Power-One, Inc. (PWER)

[eastunder]

Italian Solar Market: Uncertainty Is Still the Rule
Eric Rosenbaum

03/03/11 - 02:42 PM EST

http://www.thestreet.com/print/story/11030883.html

(Solar story, Italy solar story, updated for analyst commentary)

NEW YORK (TheStreet) -- The Italian government's new draft decree of changes to solar policy will not include a cap on installations at 8 gigawatts, but changes to be made in Italy's solar incentive policy in the coming months will be significant for the solar industry. Solar stocks have been in limbo this week after a big decline on Monday when the Italian government was still considering the cap at 8GW.

The specific changes to be made by the Italian government are expected to include a lower feed-in tariff (FIT), a potential cumulative annual cap on installations eligible for the revised FIT, both to be implemented as early as June, as well as land restrictions and project size restrictions, as had been in the original draft decree. The exact size of the subsidy decline and FIT-linked cap to be implemented were not clear on Thursday morning and are expected to be debated until the end of April, setting a new barometer for the existing uncertainty in the Italian solar market, according to analysts.

Morgan Stanley analysts wrote on Thursday morning, "We believe that it is hard to spin this news positively or negatively for the sector as there are still many unknowns. While bulls may point out to the removal of the 8GW cap, bears can point to the fact that the level of feed in tariffs beyond June 1st will be unknown for two months, which will mean that financing for projects that get interconnected after June 1st will likely be frozen until there is more clarity on the new levels. The key takeaway for us is that today's news just pushes out uncertainty for the sector by another 2 months."

Of course, spinning it positively or negative began immediately, and confusion continued to be a part of the news flow related to the Italian solar policy. The Italian industry minister, Paolo Romano, for example, said in a statement quoted by Reuters "No cut, no cap, no stop to the manufacturing sector development has ever been envisaged."

Trading in solar stocks on Thursday suggested a less than enthusiastic response to the Italian political developments, as solar stocks went higher at the opening bell, but quickly retreated, and on Thursday when equities were surging.

Dan Ries, analyst at Collins Stewart, stated on Thursday morning that the Italian policy announcement removes the big risk of a halt to the Italian solar demand, but is by no means a free lunch. "The revised policy points to a feed-in-tariff reduction on June 1, which is potentially HIGHLY DISRUPTIVE to the solar supply chain due to the uncertainty it creates."

Jeff Osbourne, analyst at Stifel, said that solar stock trading may remain volatile while Italy decides on a new solar incentive policy. The analyst wrote on Thursday morning that, "While the removal of the cap on installations is a positive, we still don't know where the Italian market is headed. In the meantime, we expect the lack of clarity will keep the pace of installations high, keeping prices for wafers, cells and modules elevated for another month or two."

The Stifel analyst added, "Given there is a typical 45 day lag from shipment from Asia to installation in Europe with the majority of systems, prices generally move 30-45 days ahead of demand shifts, so pricing could change quickly a month or two from now, which we expect to be the case. The news today should benefit the Chinese solar complex as it relates to 2Q11 shipments; however, it still does not provide clarity about the second half of the year, which will likely keep multiples compressed in our view."

Sam Dubinsky, analyst at Wells Fargo, wrote a similar opinion on Thursday morning, stating that Italy had more or less pushed the risk out a few months, even as it removed the worst-case scenario cap. "Solar stocks will likely bounce this morning, but we urge investors to tread carefully as the subsidy discussions are still ongoing and bank lending for Italy projects could tighten given uncertainty," the analyst wrote.

The Collins Stewart analyst explained that the combination of the feed-in-tariff not defined after June 1 and the long lag time needed after a system is built for it to be registered creates a situation where a system built as early as March or April might not know what feed-in-tariff it will receive.

