Solar Energy Handbook Barcap

EQUITY RESEARCH AMERICAS

Solar Energy HandbookTECHNOLOGY Solar Energy SECTOR VIEWRating: 1 - POSITIVE

The Second Growth Phase of Solar EraWe expect the solar market to triple in the next four years as ongoing government incentives and accelerated cost reductions make solar electricity attractive in several regions of the world. We expect supply to exceed demand in 2009 potentially driving weaker manufacturers out of business. But we expect potential resolution of financing/permitting bottlenecks to mark the beginning of the second growth phase of the solar era as we believe new incentives in multiple markets and greater supply of lower priced panels should lead to accelerated shipment growth from 2010. We expect companies with strong balance sheets, low cost structure, and geographic diversification to emerge as winners during the second growth phase. In this extensive report, we examine the global solar market and investigate the market sizes, growth rates, market shares, and principal drivers for each of the major segments. The focus of this report is to provide a longer-term framework for industry and company analysis. We provide detailed updates on global solar incentives and updates on key areas of solar supply chain, solar equipment, and solar thermal markets. Solar currently represents less than 0.5% of global electricity generation. However, as renewable electricity gains importance in the $1 trillion global electricity market, we forecast solar photovoltaic shipments to rise at a compound annual growth rate of 50% for the next four years. We expect an increasing number of countries to promote s olar energy as the cost gap between solar and fossil fuel generated electricity closes.

Vishal Shah1.212.526.4378 [email protected] BCI, New York

Analyst CertificationI, Vishal Shah, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

We expect development of financing to remain the primary constraint during the second growth phase. Our base case forecast assumes $55 billion of financing in 2012 to support worldwide installations of more than 14 gigawatts at $4 per watt average system price. This compares with an estimated $40 billion of capital consumed by the industry in 2008 to install 6 gigawatts of solar capacity at $7 per watt average system price.

Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Customers of Barclays Capital in the United States can receiv e independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-253-4626 to request a copy of this research. Investors should consider this report as only a single factor in making their investment decision.

May 01, 2009

PLEASE SEE IMPORTANT DISC LOSURES BEGINNING ON P AGE 391

Solar Energy Handbook

Table of Contents Chapter 1: Investment Thesis ...........................................................................19 Chapter 2: Solar Background ..........................................................................59 Chapter 3: How to Screen Solar Stocks .............................................................69 Chapter 4: Solar PV Supply Chain Analysis ........................................................75 Chapter 5: Solar Equipment Market ................................................................101 Chapter 6: Solar Thermal Market ...................................................................115 Chapter 7: Key Solar PV Markets ...................................................................123 Chapter 8: Overview of U.S. Renewable Portfolio Standards ...............................175 Chapter 9: Solar Energy Project Development Process Overview ...........................201 Chapter 10: Solar Energy Basis ......................................................................215 Chapter 11: Glossary ...................................................................................233 Chapter 12: Performance Valuation & Financial Statistics ......................................239 Chapter 13: Earnings Models ........................................................................245 Chapter 14: Private Solar Companies ..............................................................289 Chapter 15: Company Descriptions .................................................................299 Chapter 16: Solar Energy 101 .......................................................................311 Table of Figures............................................................................................378

2

May 01, 2009


Executive Summary "We know the country that harnesses the power of clean, renewable energy will lead the 21st century" President Barack Obama (Presidential Address to Congress, 2/24/09) While the near-term outlook for the solar sector may be considered bleak, we believe longterm prospects have never been this encouraging. As global economies take action to mitigate climate change, we expect an era of fundamental reshaping of the global energy infrastructure to create a prominent role for the renewable energy sector. Renewable electricity represented 2.5% of worldwide electricity generation in 2008 and we believe it could represent more than 20% of worldwide electricity generation, as policies to promote renewable energy are implemented globally over the next 20 years. In this report, we provide insights into what we believe may turn out to be one of the brightest new renewable energy sectors to emerge in the coming years. Sola r Power has historically been viewed as an expensive source of alternative energy generation. However, we expect ongoing transformation of the industry supply chain to cut solar electricity prices by half in 2009. More importantly, as the United States and other countries create mechanisms for pricing the external costs of carbon dioxide emissions into the marketplace, we expect the cost differential between solar power and other conventional sources of energy to diminish in an increasing number of markets globally . Solar industry shipments have increased at a 40% compound annual growth rate over the last five years primarily due to attractive incentive programs in markets such as Japan, Germany, and Spain. In our opinion, we are about to enter what we call The second growth phase of the solar erawhere we expect demand for new solar installations to be generated from multiple markets. We see three key factors potentially driving demand during the second growth phase: 1) greater supply of lower priced solar panels; 2) new incentives in several emerging solar markets; and 3) potential resolution of permitting/financing bottlenecks that have impaired growth in several emerging solar markets so far. We expect the total subsidy pool for the solar industry to continue to grow as more countries provide a greater amount of incentives. During the second growth phase, we expect supply and availability of financing to drive demand. During the first growth phase, polysilicon prices in the spot market increased from $25 to $400 per kg and companies with relatively low reliance on spot market emerged as strong Wall Street's performers. We expect the following trends to potentially emerge as powerful differentiators between winners and losers during the second growth phase: 1) balance sheets; 2) capital intensity; 3) cost structure; and 4) geographic diversification. Given the early stage nature of this sector, we believe a lot of uncertainties remain about the execution capabilities of individual companies and government policies among all major markets. Having said that, we remain confident of the following: 1) growth will likely be significant; 2) volatility will likely be high as investor sentiment changes between investing in growth sectors (there are very few in this environment) and being concerned about valuation; and 3) market structure, business models, and strategies will likely change rapidly.May 01, 2009 3


We recommend investors take a long-term portfolio approach and build positions over time in order to mitigate some of the execution, macro, and sentiment risks. Someday soon, green energy will no longer be an alternative; it will be the standard ahead. We mass-produced the car, and American manufacturing built the middle class. We sparked the IT revolution, and our high-tech industry fueled American prosperity for years. Today, being one step ahead means developing the green energy economy of the future before anybody else does. U.S Senator Tom Udall, (D-NM) (US Senate, 2/2/09) How to Read This Report This report is focused on long-term themes in the solar sector and is written with several audiences in mind. Our aim is to examine broader sector trends in the rapidly growing solar sector as opposed to picking stocks in the near term. This report is lengthy and certain sections of the report may not be of interest to all readers; consequently, we suggest the following: BeginnerVery little understanding of the solar and alternative energy sector. Read Chapters 1, 2 and 16 first in order to familiarize with industry basics, then read Chapters 3 to 15. IntermediateAlready familiar with what solar is and believe in the potential, but not sure how solar fits into the overall renewables investment framework. Read Chapters 1 through 15. ExpertAlready read several other solar primersread Chapters 1 and 8. Below, we provide brief thoughts on key topics of interest to investors. Grid Parity Given the sharp decline in oil and natural gas prices, we are often asked if solar is still a feasible alternative to conventional fossil fuels.

