Lowering Estimates On First Solar, But Large Upside Remains

The recent turmoil in the solar industry has seen solar stocks plummet over the past few months as PV module manufacturers cut down sales estimates due to falling demand from European markets. Solar companies have been hit by the drop in demand after having ramped up capacity over the last few years. High inventories, excess production capacity and weak demand have resulted in a sharp drop in prices in Q2 2011 that has hit the margins of solar module manufacturers. We have incorporated the changed market dynamics in our forecasts and have revised our price estimate for First Solar (NASDAQ:FSLR) to $111, which is still a 50% premium over its current market price. We are also revising our estimates of Sunpower (NASDAQ:SPWRA), SunTech Power (NYSE:STP) and LDK Solar (NYSE:LDK).

Parity to drive demand in the long term

One of the main reasons for the reversal in fortune of solar firms since Q2 2011 has been the decreasing support from governments of European countries such as Italy, Spain and Germany.

Europe accounted for nearly 84% of the market for solar energy in 2010 as governments supported solar projects with generous subsidies. ^[1] However as investors flocked to take advantage of the incentives, governments had to enforce subsidy cuts and capacity limits to cut back on their spending for these programs. The cuts are expected to deepen as many governments are being forced to rein in budget deficits by decreasing spending. In such a scenario, the long term viability of solar module sales will depend on the ability of firms to lower the price of generating solar energy to levels where it can compete with conventional sources such as coal and nuclear energy.

Solar power has already achieved retail grid parity in geographies such as Hawaii where the cost of conventional energy is high. In the European market, the cost of generating solar power at utility scale is between Euro 0.15 – 0.29 /KWh while the retail price of electricity ranges from Euro 0.13 /KWh in Greece to Euro 0.29 in Denmark.((ref:1)) ^[2] Peak price parity is expected to be reached in Southern European countries by 2013 and in Northern countries by 2016 – 17 as module prices drop and the price of retail power increases. Wholesale and bulk price parity is expected a few years after that.

The average retail price of electricity in the U.S. is about $0.10 in 2010 while solar power is generated at $0.16 in utility scale plants. ^[1]((Electricity Data, U.S. Energy Information Administration, for twelve months ended May 2011)) Our forecasts reflect a rise in demand as grid parity is achieved in different markets and demand for solar modules is driven more by commercial viability than by incentive programs. The German market is expected to stagnate at present levels as the increasing economic feasibility of solar electricity is negated by feed-in tariff cuts.

Price declines pull down stock

Falling module prices are pulling down revenue and margins for solar firms. We have adjusted our estimate for the decline in the prices of modules to reflect the pricing pressure in the market and the effects of oversupply and competition from low cost Chinese players that should lead to suppressed prices over the forecast period.

Click here for our full analysis of First Solar.

1. Solar Generation VI, EPIA [↩] [↩]
2. Europe’s Energy Portal, as of June 2011 [↩]