"A system buyer that does not know what cash flow the system will generate (the FIT determines the cash flow into the system) will want to renegotiate the system price after it knows the FIT will be lower than expected. Similarly, banks that plan to lend to Italian projects may also balk at lending to projects for which the FIT and therefore cash flow is undefined.... The Italian policy change set to occur in June will have implications for module sales in the very near-term," the Collins Stewart analyst wrote.

Bottom lining the new issue and echoing the comments from Stifel, Collins Stewart's Ries wrote, "Our point is that without the FIT being known for June, [it] can affect projects as early as March or April. That is within the normal lead time for module sales agreements. We suspect a lot of calls are being made from module buyers to module producers (in China) saying 'Hey, I am not sure I need all those modules I ordered for 2Q11 and I am sure I will need them at a lower price.'"

There is still debate in regards to the size of the land-based project market in Italy relative to the rooftop solar market, too, and whether significant restrictions on land-based projects in Italy may seriously impede Italy's solar market growth.

Gordon Johnson, analyst at Axiom Capital, said that the only solar trade to make given the debate in Italy is an immediate short position on solar stocks. The Axiom analyst said that the market does not fully understand the impact of the changes being contemplated in Italy, and that is reason alone to short stocks that will adjust lower once the impact is understood.

While many of the analyst reports on Thursday focused on the removal of the 8GW cap and the FIT revisions, the Axiom analyst said that the draft decree he has seen includes "an annual limit of total PV power to be incentivized as part of a new FiT scheme to be effective June 1st, 2011, or a '11 cap which will apply to out years - the Italian market will be effectively capped this year moving forward (any provisions to the new decree will over-rule the provisions in the current feed-in-tariff "conto energia" decree)."

Christine Hersey, analyst at Wedbush Securities, said that given the continuing uncertainty over exactly what is going to be done in Italy, it's better to focus on the fundamental issue for the industry, which hasn't changed: potential oversupply.

For the Wedbush analyst, the fact that the major Chinese solar module makers have all been aggressively increasing shipment guidance during a period of time when the market knew Italy was contemplating significant changes to solar support is reason enough to be concerned about the outlook. Furthermore, the fourth quarter results for companies indicate that increased shipments of solar modules must have been going to Italy, even if the module manufacturers themselves didn't know it. The Wedbush analyst explained that with a slowing of demand in Germany, German solar companies were likely re-directing sales to Italy where returns to be generated on solar projects are higher, a situation that could mean a solar module manufacturer ships to Germany and never knows that its module actually ends up in Italy.

Axiom's Gordon Johnson echoed this concern, writing, "even though the Chinese solar vendors may be selling 30% of their product to distributions/installers in Germany, those same distributors/installers may then be taking those modules & reselling them into Italy at higher prices given the higher FiTs in Italy. Thus, the cell/module vendors appear NOT to have visibility on where their product is ending up, which in our opinion skews their ability to understand what a fall-off in the Italian market means. Again, we do not believe the Street fully understands this dynamic."

All the leading solar module makers actually rose in early trading on Thursday as the "cap removed" headlines held sway, though gains of 3% at the open were quickly eliminated and solar stock trading took a negative turn.
First Solar(FSLR) and SunPower(SPWRA), which have project businesses in Italy, were up by 3% at the open yet saw those gains disappear within a half hour of trading.

U.S. solar inverter companies that had taken a big hit on the Italian solar policy debate were surging in early trading on Thursday, with SatCon(SATC) up 8% and Power-One(PWER) up 2%. The inverter companies were the only solar stocks holding any gains on Thursday.

The leading Chinese solar module makers, Trina Solar(TSL), Yingli Green Energy(YGE) and Suntech Power(STP), opened higher but also saw their gains quickly evaporate. Jinko Solar(JKS) was among the market's biggest loser on a big day for equities, leading the sudden about-face in solar trading after a positive open and declining by 3%, with the other Chinese solar vendors down in a range between 1% and 3%.

It was a bullish morning for the equities market as well, with the major indexes all rising by more than 1% and outpacing the solar stocks.

-- Written by Eric Rosenbaum from New York.