4

May 01, 2009


Figure 1: Relationship Between Solar System Price and Natural Gas Prices6000 5000

Solar System Pri ce ($/M W)

4000 3000 2008 N atural Gas Price $5W system cost required to reach grid parity

2000 1000 0 1.6 2.0 2.4 2.8 3.2 3.6 4.0 Current Natural Gas Price $3/W system cost required to reach grid parity

Natural Gas Price ($/MM BTU)

4.4

4.7

5.1

5.5

5.9

6.3

6.6

7.0

7.4

7.8

8.2

8.5

8.9

9.3

Source: Barclays Capital research

We believe the prospects for solar are still promising and our grid parity outlook has not deteriorated for the following reasons: 1) although we agree that average natural gas electricity prices are likely to decline by nearly 50% year over year in 2009 due to a decline in fuel costs, the price premium of solar electricity over natural gas electricity is likely to remain constant or even decrease somewhat if module prices decline to $2/W. More importantly, forecasts from Barclays Capital commodities and utilities teams suggest power prices are likely to increase during 201015, potentially leading to grid parity by 2012 in a scenario where no carbon tax is implemented in the U.S.; 2) if we assume a $15/MWhr carbon tax is implemented in the U.S. from 2011, we believe grid parity for California utilities is likely by 2011; and 3) we note that several utilities generally purchase renewable energy at a premium to conventional energy using the Market Price Referent (MPR) (which is typically $20/MWh premium to the natural gas generated electricity price) and by applying a Time of Delivery (TOD) multiplying factor. As shown in Figure 2, assuming PG&E purchases solar using TOD / MPR, solar has the potential to reach grid parity by 2010.

May 01, 2009

5


Figure 2: Potential Solar Grid Parity Scenarios250

Powe r Price s ($/MWh) Solar Price ($/MWh)

200

Powe r Price s w ith Carb on T ax ($/M Wh) MPR Including T OD ($/MWh)

150

$/MWh100 50 0 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E


Pricing We forecast module prices to decline from $3.70/W in 2008 to $1.00/W in 2015. We forecast balance of system costs for large systems to decline to $0.80/W by 2015 from the current levels of $1.50/W. Finally, we expect balance of system costs for small systems to decline from $2.50/W in 2008 to $1.35/W in 2015. Figure 3: Solar Module and Balance of System Pricing Trend4.50 4.00 3.50 3.00 2.50$/ W

BOS Cost - Small Systems Module Price BOS Cost - Large Systems

2.00 1.50 1.00 0.50 0.00 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E


6

May 01, 2009


We believe the best-in-class solar module companies have the capability to produce solar panels for $1.15/W, sell at $1.50/W, and make 25% gross margins in a $50/kg poly price scenario. We believe approximately 40% of the solar industry has the capability to produce and sell modules at $1.50/W today. The median cost producers, many of which are European players, generally have non-silicon costs of $2.00/W. We estimate the cost structure and profitability of some of these companies would be challenged if poly prices decline to $50/kg. We believe the Japanese companies typically have a relatively high cost structure and may not be able to sell products for $1.50/W. Assuming the median solar companies cut costs and reduce their poly input costs even further, we see downside risk to $2/W panel prices in 2009. Thin Film Versus Silicon In our opinion, silicon technology would continue to lead the growth wave for the following reasons: 1) capital intensity of thin film players ($2/W) is higher than that of silicon players ($0.50$1/W). We expect relatively low levels of vertical integration in the silicon space especially since upstream/midstream segments have more than adequate capacity to support near to medium term growth; and 2) new thin film technologies could find it difficult to scale and achieve bankability status. We believe companies such as Sharp that have strong balance sheets and have made significant technology advancements stand to potentially lead the thin film growth wave along with First Solar. For other start-ups particularly funded by equipment suppliers such as Applied Materials, success would depend to large extent on subsidy programs and manufacturing incentives of local governments. Where Will Growth Come From? During the first growth phase, markets such as Japan and Germany led most of the installation growth. Growth was largely within the small/medium size rooftop segment. Over the next three to five years, we see the potential for large commercial rooftops and ground mounted systems to achieve superior growth as the U.S. utilities become more aggressive with solar PV programs. In the near term until financing conditions improve, we expect growth to be limited to the small/medium size rooftop segment. In addition to the traditional markets such as Germany, Italy, and Spain, we expect Japan, China, U.S., Canada, and India to be the key swing markets with potential upside surprise in the 201012 timeframe. Growth Strategies During the first growth phase, the focus of most companies was to procure as much polysilicon supply as possible. During the second growth phase, we expect the focus of most companies to identify end markets for product deployment. To that extent, we expect execution strategies of companies to be defined by downstream acquisitions. Companies with larger contract wins should be able to scale their operations and increase market share. We expect more downstream M&A activity over the next three to five years as companies look to diversify geographically and establish new downstream channels.

May 01, 2009

7


We also see the potential for strategic alliances to emerge between large-scale solar power developers with strong financial backing and upstream polysilicon players with relatively strong balance sheets. We expect downstream players to lead the industry transformation as the power development market is localized as inherently more complex industry constraints have shifted from upstream to downstream. As cell/module players reach efficiency development limits, we expect scale to be the primary cost differentiator and consequently we expect the emergence of EMS type business models in the mid-stream segment. We acknowledge that it is early to identify obvious winners in the race toward market leadership. We expect a combination of business models to dominate the sector over the next three to five years as: 1) midstream players aggressively diversify downstream through power developer M&A; and 2) large-scale downstream companies (there are only a handful at present) strike alliances with upstream players. Long-Term Margin Outlook and Valuation Framework for the Sector Within the silicon value chain, we expect gross margins of the midstream players to improve in the near term as silicon costs decline faster than ASPs. For thin film companies, we expect margins to decline depending upon their ability to achieve cost reductions. We expect companies with downstream integration to better manage margins compared with companies without sufficient downstream integration. Although downstream vertical integration could potentially negatively impact margins, we believe by controlling the downstream channels, solar manufacturers with superior cost structure would be able to scale and also protect margin erosion. Unlike a unified P/E valuation approach used by many today, we expect two separate frameworks to emerge over the next three to five years: 1) for companies with EMS type business models, we expect investors to assign a relatively low P/E multiple; and 2) for companies with downstream integration (mostly the case for market leaders), we expect investors to assign a sum-of-parts valuation with EBITDA multiple for systems integration business and a growth P/E multiple for module segment. Ten Reasons Select Solar Stocks Could Participate in the Near-Term Market Rally 1) Street Estimates Fully Discounting Near-Term Weakness; Earnings Momentum Could Potentially Turn Positive As shown in Figures 4 and 5, Street 2009 estimates for select Chinese solar stocks have declined from peak levels of $23 per share in September 2008 (beginning of the solar meltdown) to $3.45 per share in March 2009. Although the decline in U.S.-based companies has not been this severe, we believe U.S.-based solar companies have also seen nearly a 45% reduction in EPS estimates during the corresponding period. We believe Street estimates are fully discounting the near-term weakness in fundamentals (or perhaps one to two quarters away from bottoming) and potentially have room for upside as a result of recently announced incentive programs in Japan, China, and several other markets. We believe we are about to enter a phase of positive earnings momentum once estimates are reset over the next one to two quarters. Some of the factors that could cause positive earnings momentum include: 1) upside to 2009 and 2010 pricing expectations;8 May 01, 2009


2) upside to 2009 margin expectations; and 3) upside to 2010 volume expectations (we discuss these three points in more detail in this report). Solar stocks have historically seen significant P/E multiple expansion during periods of positive earnings momentum. We believe a combination of positive earnings momentum and valuation multiple re-rating could potentially lead to meaningful upside catalysts for selective solar stocks. Figure 4: China versus U.S. Consensus EPS Estimates$25.0-44%

Figure 5: 2009 EPS Es timate Reductions From Peak Levels-1 0% Fir s t Solar U Solar C om panies S SunPow er Ener gy Conv er s ion De vice s Yingli Gre e n Ene rgy Tr ina Sola r R ne Sola e SunTec h Pow e r MEM C Chine s e Solar C om panies JA Solar LDK Solar

$20.0 $15.0 $10.0 $5.0 $0.0 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 2009 US Companies 2009 Chinese Companies-5 9% -60% -78% -80% -8 3% -84% -85 % -8 9% -90%

-49%

Note: Numbers are an aggregate of companies under coverage Source: Barclays Capital research, FactSet

