jeudi 30 juillet 2009

Solar PV: India Joins the Party

One of the, if not THE, most popular debates in solar PV circles is about when exactly the electricity produced by solar PV systems will reach "grid-parity", or become competitive with like-generation fuels (i.e. non-baseload) on a stand-alone basis (i.e. no feed-in tariffs, mandates or rebates).

A lot of the time, these discussions slip into arcane sub-debates about module costs, as expressed on a dollar per watt basis, and how far they need to fall for solar PV to be competitive. But module costs are only one part of the equation; inverter, installation and other balance-of-plant costs can make up to 50% of the installed cost of a system, and the local solar regimes, cell efficiency, interest rates and system orientation can all impact the levelized cost of the power produced, and thus its relative cost position on the grid.

While such discussions are most definitely intellectually stimulating, the fact remains that the solar PV industry is, by-and-large, heavily dependent on regulatory incentives for growth. Recent figures by REN21 (p. 24 of the PDF document) demonstrate the extent of this dependency. In 2005, Japan accounted for ~24% of new installations and ~35% of total installed capacity for grid-tied solar PV globally, while for Spain the numbers were ~2% and ~2%, respectively. By the end of 2008, Japan made up ~5% of new installations and ~15% of installed capacity, whereas Spain accounted for ~48% and ~26%, respectively. What changed in those three years? Japan canned its residential incentive in 2006 and Spain implemented its feed-in tariff in 2004. Now, both countries have made 180-degree turns, with Spain canning and Japan re-instating. I expect investment flows to reverse.

Reaching grid parity in certain regions with high wholesale power prices is not going to change that situation overnight - last year, McKinsey & Co published a forecast in which they estimate that economic demand for solar PV will begin outpacing policy-driven demand by about 2015. By 2020, the authors believe, policy-driven demand will still account for a little under a third of total global demand. Regulatory incentives are thus going to account for a substantial portion of installed solar PV capacity for at least the next decade.

That is why solar PV investors should be elated that India has finally decided to join the solar club by planning to have its own targets and incentives announced by September. Early information points to a non-trivial target of 20 GW installed by 2020 (Germany had about 5.4 in 2008), with 1 to 1.5 GW installed by 2012. The scope for solar PV growth in India is massive, especially growth in distributed solar as over 600 million people - mostly in rural areas - currently don't have access to electricity.

As of yet, few details have been made public on the upcoming policy so it is difficult to gauge what this will mean for the solar PV sector. However, if India's solar ambitions turn out to be as big as their IT ambitions, this could prove a welcomed boost for the industry.

I am finding it difficult to pick stocks in the solar PV sector for three reasons: (1) the intense sell-side focus, exemplified by the fact that every shop on the Street now has a solar PV analyst, makes it very difficult to gain and exploit an informational advantage; (2) stocks tend to be highly volatile, with the success stories trading at astronomical multiples (e.g. First Solar) and the firms experiencing difficulties getting destroyed (e.g. Timminco); and (3) the industry remains relatively young, with new entrants and emerging technologies continually threatening established market positions.

My favorite way to play this sector and macro events like the India announcement thus remains through one of the two solar power ETFs: theClaymore/Mac Global Solar Index ETF (TAN) or the Market Vectors/Van Eck Global Solar Energy ETF (KWT) . While volatility and high multiples remain a factor for the ETFs, they nonetheless eliminate much of the firm-level risk.

I took a long position in TAN in early March, and this has done quite well for me so far. My time line there was 18 to 24 months and that remains the case today. However, the announcement by the Indian government in September could provide near-term momentum for these two ETFs, especially if the program is to be implemented sooner rather than later.

Source : Seeking alpha, July 30 2009

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