Analysis: Cap and cut fears cast pall on German solar recovery

FRANKFURT Mon Oct 25, 2010 4:05pm EDT

A construction worker fixes solar panels for a new solar power plant near Olching-Esting westward of Munich July 7, 2010. REUTERS/Michaela Rehle

A construction worker fixes solar panels for a new solar power plant near Olching-Esting westward of Munich July 7, 2010.

Credit: Reuters/Michaela Rehle

FRANKFURT (Reuters) - Germany's battered solar stocks could take a further hit as fears of a fresh cut in sector subsidies and a cap on new installations outweigh a recent pick-up in earnings momentum.

A surge in renewable energy capacity added in Germany this year will lead the levy that consumers pay on their electricity bills for green power to rise to 13 billion euros ($18.1 billion) in, or 60 euros per household per year, the country's grid operators said earlier this month.

This has led to demands that the renewable energy generators -- mainly households with solar panels installed on their roofs -- get paid less for the power they sell to the grid.

These production subsidies, intended to encourage clean power and payable until costs come down to the level of fossil fuel-based power, have made Germany the world's biggest market of solar power in recent years.

But there's a real chance of additional cuts in feed-in tariffs to follow a massive reduction implemented in July or even a cap on new installations when Germany's renewable law (EEG) comes under review next year.

A similar a move had caused the Spanish market, once the world's No.1, to collapse.

"Given the growing impact that solar is having on the overall cost of electricity in Germany, a substantial tariff cut in 2012 or even a potential hard cap on installation levels cannot be ruled out," said Robin Batchelor, manager of BlackRock's New Energy Fund.

German solars have massively underperformed the broader market, with the OekoDAX index of the country's biggest renewable stocks falling 27 percent year-to-date, compared with a 12-percent rise in the bluechip DAX.

StarMine shows that a group of Germany's five largest solar companies on average have a so-called "Price Momentum" -- indicating the level of momentum for future performance -- of 19.6, compared with 32 for a similar group of Chinese peers.

This indicates German solar stocks have better price momentum than 19.6 percent of their peers, less impressive than the figure for Chinese players.

Under normal market conditions, companies with positive price momentum tend to outperform, with past winners over the past 3-12 months tending to be future winners.

BEARISH SCENARIO

A cap would be painful for solar stocks around the world but German players such as Q-Cells and SolarWorld would see a particular hit as their production costs are higher than those of Asian competitors.

German solar companies have benefited from ballooning demand for solar products in their home market, leading players such as Phoenix Solar and SMA Solar to post record quarterly results.

But stocks have underperformed not just the DAX but even the FTSE clean tech index, which has fallen 8 percent this year.

"I think that if you look at valuations in indisputably good (German) companies such as SMA and Centrotherm, the market is discounting quite a bit for next year. You need to factor in pretty bearish scenarios to come up with that," said Ben Lynch, analyst at Brian, Garnier & Co.

SMA Solar, market leader in solar inverters with an EBIT margin of close to 30 percent, currently trades at 9.9 times 12-month forward earnings, StarMine shows. Centrotherm, which makes 86 percent of sales in Asia, trades at 14.3 times.

This compares with 16.2 times for Suntech Power Holdings, the largest Chinese maker of photovoltaic equipment, which reported a net loss of $175 million for the second quarter.

Based on Reuters calculations, the OekoDAX trades at 11.0 times 12-month forward earnings, far below the 18.9 times for the FTSE cleantech index.

The likelihood of a cap, however, is difficult to predict, politicians and analysts said. The solar industry provides about 83,000 jobs in Europe's largest economy, particularly in the eastern part of the country.

"We don't want to upset investors by creating insecurities. Security for planning is a precious commodity and we don't want to tamper with that," said Joachim Pfeiffer, an economic policy spokesman for Chancellor Angela Merkel's ruling party block.

However, he also said that the coalition would be looking at various proposals on the different renewable energy sub-sections such as wind, photovoltaic (PV) and biogas, and that there were "no bans on any ideas" to avoid excessive support.

"A severe action such as an installation cap on solar technology conceivably could cause a mutiny among regional German politicians who count PV companies as electoral constituencies," said Stefan de Haan, analyst at iSuppli.

(Additional reporting by Erik Kirschbaum in Berlin and Blaise Robinson in Paris, Editing by Sitaraman Shankar)

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