Source: Barclays Capital research, FactSet

Figure 6: Suntech Power Earnings Momentum$4.00 $3.50 3 0x

2 5x

$3.00 2 0x $2.50 $2.00 2 010 EPS 1 0x 2 009 P/E 1 5x

$1.50 $1.00

5x 2009 EPS x 3/200 9 2/200 9 1/200 9 12 /20 08 11 /20 08 10 /20 08 9/200 8 8/200 8 7/200 8 6/200 8 5/200 8 4/200 8 3/200 8 2/200 8 1/200 8 12 /20 07 11 /20 07 10 /20 07 9/200 7 8/200 7 7/200 7 6/200 7 5/200 7 4/200 7 3/200 7 2/200 7 1/200 7 12 /20 06 11 /20 06 10 /20 06

$0.50


May 01, 2009

9


2) New Incentives in China, Japan, and the U.S. Could Lead to Potential Demand Upside With the recent introduction of new incentives in China and Japan in addition to the U.S. incentives, we expect the 2010 demand outlook to improve significantly. We see upside potential to our and consensus 2010 demand estimates leading to a potentially more stable ASP environment compared with more than a 30% ASP decline baked into consensus estimates. We present three scenarios for the supply/demand outlook: 1. Bull case scenario where China, Japan, and the U.S. upside leads to relatively flat demand in 2009 (5.6 gigawatts) and nearly 65% growth in 2010 (9.2 gigawatts); 2. Base case scenario where demand declines by 25% in 2009 (4.5 gigawatts), demand increases by 55% in 2010 (6.8 gigawatts); and 3. Bear case scenario where demand declines by 40% in 2009 (3.5 gigawatts), and increases by 60% in 2010 (5.6 gigawatts). We assume that supply cuts continue in 1Q09 and 2Q09 such that supply decreases to 6.9 gigawatts in 2009 (versus current plans of approximately 7.5 to 8 gigawatts), and 8 gigawatts in 2010. We also assume that the tier 2/tier 3 supply is not consumed by the industry due to concerns over warranty. In this analysis, we assume that the top solar companies continue to gain market share led by bankability and cost structure. We assume the market share of leading solar companies increases from 55% in 1Q09 to 80% in 4Q10. Our analysis shown in Figure 7 suggests that the industry has the potential to reach supply/demand balance by 3Q09 in the bull case scenario (Japan installs 600 megawatts and 1 gigawatt in 2009 and 2010, respectively; China installs 200 megawatts and 500 megawatts in 2009 and 2010, respectively). We believe potential for supply/demand balance by 4Q09 exists in the base case scenario (Japan installs 330 megawatts and 570 megawatts in 2009 and 2010, China installs 60 megawatts and 100 megawatts in 2009 and 2010). Finally, we believe the industry could reach supply/demand balance in bear case scenario in 4Q10 if Japan/China demand does not pick up as expected in 2010 (Japan installs 270 megawatts and 500 megawatts in 2009 and 2010, China installs 40 megawatts and 80 megawatts in 2009 and 2010).

10

May 01, 2009


Figure 7: Quarterly Supply Demand Outlook3,000

Bull Demand

2,500Supply-Dem and balance by Q309 in Bull S cenar io if Japan, China dem and picks up

Supply-Demand balance by Q409 in B ase Scenario Supply

2,000

B ase Demand

MW

1,500Bear Demand

1,000S cenar io analys is as sumes Japan, China and the U.S demand accelerates from 2H09 and also ass um es 1-2 m ore round of s upply c uts (in Q109/Q209) by all solar companies. B ull case assumes 600MW/1GW demand in J apan in 2009/10, 200MW/ 500MW demand in China in 2009/10. Base case ass um es 330MW/ 570MW demand in Japan in 2009/10, 60MW/100MW dem and in China in 2009/2010. Bear case assumes 270MW/500MW in Japan in 2009/10 40M W/80MW demand in China in 2009/10.

500

0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09E

3Q09E

4Q09E

1Q10E

2Q10E

3Q10E

4Q10E


3) Low Poly Costs Could Aid Margins Poly prices for most companies have declined and we expect leading solar companies to take advantage of this environment and report strong margins. We do not forecast an uptick in poly prices anytime soon. In our view, consensus estimates (including our estimates) do not completely factor the $40/kg poly price scenario in 2010. As shown in Figure 8, our 2010 estimates are based on blended poly price assumption of $75 $100/kg. As discussed previously, our estimates are based on 30%40% year-over-year ASP declines and as such we believe consensus margins, which in many cases are comparable to our margins and are also based on similar blended poly price assumption. In a scenario where poly prices decline to $40/kg, we believe potential 10%20% gross margin upside exists for all these stocks.

May 01, 2009

11


Figure 8: 2010 Gross Margin Scenario AnalysisGross Margins - 2010 Barcap STP CSIQ CSUN JASO LDK SOLF TSL YGE SOL 28% 11% 11% 17% 19% 8% 11% 26% 15% Consensus 16% 12% 13% 15% 21% 12% 19% 24% 16% Current Poly Price ($/kg) 74 80 69 1.09 98 69 85 108 84 Poly Price Potential ($/kg) 40 40 40 40 40 40 40 40 40 2010 GM Potential 28% 24% 28% 21% 48% 19% 33% 46% 40%

Note: JASO Poly Price is in $/W cost for WafersSource: Barclays Capital research, Company reports

4) Estimates Appear Reflect the Worst Case Scenario for Pricing Our 2010 estimates are based on 30%40% ASP declines, a scenario that we believe accurately reflects the potential pricing backdrop in Japan/China/U.S. subsidy environment. We believe project IRRs in several markets have the potential to reach inflection point at 30%40% lower panel prices. We disagree with the argument that panel prices could continue to drop if financing conditions do not improve and elasticity does not kick in. In our opinion, volume, not pricing, would be impacted in such a scenario. Our pricing assumptions are also supported by the fact that non-silicon costs of several European manufacturers (that make up nearly 40% of worldwide capacity) are near $2/W. We do not foresee a scenario where panel prices decline below cash cost levels of European players. 5) Inventory Correction Underway Checks suggest module prices have stabilized over the past month or so suggesting that channel inventory may be reaching normalized levels. Checks with installers suggest that inventory levels have declined to reasonably low levels through a combination of reduced purchases, write-downs, and sell-through demand. We do not expect much product from 4Q081Q09 to remain in the channel uninstalled until 3Q09. We believe inventory levels at the end of 1Q were potentially around 900MW and could likely decline to a more normalized 400MW to 500MW levels by 3Q09. 6) Investor Capitulation Underway We also expect rotation out of the European stocks to the Chinese solar stocks. As shown in Figure 9, solar stocks have seen significant downward estimate revisions reflecting the fact that expectations may be approaching a bottom soon. As fundamentals start to improve, we expect to see an upward trend with respect to rolling EPS. We also expect investor rotation out of structurally challenged stocks (companies with high non-silicon cost structures) into market leaders in the U.S. and China.

