U.K. Solar Industry Could Add Big Projects Under Old Incentive Scheme

The solar industry in the U.K. could add as much as 600 Megawatts (MW) of solar capacity by next April despite government cuts in subsidies and other limitations imposed on utility scale plants. ^[1] Solar companies are using a decade old renewable energy incentive program to sidestep a 5 MW cap on solar plants that rely on feed in tariff subsidies. The latest rush to build new solar plants comes despite government efforts to limit installations by cutting tariff subsidies last year.

Dropping costs for setting up utility scale solar plants has encouraged investors to use Renewable Obligation Certificates (ROCs). Although the returns through the program are lower than through other programs, their use allows utility scale developers to override the 5 MW limit of solar farms that is currently in place. Increased installations in the U.K. through 2012 could have a positive impact on the global sales of SunPower (NASDAQ:SPWR).

We have a $7.50 price estimate for SunPower Corp., which is at a 50% premium to its current market price.

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Large scale development

Across Europe, governments are taking steps to limit the development of utility scale plants. Germany imposed a 10 MW on solar projects in the latest overhaul of its subsidies program and countries such as Italy are focusing on small scale and rooftop solar installations. Developers of utility projects are therefore, being forced to adopt other means to tap into energy subsidies. Renewable Obligation Certificates were introduced by the U.K. in 2002 to originally support the development of offshore wind farms. ^[1] Despite the low returns through the ROC program, developers are using the route to plan multiple large scale plants, which could result in the addition of around 600 MW of capacity over the next several months. Equipment manufacturers such as SunPower could benefit from such a jump in installations. Lower demand from markets such as Germany is forcing SunPower and its competitors to target other markets.Utility and power plant component sales contribute to about 20% of our price estimate for the company.

Another major factor that will influence the addition of new products is the steep decline in the cost of solar equipment.  The cost of construction of utility plants has dropped by half over the past year according to some estimates. ^[1] Falling panel prices are largely responsible for the drop in the cost of producing solar energy. Governments have been forced to cut subsidies multiple times over the past couple of years to rein in installations and experts say that he U.K. could pose restrictions on the use of ROCs for solar power if installations jumped rapidly.

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1. U.K. Solar Industry Sidesteps Tariff Cut to Build Biggest Plants, Bloomberg [↩] [↩] [↩]