are made from 2012-2016, the €6bb/year economic burden by 2016 translates to ~2.1GW/year from 2012-16. If the industry instead accepted a €25c/kWh FiT (~30% cut), the industry could support a 3GW/year cap at the same economic burden. If the industry accepted a €20c/kWh FiT (~40-45% cut), the industry could support 3.75GW/year. If the industry accepted €15c/kW FiT (55-60% FiT cut), the industry could support 5GW/year.…