12

May 01, 2009


Figure 9: Suntech Power Es timate Revisions

2.50

Ph ase 1

Phase 2

Pha se 3

40 30 20 10

2.00

Supp ly con stra ine d en viron ment, sta ble to ri sin g prici ng . EPS, valu ation m ultip le e xp an sion

Oversu ppl y. EPS red uctio n, val uatio n mul ti ple d estructio n

-1 0 Esti mates, Mul ti ple s b otto med ? Ove rsup ply con cern s. EPS gro wth, va lua ti on mu ltipl e comp ressi on -2 0 -3 0 -4 0 In vestor, Ma nag eme nt Cap itul ation -5 0 -6 0Jan -06 Ap r -0 6 Jul 06 Oc t- 0 6 J an - 07 Ap r-0 7 J ul - 07 Oc t- 0 7 Jan -08 Ap r -0 8 Jul 08 Oc t -0 8 J an - 09 Ap r-0 9

1.00

0.50

0.00

Source: FactSet, Barclays Capital

7) Financing Conditions Set to Improve We continue to expect financing to be the biggest bottleneck for the industry in 2010; however, we believe a combination of 1) rising project IRRs (such that solar IRRs are greater than wind); 2) new sources of funds (pension, hedge funds); and 3) government injected capital (such as KfW, U.S. loan guarantee program) could likely lead to more stable financing conditions in 2010. 8) Exchange Rate From Headwind to Potential Tailwind Solar fundamentals are highly correlated to exchange rate fluctuations since most demand is generated in Europe and costs are either in U.S. dollars/RMB. In addition to tighter credit markets, appreciation of the U.S. dollar against the Euro acted as a significant headwind for solar industry fundamentals. Barclays Capital currency strategist David Woo expects the U.S. dollar to depreciate against the Euro and approach 1.45 by 4Q10. We expect potential U.S. dollar depreciation to act as potential tailwind for solar fundamentals in 2010. Our current forecasts are based on the assumption of a relatively constant exchange rate. Our FSLR forecasts assume that the foreign exchange rate declines from 1.37 in 1Q09 to 1.20 in 3Q09 and remains constant at 1.20 through all of 2010.

May 01, 2009

Net r evisions

1.50 N TM EPS

0

13


Figure 10: Foreign Exchange Could Act As Potential Tailwind1.60

1.50

FX Poten tial Tailwind FX Headwind Barclays FX Team Forecast Chin a Solar Mode l Assumptions

1.40 EUR/USD

1.30

1.20 FSLR Model Assumptions 1.10

1.00 Q108 Q208 Q308 Q40 8 Q1 09 Q209 Q309 Q409 Q110 Q210 Q310 Q41 0


9) Bear Thesis Appears Overblown A common investor concern we have heard is that solar panel prices could decline to cash cost levels. We disagree with this view. In our opinion, although margin pressure could persist as balance of power shifts downstream, we find it difficult to see a scenario where project investor returns increase from $3 per watt (assuming $10 per watt net present value of government incentives, $7 per watt system price) to $7 per watt (assuming $10 per watt incentives, $3 per watt system price). 10) Balance Sheet Risks Diminishing, Potential for Free Cash Generation in 2010 Within our coverage universe, Chinese solar stocks have a high net debt position and are likely most at risk. However, the recent introduction of a stimulus package in China demonstrates broad-based government support for the leading Chinese solar firms. Most companies have slowed down and/or halted capacity expansion plans and with declining poly prices and improving margins we believe the outlook for free cash generation in 2009 has improved. 2009 Outlook We believe near-term fundamentals continue to remain challenging. We expect 2009 industry shipments to decline 25% year over year for a number of reasons. 1. We believe 1Q installation activity was negatively impacted by severe weather conditions in Germany and other key European solar markets. First quarter shipments of the eight leading solar companies are expected to decline 13% year over year. We believe over 60% of 1Q shipments occurred in March and were mostly for installation

14

May 01, 2009


activity in late April. Inverter manufacturer SMA also guided 1Q shipments to decline 30%35% year over year supporting our view of worse than normal 1Q seasonality. 2. Checks suggest credit conditions in the U.S. commercial segment continue to remain challenging. The number of tax equity financing firms has declined from nearly 10 in 2008 to only three to four in 2009. Most of these firms are supporting existing clients and even incremental relatively low risk projects are finding it difficult to achieve sufficient financing. In addition, our checks suggest that several projects are on hold until further clarity over DOE loan guarantee program and ITC cash grants becomes available. New project announcements from several leading U.S. commercial players such as SunPower have decreased significantly. 3. Declining new home construction activity and a deep recession are likely to impact residential installation activity in the U.S. and Germany. 4. Although German lending conditions for solar are somewhat better than rest of Europe, we believe KfW's renewables financing budget is flat compared with 2008 budget of EUR4 billion. Checks suggest KfW is allocating more funds to wind versus solar. Assuming wind/solar allocations are unchanged from 2008, higher equity portion (30% in 2009 versus 20% in 2008), 15% lower system pricing is likely to result in about 20%30% incremental shipments growth. Figure 11: System Pricing vs. Shipments Growth2008 Total KfW Financing (Euros MM) Portion for Solar (50%) Portion for Wind (50%) Debt to Equity Ratio Total Funding for Solar Sys tem Cost per Watt Total Shipments 2009 Total KfW Financing (Euros MM) Portion for Solar (50%) Portion for Wind (50%) Debt to Equity Ratio Total Funding for Solar Sys tem Cost per Watt - 15% Decline YoY Total ShipmentsSource: Barclays Capital estimates

4,000 2,000 2,000 80% 2,500 4.50/W 556MW

4,000 2,000 2,000 70% 2,857 3.83/W 747MW

5. We believe financing of large commercial/ground mounted projects (about 20% of market) in Germany is still very challenging as KfW funding is not readily available.

May 01, 2009

15


Furthermore, even in this segment, we believe it is difficult for c-Si module players to compete effectively as incentives are significantly lower in 2009 (only First Solar can effectively compete in this segment). 6. We believe financing conditions in Italy/France still remain difficult. We expect these markets to grow, but we believe growth could be constrained by permitting issues as well. Finally, we believe the Japanese market may remain weak ahead of the implementation of new incentive program and the South Korean market could be impacted by over 40% depreciation of the Won against the U.S. dollar. What does all this mean? We believe the U.S. and German markets could end up being flat in 2009. In our view, growth in other emerging solar markets may not be sufficient to offset the expected Spanish market decline (over 2 gigawatts) in 2009. In terms of market segments, we forecast the residential segment (approximately 45% of shipments) to show some growth (500,000 households installing solar in 2009 versus 415,000 in 2008), commercial segment (approximately 30% of shipments) to decline by 25% and ground mounted segment (approximately 25% of shipments) to decline by 50%. Our view is that both wind and solar technologies would experience similar growth curves. Wind technology may have achieved its full potential in terms of cost reduction. We believe solar will get there over the next three years and has the potential to even surpass wind's cost structure if new disruptive low-cost technologies are commercialized. The promise of solar is in distributed generation especially in areas where transmission access is limited. Take the example of China. Installation costs in China can end up being less than $1 per watt (cheap labor, home grown inverters). Solar module prices can drop to $1 per watt if companies like YGE and STP can achieve scale and poly drops below $50 per kg. At $2 per watt system price in rural China, solar on roof-tops (distributed generation) would be cheaper than wind. We believe solar programs targeted for rural China/India would be a key focus for those governments. Figure 12: Global Wind vs. Solar Shipments30GWWi nd Insta lled (MW ) Sola r Install ed (MW)

