PowerShares WilderHill Clean Energy Portfolio (PBW)

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Rays of Hope for Solar Stocks
Wedbush Morgan sees a more favorable U.S. policy under Obama.

Wedbush Morgan Securities

WE CONTINUE TO LIKE THE long-term prospects for the solar industry but remain concerned about negative short-term industry trends. We expect shares to continue to remain volatile, moving upward in response to positive headlines surrounding favorable long-term industry prospects and downward in response to short-term negative data points until the near-term industry correction is over.

Cabinet member and White House post selections signal the environmentally friendly attitude of President-elect Barack Obama. Secretary of Energy nominee Steven Chu; Carol Browner selected for a new White House post to oversee energy, environmental, and climate policies; Lisa Jackson, chosen to oversee the Environmental Protection Agency; and Nancy Sutley picked to head the White House Council on Environmental Quality are all strong proponents of renewable energy.

More favorable U.S. policy under the Obama administration could provide a boost to the sector in 2009. President-elect Obama has signaled that he is committed to tackling climate change and moving the U.S. toward energy dependence.

Industry lobbying groups are also pushing to attach several measures to the stimulus package expected in February 2009. Such measures include a massive investment in solar energy for federal government and military installations, revisions to the investment tax credit (ITC) that passed on Oct. 3, 2008, and creation of tax incentives to promote solar manufacturing in the U.S. passage of a national renewable portfolio standard (RPS) for electricity production and national climate change legislation could also benefit the sector.

The rapid advanced-solar-photonics decline during the fourth quarter of 2008 signals a difficult environment for solar companies. Companies have attributed this rapid drop in advanced solar photonics to the global economic slowdown, decline in the euro, reduced demand, tightening of credit markets, seasonality, and a supply glut in Spain following the country's revision of its feed-in-tariff.

The drop in advanced solar photonics has forced companies throughout the solar value chain to renegotiate contracts with customers and suppliers. We believe investor expectations are incorporating a 30%-plus drop in 2009 advanced solar photonics.

A recent DigiTimes article cited prices for spot polysilicon dropping to $150 to $175 per kilogram with prices as low as $100 per kilogram for product with less-stable quality and from new suppliers. We expect several companies may have to take inventory charges during fourth quarter 2008 to reflect the drop in spot poly prices. If the decline in poly prices continues, expect companies with supply contracts priced greater than the spot market to take write-downs and seek new terms for contracts. If spot poly prices reach $70 to $90 per kilogram, we would expect some silicon module manufacturers to approach the $1.00 per watt manufacturing costs achieved by thin film manufacturers.

The drop in the price of oil makes some projects appear less attractive. Given the drop in oil prices to less than $50 per barrel, it is likely that some renewable energy projects will be delayed or cancelled. While government subsidies have been the driving factor for recent industry growth, positive sentiment toward the industry is expected to be muted in an environment where the prices of fossil fuels are coming down. We have not yet seen any signs that countries with photovoltaic incentives are looking to reduce or eliminate subsidy programs due to the lower oil price and economic crisis.

We are maintaining ratings and price targets for Ascent Solar Technologies (ticker: ASTI), Energy Conversion Devices (ENER), Evergreen Solar (ESLR), First Solar (FSLR) and SunPower (SPWRA).