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Weekend: Does Size Matter?

Written By Nick Hodge

Posted October 9, 2010

Welcome to the Energy and Capital Weekend Edition — our insights from the week in investing and links to our most-read Energy and Capital and sister publication articles.

It’s not all sunny for the solar sector…

Despite being on a torrid run of late and a generally bullish outlook, pockets of resistance are starting to form.

You can see the disparity in performance in this three-month chart:

Solar 10-09-10

I won’t beat the China drum any more (they’re clearly pulling away from the pack), but instead focus on the nuances of the sector expected to be important factors over the next year or so.

They’re all the biggest…

I don’t remember exactly who said it — it might have been a Citibank executive — but at a finance forum on Wall Street this summer, I heard every solar project approved in California this year would be sequentially larger.

This week, BrightSource Energy said it won final approval for a 370 MW solar thermal plant valued at $1.7 billion to be built in Southern California.

But this party’s just getting started…

Eight other plants between 500 and 900 MW are either being planned or under construction. A 980 MW plant is being built at Fort Irwin by Acciona; a 1,000 MW plant to be built by Solar Millennium was just approved for Blythe, California.

And that’s just solar thermal…

A 1,500 MW conventional photovoltaic plant is planned for the Panoche Valley.

And a plan has been floated to build a 5,000 MW plant on 30,000 acres of aging agricultural land in the San Joaquin Valley.

So everything’s good, right?

Not quite…

Sure, California has greenlighted thousands of megawatts worth of solar projects in the past month. But there’s a troubling reason why…

In order to qualify for federal stimulus funds, the projects must be approved before December 31 of this year.

That means the domestic solar market is on a precipice. With Congress adjourned and the hit Democrats are going to take in the coming election… chances of an energy bill this year are about as good as Lindsay Lohan staying sober.

So yes, a plethora of projects have been approved.

But that’s only because gridlock is on the way.

And the world’s largest solar market could be facing the same. A report out late this week claimed “rising costs for solar power in Germany could either trigger a further large cut in sector subsidies or a cap on new installations.”

That country’s feed-in tariff has been so successful that costs are climbing out of control. It’s a good problem to have — it means the industry is maturing — but it’s a problem nonetheless.

A similar cut caused Spain to fall from the largest solar market in 2008 to ninth place last year.

And, according to Robin Batchelor, who runs BlackRock’s $2.9 billion New Energy Fund: “Any softening in demand in this end-market (Germany) would likely return the market to over-supply and hurt pricing if not offset by growth in other large markets such as Italy, USA or China.”

How to play it

All these projects in California (and any rush to buy panels before another subsidy cut in Germany) will end up on balance sheets in the next few quarters.

I’d be using any buy-in opportunities that coming earnings present to establish a position.

That means buying on the dips for companies that fail to meet expectations this quarter… and then holding them for the payoff after projects currently being approved make their way to the balance sheet.

And it also means finding the best-in-breed companies for all current technologies. First Solar (NASDAQ: FSLR) in the thin film space; JA Solar (NASDAQ: JASO) for cells; Renesola (NYSE: SOL) for wafers.

So keep an eye on solar earnings in the coming month. And catch up on the rest of this week’s investment ideas below.

Call it like you see it,

Nick Hodge


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