25GW 20GW 15GW 10GW 5GW GW 2001 2002 200 3 20 04 2 005 2006 200 7 20 08

Source: Barclays Capital Research, Global Wind Energy Council, Solarbuzz

16

May 01, 2009


Figure 13: Global Solar Company Valuations (As of April 30, 2009)C ompany Sol ar C ell Manufacturers C hina Sunergy Energy C onversion Devices ErSol E-Ton Ev ergreen Solar First Solar J A Solar Motech Q-C ell s SunPow er SunTech P ow er Ticker CS UN EN ER B0LGLV4 B06BMV ESLR FSLR JASO 660944 QC E-D E SPW RA STP Rating 2-EW 3-UW NR NR 2-EW 2-EW 1-OW NR 2-EW 2-EW 3-UW S ector R ating 1-Pos 1-Pos NR NR 1-Pos 1-Pos 1-Pos NR 2-Neu 1-Pos 1-Pos Local C urrency U SD U SD E UR TWD U SD U SD U SD TWD E UR U SD U SD Price 4/30/2009 3.04 18.38 104.00 95.60 2.43 187.29 3.51 93.00 16.23 27.38 14.93 Mean Median Pol ysili con M anufacturers LDK Sol ar MEMC R eneS ola Shin-Et su Chemical Sino-American Silicon Sumco Tokuyama Corporation Topc o Sc ientif ic OCI W ac ker Market Cap ($M) 120 784 1,434 279 393 15,442 547 699 1,719 2,344 2,535 2,390 784 Enterprise Value ($M) 195 701 1, 422 560 666 14,924 640 742 1, 751 2, 662 3, 653 2, 538 742 Price to Sales 2009E 2010E 0. 5 2. 3 2. 9 0. 6 1. 2 8. 1 0. 7 1. 1 0. 8 1. 7 1. 3 1. 9 1. 2 0.3 1.6 2.1 0.6 0.8 5.9 0.5 0.9 0.6 1.1 1.1 1.4 0.9 EV to Sales 2009E 2010E 0. 7 2. 0 2. 8 1. 1 2. 1 7. 9 0. 8 1. 2 0. 8 1. 9 1. 9 2. 1 1. 9 0. 5 1. 4 2. 1 1. 2 1. 4 5. 7 0. 6 1. 0 0. 6 1. 3 1. 6 1. 6 1. 3 Pri ce to Earnings 2009E 2010E NM 25.8 26.1 7.4 NM 28.6 23.8 14.9 14.0 23.0 30.2 21.5 23.8 10. 1 14. 2 18. 4 6. 6 7. 6 22. 0 9. 5 10. 7 7. 9 13. 1 16. 4 12. 4 10. 7 PEG 2009E NM 0.7 0.5 0.2 NM 0.6 1.2 1.4 0.6 0.8 1.1 0.8 0.7 2010E NM 0.4 0.4 0.2 0.3 0.4 0.5 1.0 0.4 0.4 0.6 0.5 0.4

LDK W FR SOL 4063 633527 3436 4043 625408 649700 B 11Y56

2-EW 1-OW 2-EW NR NR NR NR NR NR 1-OW

1-Pos 1-Pos 1-Pos NR NR NR NR NR NR 2-Neu

U SD U SD U SD JP Y TWD JP Y JP Y TWD KRW E UR

8.00 16.20 3.47 4,760.00 79.10 1,436.00 584.00 25.35 225, 000.00 78.38 Mean Median

894 3,647 227 21,992 518 3,894 1,722 104 3,331 4,999 4,133 2,526

1, 899 2, 778 478 19,994 601 6, 089 2, 157 112 4, 259 5, 087 4, 346 2, 468

0. 7 3. 3 0. 4 1. 9 1. 7 1. 4 0. 5 0. 5 2. 2 1. 0 1. 4 1. 2

0.6 2.3 0.4 1.8 1.4 1.2 0.5 0.5 1.6 0.9 1.1 1.1

1. 5 2. 5 0. 8 1. 7 2. 0 2. 3 0. 7 0. 5 2. 8 1. 0 1. 6 1. 6

1. 2 1. 8 0. 8 1. 6 1. 6 1. 8 0. 6 0. 5 2. 0 0. 9 1. 3 1. 4

17.5 30.4 8.2 16.3 14.6 NM 28.6 10.6 11.0 17.3 17.2 16.3

7. 2 11. 2 6. 5 14. 2 11. 8 NM 13. 5 9. 4 6. 9 11. 6 10. 3 11. 2

0.9 1.8 0.3 1.6 5.9 NM 1.1 NM 0.1 1.2 1.6 1.1

0.4 0.7 0.3 1.4 4.7 NM 0.5 NM 0.1 0.8 1.1 0.6

Module Manufacturers aleo s olar C anadian Solar Solar-Fabrik Solarf un Solart ron Solon AG

B189YN CS IQ 739438 SOLF B06XP07 7450738

NR 3-UW NR 3-UW NR 3-UW

NR 1-Pos NR 1-Pos NR 2-Neu

E UR U SD E UR U SD TH B E UR

5.91 6.55 4.50 4.29 0.92 9.48 Mean Median

99 233 68 222 8 153 130 126

128 274 NM 2, 334 10 401 629 274

0. 2 0. 5 0. 2 0. 4 NM 0. 1 0. 3 0. 2

0.2 0.3 0.2 0.3 NM 0.1 0.2 0.2

0. 3 0. 5 NM 4. 0 NM 0. 4 1. 3 0. 4

0. 2 0. 4 NM 3. 4 NM 0. 3 1. 1 0. 4

7.1 NM 13.0 NM NM 6.8 9.0 7.1

5. 4 13. 1 12. 5 0. 0 NM 5. 2 7. 2 5. 4

0.4 NM NM NM NM 0.2 0.3 0.3

0.3 0.7 NM 1.1 NM 0.1 0.6 0.5

System I ntegrators C armanah Technologies C entros olar AG C onergy Solars trom Sunways

*C MH B0LL75 706672 566211 703682

NR NR 2-EW NR NR

NR NR 2-Neu NR NR

C AD E UR E UR E UR E UR

0.80 2.84 0.78 1.79 2.31 Mean Median

42 53 197 28 34 71 42

33 148 NM 35 56 68 45

0. 6 0. 1 0. 2 0. 2 0. 1 0. 2 0. 2

0.5 0.1 0.1 0.2 0.1 0.2 0.1

0. 5 0. 3 NM 0. 2 0. 2 0. 3 0. 3

0. 4 0. 3 NM 0. 2 0. 1 0. 3 0. 2

22.0 4.8 NM 8.0 15.7 12.6 11.9

7. 7 3. 1 37. 0 5. 9 2. 8 11. 3 5. 9

NM NM NM NM NM N/A N/A

NM NM 13.1 NM NM N/A N/A

Verti call y I ntegrated Manufacturers R EC Solar World Trina Solar Yingli Green Energy

REC-NO 581986 TS L YGE

1-OW NR 2-EW 1-OW

2-Neu NR NR NR

N OK E UR U SD U SD

60.50 21.65 14.14 6.98 Mean Median

4,403 3,105 401 903 2,203 2,004

5, 598 2, 898 667 3, 634 3, 199 3, 266

2. 3 2. 3 0. 5 1. 3 1. 6 1. 8

1.5 1.8 0.5 1.1 1.2 1.3

3. 0 2. 2 0. 9 5. 3 2. 8 2. 6

1. 9 1. 7 0. 8 4. 5 2. 2 1. 8

13.5 16.5 12.7 9.5 13.0 13.1

7. 6 13. 1 6. 6 6. 2 8. 4 7. 1

0.2 0.9 0.5 0.2 0.4 0.3

0.1 0.7 0.2 0.1 0.3 0.2

Sol ar E qui pment C omposi te GT Solar R ot h & Rau C entrot herm Oerlik on Spire BTU International Manz Automat ion Meyer Burger

