FRANKFURT Rising costs for solar power in Germany could either trigger a further large cut in sector subsidies or a cap on new installations in the world's No.1 solar market, a BlackRock fund manager said.
Power transmission grid operators are obligated to pay feed-in tariffs (FIT) to producers of solar power, which are then added to customers' bills, and critics have noted that ballooning demand for photovoltaics leads to higher costs.
The German government agreed in January on a large one-off cut of at least 16 percent to the tariffs, which took effect in July, but analysts have repeatedly mentioned that further action was likely to make the subsidy-dependent industry more competitive.
"A substantial tariff cut in 2012 or even a potential hard cap on installation levels cannot be ruled out and would likely create a degree of pre-buying ahead of any legislative change," Robin Batchelor, manager of Black Rock's New Energy Fund told Reuters.
Top holdings in Batchelor's fund include the world's largest maker of wind turbines, Vestas, German group Wacker Chemie which also supplies the solar industry, and Iberdrola Renovables, the world's largest renewable energy generator.
A cap on solar caused Spain to collapse from the world's largest solar market in 2008 to ninth place last year, and there are concerns Germany could see a similar development should such moves become reality.
Batchelor, whose $2.925-billion fund has dropped about 16 percent in the year to date, sees falling demand in Germany as a key risk for a renewed slump in prices for solar cells and modules, which had previously thrown the sector into crisis.
"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," he said.
According to industry association EPIA's bear case scenario, new installed volumes in Germany will reach 3 gigawatts (GW) next year, while China, the United States and Italy are expected to come in at 2.4 GW.
"In absolute MW (megawatt) terms, Italy is widely expected to be the main growth driver in Europe in 2011, driven by a combination of high solar irradiation levels and an attractive feed-in tariff," Batchelor said.
But planned subsidy cuts in several European countries have also fueled speculation that struggling solar companies could fall victim to the sector's consolidation. A recent study by Roedl & Partner and Mergermarket suggest M&A activity will accelerate over the next 12 months.
"Horizontal integration (i.e. one cell manufacturer buying another) makes less sense as most companies would prefer to add brand new state-of-the-art capacity themselves rather than take on higher-cost, older production lines from another competitor," Batchelor said.
(Editing by Vera Eckert)