S OLR B142TD4 B 2885W 6 4612757 SP IR B TU I B1D XPB B1HDMD

2-EW 3-UW 2-EW NR NR NR 2-EW 2-EW

1-OW 2-Neu 2-Neu NR NR NR 2-Neu 2-Neu

U SD E UR E UR SW F U SD E UR E UR SW F

7.09 18.08 29.35 66.00 7.00 3.74 34.78 158.80 Mean Median

1,021 316 727 770 61 45 161 428 358 372

928 203 615 NM 59 23 79 394 229 203

1. 4 1. 0 1. 1 0. 3 0. 7 0. 6 0. 7 1. 2 0. 9 0. 9

1.3 0.9 1.0 0.2 NM 0.4 0.6 1.1 0.8 0.9

1. 4 0. 7 1. 0 NM 0. 7 0. 3 0. 3 1. 1 0. 8 0. 7

1. 1 0. 6 0. 9 NM NM 0. 2 0. 3 1. 0 0. 7 0. 7

8.6 13.5 13.2 NM 13.7 NM 13.7 18.7 13.6 13.6

7. 5 11. 9 11. 4 36. 5 NM 9. 1 10. 7 15. 4 14. 6 11. 4

0.2 0.9 0.6 NM NM NM 0.2 2.7 0.9 0.6

0.2 0.8 0.5 -9.6 NM 0.6 0.2 2.2 -0.7 0.5

Source: FactSet, Company reports, Barclays Capital estimates

May 01, 2009

17


18

May 01, 2009


Chapter 1: Investment Thesis

May 01, 2009

19


The Long-Term Investment Case for Renewable Energy We believe new investments in the global renewable energy sector should accelerate due to several potential long-term secular growth drivers: 1) increasing energy demand particularly resulting from strong growth of emerging economies such as India and China; 2) depleting supply of traditional energy sources; 3) increasing trend toward using carbonneutral solutions to address the climate change problem; 4) improved renewable energy cost economics; and 5) geopolitical factors such as energy security creating a positive shift in the energy policy of major governments globally. Figure 14: Potential Renewable Energy Investment DriversSECULAR TREND CYCLICAL TREND

ENERGY DEMAND

LOW INTEREST RATES

ENERGY SUPPLY

WEAK DOLLAR JOB CREATION

ENERGY I MPACT

ENERGY ECONOMICS

ENERGY SECURITY

Strong/ PositiveSource: Barclays Capital research

Weak/ Nega tive

1. Rising energy demand particularly from emerging economies such as India and China. Although we do not expect India and China to become large solar energy users anytime soon, we expect overall demand growth in those regions to cause upward pressure on overall energy demand. We also see significant potential for India and China to become large solar energy demand centers once solar achieves grid parity.

20

May 01, 2009


Figure 15: GDP Growth versus Per Capita Elec tricity Consumption10% 9% 8% 7% GDP G rowth 6% 5% 4% 3% 2% 1% 0% 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 Per Capita Consum ption (kWh) Mex ico Brazil Russia OECD Europe Japan India South Korea Australia United St ates Canada China


2. Depleting energy supply, particularly traditional sources of energy such as coal, oil, and natural gas. Assuming the solar achieves grid parity in 2012, we see the potential for new solar supply to influence peak power generation demand. We see the potential for natural gas resources to be readily replaced by solar PV technologies and once appropriate low-cost storage solutions are developed, we see the potential for further solar penetration in coal-based electricity markets. Figure 16: Reserve Period (Number of Years) of Traditional Energy ResourcesYears 250 US Coal Reserve Period 200

150

World Coal Reserve Period

100 W orld Natural Gas Reserve Peri od 50 World Oil Reserve Period 0 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Europe Natural Gas Reserve Period

Annual Rate of Dep letion

Source: World Energy Council

May 01, 2009

21


3. Environmental impact such as climate change from the use of traditional fossil fuel generated sources of energy. It is widely understood that traditional sources of electricity generation such as coal are the greatest source of carbon emissions globally. We believe solar is the cleanest form of alternative energy solution and could be most effectively used by several countries to solve the carbon problem. Solar could potentially contribute to 21% of Italys CO 2 reduction goal by 2012. Solars forecast contribution to CO 2 reduction would be 14% in Greece, 12% in France, and 8% in Spain. Figure 17: Potential Solar Contribution to Carbon Emissions Reduction By 2012E

21% 14%

12% 8% 1% U. S. 3% South Korea 4% Japan Spain France

G reece

I taly


22

May 01, 2009


Figure 18: European Union Target Shares of Renewables by 2020Ma lta L uxembor g Belg ium 0.0% 0.9 % 2.2% 1 0.0% 1 1.0% 13 .0 % 1 3.0% 13 .0 % 13 .0 % 1 4.0% 1 4.0% 15.0% 1 5.0% 1 6.0% 9 .4 % 5.2% 5 .8% 6 .9 % 8.7% 10 .3 % 15.0 % 1 7.8% 1 6.0% 18 .0 % 1 7.0% 20.5% 2 3.3% 2 8.5% 3 4.9% 39 .8 % Sh are o f Re newa ble s (2 005 ) T arg et sh are o f Re ne wa ble s ( 202 0) 16 .0% 1 7.0% 1 8.0% 18.0 % 2 0.0% 23.0% 23 .0 % 24 .0 % 2 5.0% 25 .0 % 3 0.0% 31.0% 3 4.0% 3 8.0% 4 2.0% 4 9.0%

Cypr us 2 .9 % Hu nga ry T he C ze ch Rep ubl ic 4 .3 % 6 .1 %

T h e Nether lan ds 2 .4 % T he Slo vak Rep ubl ic Unite d Ki ngd om Pol an d 6.7% 1.3% 7 .2 %

Irel an d 3 .1 % Bulg ari a Ita ly G er ma ny G ree ce Spai n F ran ce L ithu ani a Ro ma ni a Slo veni a Esto ni a Den ma rk Po rtuga l Austri a F inl an d La tvi a Swe de n

Source: EPIA, Barclays Capital research

4. Decreasing solar energy costs and increasing fossil fuel generated energy costs leads to improved economics for solar energy sector. We expect grid parity, or the point at which solar electricity is competitive with fossil fuel generated electricity, to be achieved by the 201012 time frame. In fact, solar is already competitive in several regions of the world with high solar insolation and relatively high fossil fuel electricity costs.

May 01, 2009

23


Figure 19: Percentage of U.S. Consumer Wallet Spent on Electricity2.1% 2.0%

1.9%

1.8%

1.7%Estimates

1.6%

1.5%

1.4%

1.3%

1.2%

1.1%

1.0% 196 0

1964

1 968

19 72

197 6

1980

1984

198 8

1992

1996

2 000

20 04

200 8

2012

Source: Dan Ford, Barclays Capital U.S. Utili ty Sector Analyst

5. Geopolitical factors such as energy security creating a positive shift in the energy policies of all major governments globally. Countries with government solar incentives have one thing in common: high net energy imports as a percentage of energy use. We expect an increasing number of countries to look at solar energy as costs of solar modules decline and as prevailing high oil prices result in a greater focus on energy independence. America has just 3% of the world's natural gas reserves, but we consume 25% of the world's supply. That increasingly means sending American dollars to Russia and Iran, two countries that sit on more than 43% of the world's gas reserves and two countries that have shown their willingness to use energy as an instrument of coercion. U.S Senator Tom Udall, (D-NM) (US Senate, 2/2/09) Figure 20: Electricity-Genera ting Assets in Key Solar MarketsCo untryGerm any Japan US Fr ance S pain P or tugal Italy Greec e Irel and South K or ea

Net En erg y Impo rts as a % o f Ene rgy Use61% 84% 28% 50% 76% 83% 85% 67% 87% 82%

Pr imar y Ele ctr icity So urceCoal (60%) Oil Coal (33%)

T otal Installed Capac ity (GW)120 248 960 113 67 12 77 12 6 62

In sta lled Solar Capacity (G W)2.6 1.7 0.6 0.1 0.2 0.02 0.06 0.03 0.01 0.05

Nucl ear (60%) Coal Coal Oil Coal Oil Coal

Source: EIA, Barclays Capital research

In addition to the long-term growth drivers, we believe the following near-term trends could also positively influence clean energy demand growth:

24

May 01, 2009


Lower interest rate environment potentially creating a favorable capital cost outlook for several technologies such as solar thermal (approximately 80% of cost of solar thermal projects is capital cost). Figure 21: Interes t Rate Environment Acts As a Tailwind for Solar Fundamentals21% High Interest Rate Environment 18% Cost of capital and expected rate of return often represent the largest cost component of solar electricity costs. Lower interest r ate environment plays an impor tant role in overall solar electr icity cost r eduction

15%

12%

9% Low Inter est Rate Environment 6%

3%

0% Jan-71

Jan-74

Jan-77

Jan-80

Jan-83

Jan- 86

Jan- 89

Jan-92

Jan-95

Jan-98

Jan-01

Jan-04

Jan- 07

Interest Rates

Source: FactSet

Job creation potential in a weak global economic outlook. As shown in Figure 22, job creation potential of solar is the highest among electricity generation technologies. Figure 22: Job Creation Potential of Various Electricity Genera tion Technologies40

Number of Jobs per MW

30

20

10

0

C oal

Na tura l Gas

Nucl ear

Tidal

Wind

Geothe rmal

Bioma ss Ded icated Stea m

Solar PV

Source: INEEL, BC Sustainable Energy Association, Renewable Energy Policy Project, Barclays Capital research

May 01, 2009

25


Figure 23: Microsoft Employees versus Market Capem ployees , '000 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 mar ket c ap, $b n 600 500 400 300 200 100 0

Figure 24: Solar Employees versus Market Capem ployees , '000 mar ket c ap, $b n 120 100 80 60 40 20 0 2004 2005 2006 2007 2008 2008

employ ees market c ap

employees market cap

Source: Thomson Financial, Company reports, Barclays Capital research

Source: Thomson Financial, Company Reports, Barclays Capita l research

Some individuals say the solar boom was a result of high oil prices. As a different perspective, we highlight the following two points: Government policies in Germany, Spain, and Japanthe three primary drivers of solar energy todaywere put in place when oil prices were near $30/bbl. Figure 25: Oil Price and Government IncentivesDate of initial solar incentives Japan Germany Jan-94 Jan-04 Oil Price ($/bbl) $14.50 $33.00

Price Outlook

Spain

Aug-05

$66.00

Strong

W eak

Source: Barclays Capital research, Factset

Solar sector has no fundamental correlation to oil prices. Electricity price increases are not just a function of high oil prices. There are several other variables that influence electricity prices. For instance, aging transmission capacity, higher capital expenditures for coal, natural gas plants and increasing lead times are just a few variables. As we discuss in detail in this report, we believe solar electricity has the potential to be competitive with fossil fuel-generated electricity even if oil prices reach $30/bbl.

26

May 01, 2009


Bottom Line: We believe that wind and ethanol represented the first wave of investments to address the changing macro energy trends. In our opinion, we are currently in the second wave of investments in the global clean energy sector. We believe solar today is where wind was five years ago. We expect the third wave of investments to be characterized by second generation solar PV technology, solar thermal and storage technologies. We see a number of potential new solutions by 2011. Finally, we expect the fourth wave of solar investments to be influenced by solar applications such as electric cars. Just as killer apps such as email and the Internet accelerated growth of the technology sector, we believe the pervasiveness of solar technology will drive several new applications once solar reaches grid parity. Figure 26: Solar Energy Investment Potential Growth Drivers

Revenue

Solar P V Wind Ethanol

Gen 2 Solar PV S olar Thermal Storage

Electric Cars S olar "killer apps"

2001

2006

2010

2014

Time


May 01, 2009

27


Three Phases of Solar Investing We believe the solar industry is currently transitioning from the first growth phase where demand was driven by two to three major markets such as Germany, Japan, and Spain to the second growth phase, where demand could potentially be driven by multiple markets. We expect grid parity to be achieved in several key markets by 201012, which could potentially mark the beginning of the third growth phase for the solar sector. Forecasting Solar Demand Demand forecasting has been the biggest challenge for almost all growth sectors. Solar is no different. Figure 27 shows oil forecasting trends and Figure 28 shows the U.S. mobile subscribers forecasting trends. The difference between actual demand and forecasts was surprising in both these cases. We believe solar energy demand forecasts are also likely to be wrong. The forecasting errors for solar demand will be of even greater magnitude in our view, as development depends on subsidy, oil price, and financing development. Figure 27: Oil Forecasting Trends50 F orecast F orecast

Actual

Act ual

45

Oil Price in $/Barrel

40 5 Year F orecast Error Forecast 30 Actual F orecast 25 Forecast 20 Act ual Act ual 1985 Act ual 1990 1995 2000 Forecast Actual 10 Year F orecast Error

35

Forecast

15

Source: Vinod Khosla, Khosla Ventures, May 2008; Barclays Capital research

Figure 28: U.S. Mobile Subscribers Forecasting TrendsSource Fortune (1984 - 1989) Herschel Shostek Associates McKinsey for AT&T (1980 - 2000) McK insey on Solar 2008-2020 McKinsey Quarterly June 2008 Forecasts 1 million 60-90 million 0.9 million Actual 3.5 million 180 million 109 million % Annual Error 70% 20-30% 606%

160GW cumulative demand by 2020. 20GW annual installations by 2020

???

Source: Vinod Khosla, Khosla Ventures, May 2008; M cKinsey Quarterly , June 2008, Barclays Capital research. Note McKinsey solar estimates are for Photovoltaic base case scenario only. Aggressive growth scenario predicts tota l solar installed capacity of 400GW by 2020.

So how do we forecast demand? Our demand forecasting framework is based on two primary growth drivers for solar: development of government subsidies and development of

28

May 01, 2009


financing. We believe that, as long as these two growth drivers are intact, the solar market (the entire value chain) in dollar terms should grow at a robust pace. In our view, as long as solar is not at grid parityi.e., as long as solar demand is driven by government subsidiesinvestors should focus on volumes times price, not just on volumes or on price. The upper limit to market growth is likely to be defined by government subsidies: as long as government subsidies grow, solar market size should grow. If volumes increase rapidly, prices should decrease in a similar proportion, such that the overall market size is the same. We believe that, once solar achieves grid parity, the solar market is likely to be driven by the pure economics of supply/demand and is likely to have one less growth driver (no government subsidies).We believe solar market growth in a subsidy-driven environment is likely to be driven primarily by execution and development of financing.

We expect solar market growth to be determined by how quickly or slowly the solar value chain takes advantage of government subsidies. In our view, solar market growth would be faster if the subsidies are spent in fewer years and it would be slower if the subsidies are spent in more years. For instance, if a 1W solar system costs $9 and the government incentives are approximately $13/W, the net profit to the customer is approximately $4/W. Although the $13 government incentive is provided over a period of 20 or 25 years, the solar ecosystem receives $7$9/W up front. We believe solar market growth is likely to depend on how quickly these solar incentives provided by the government are transferred to the solar value chain through the customer. Figure 29: Solar Subsidies Should Provide Significant Catalyst for Solar DemandProfits Accumulated Over 20-25 Years

Subsidies of ~$13/W Paid Over 20-25 Years

=Upfront Purchase of $7-9/W by Customer

Demand /Reven ue Growth for Solar Value C hain


In general, during the next five years, we expect the following factors to affect solar industry shipments: Supply of silicon and solar cells. We expect the supply of solar cells to increase rapidly, as a result of an increase in production from new and existing silicon players, as well as successful commercialization by new thin-film solar manufacturers. Government support in the form of improved levels of subsidies in existing and new markets. Although we believe Germany will remain an important market for solar energy demand, we expect increased support from new governments in the form of more attractive solar subsidies to drive demand.May 01, 2009 29


Favorable solar system ASP trends. We expect solar ASPs to decline approximately 50% in 2009 and another 30% in 2010, which should improve the economics of promoting solar for several prospective new governments. Moreover, we expect the development of a solar ecosystem in the form of better customer awareness, greater availability of solar modules, and the reduction of installation costs to drive additional solar demand. Development of local fossil fuelgenerated electricity rates. As the cost of oil, natural gas, and coal-based electricity increases from 2010, we expect the gap between the solar electricity price and fossil-fuel-generated electricity price to narrow. Development of interest rates and other financial instruments driving solar demand. Last, we believe the low interest rate environment should result in favorable economics for project developers, leading to strong demand. Figure 30: Potential Solar Demand DriversSilicon/Solar Supply

Solar AS Ps

Government Subsidies

Solar Demand (Volume)

Int erest Rates/Financial Incentives

Local E lectricity Rates


Figure 31: Solar Multistage Growth Cycle

Sta ge of Grid Pa rity

Economics takeover p ost grid parity Greater subsidies ne ar grid pa rity

Subsidies primary growth driver

We believe we are hereTime


30

May 01, 2009

Figure 32: Solar Market DevelopmentDem and from sm all num ber of markets Grid Par ity

US G er many G ermany

Relative M arket Size Potential

US

Italy

Japan

Italy France

Spain South Kor ea Japan Canada Australia Belgium Netherlands Portugal Netherlands Austria Cyprus Israel Belgium Austria

France India Greece China Czec h Republic Switzerland

Germany

South Korea China

Gr eece India Czec h Republic Is rael

Aus tralia

Spain

Canada Spain

Portugal

JapanP hase 1 S ubsidiz ed Demand

Cy pr us Switz erland

Phase 2 Subsidized Dem and

P hase 3 Unsubs idized Dem and


May 01, 2009 31



Growth Phase 1: Demand from Small Number of Markets We define growth phase 1 for the solar sector as the period for the solar industry through 2008 when demand was generated only from two to three major markets such as Germany, Japan, and Spain. We believe the key factors determining growth during this phase were polysilicon or solar supply and development of subsidies. Due to the relatively small overall impact of subsidies on overall electricity bills during growth phase 1, we saw very little push back from governments. During phase 1 of industry growth, we believe the German government committed to spend an estimated $1.5 billion per year of net subsidies over 20 years and the Spanish government committed to spend an estimated $600 million per year of net subsidies over 25 years. The period through 2008 was mainly a seeding stage for emerging solar markets as during this period the emerging markets added a cumulative 3,450MW of solar shipments and represented 26% of installations in 2007. We believe an estimated $103 billion of market cap was created during phase 1 of solar industry growth. Poly prices increased from $25 to $400 per kg during the first growth phase and companies with relatively low reliance on spot poly emerged as Wall Street's top performers. Figure 33: Effect of Incentives in Major Markets on PV Shipments6000

Spain 5000

4000 Japan, Germany and Spain were the primary industry growth drivers. Solar industry installed base grew from less than 1GW in 1990 to over 10GW by 2008

Megawatts

Germany

3000

2000

Japan 1000

0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Solarbuzz, Barclays Capital research

32

May 01, 2009


Figure 34: Market Cap Crea tion by Solar Companies in Growth Phase 1 (Ending August 2008)Company First Solar Meyer Burger Manz Automation Akeena Solar Rene sola JA Solar Ascent Solar Roth & Rau SunPower Evergreen Sino-American SolarW orld L DK Timminco DC Chemical Q-cells REC Solon ECD ErSol Trina Solar Suntech MEMC CSI Wacker Spire Motech Sumco Topco Scientific BTU Internat ional Carman ah Tokuyam a Corp Solar-Fabrik Oerlikon Yingli Shin-Etsu Ch emical Sunways E-Ton aleo Solar Solarfun Conergy Solarstrom Centrosolar China Sun ergy Solartron GT Solar Total Beginning Market Cap (M ) $1,388 115 63 $21 79 $658 $29 64 $1,077 $12 NT$1 ,129 76 $2,699 C$ 42 159 ,274 1, 403 kr 2 8,635 30 $132 412 $392 $2,117 $808 $409 3, 518 $21 NT$15, 176 391,950 NT$2 ,135 $39 C$ 20 93,830 62 3, 968 $1,688 1, 854,563 67 NT$24, 304 137 $600 428 43 185 $421 1,963 $2,376 $61,029 Market Cap (8/10/08) $20,5 98 889 576 $110 408 $2,24 9 $142 333 $5,92 9 $1,01 8 NT$40,119 4,083 $4,71 0 C$ 1,959 7,219,212 4,672 kr 73,935 662 $2,61 5 1,081 $672 $4,97 2 $10,6 84 $714 6,167 $114 NT$40,025 622,00 8 NT$7,029 $111 C$ 45 203,28 7 107 6,618 $1,81 4 2,791,8 42 80 NT$24,548 129 $566 346 21 117 $328 5 52 $1,72 5 $164,22 2 Years 1.7 1.7 1.9 1.9 2.0 1.6 2.1 2.3 2.7 7.8 7.2 8.3 1.2 8.6 8.6 2.9 2.3 8.3 8.6 2.9 1.6 2.7 8.6 1.9 2.3 8.4 5.2 2.7 7.9 8.4 8.6 8.6 6.1 8.4 1.2 8.6 7.5 2.4 2.1 1.6 3.4 8.3 2.9 1.2 3.4 0.1 Market Value Creation (M) $19,210 773 513 $89 329 $1,592 $113 270 $4,852 $1,006 NT$38,990 4,007 $2,011 C$ 1,917 7,059,938 3,269 kr 45,300 631 $2,482 670 $280 $2,855 $9,876 $305 2,648 $93 NT$24,849 230,058 NT$4,894 $72 C$ 25 109,457 45 2,650 $125 937,279 13 NT$244 ( 8) -$34 ( 82) ( 22) ( 68) -$93 -1, 411 -$651 $103,193 % change in Market Ca p 1384% 670% 821% 420% 417% 242% 390% 424% 451% 8313% 3454% 5276% 74% 4582% 4433% 233% 158% 2090% 1878% 163% 71% 135% 1222% 75% 75% 449% 164% 59% 229% 184% 129% 117% 72% 67% 7% 51% 19% 1% -6% -6% -19% -50% -37% -22% -72% -27% Maket Cap CAGR 374% 228% 224% 133% 126% 115% 115% 108% 87% 77% 65% 61% 59% 56% 56% 52% 52% 45% 41% 40% 39% 38% 35% 35% 27% 22% 20% 18% 16% 13% 10% 9% 9% 6% 6% 5% 2% 0% -3% -4% -6% -8% -15% -18% -31% -99% -

Source: Bloomberg, Barclays Capital research

May 01, 2009

33


Growth Phase 2: Subsidized Demand from Multiple Markets We Expect the Second Growth Phase for the Solar Sector to Begin in 2010 During the second growth phase, we expect demand from several markets to pick up the slack of demand in Spain. We see three potential main drivers resulting in strong growth in several emerging solar markets during the second growth phase: 1. Greater supply of lower priced solar panels. Our view is that as more supply becomes available and as project returns exceed certain thresholds, new downstream channels would develop to take advantage of the incentives. We are currently forecasting below $2 per watt prices in 2010 and at these price levels, we expect IRRs to increase substantially in emerging solar markets. In our view, investing in solar is equivalent to investing in a government bond. We believe the government incentives in the form of feed-in tariffs act as an annuity stream for project investors, similar to interest earned on a government bond. Consequently, we expect project investors to add leverage and increase returns.

34

May 01, 2009


Figure 35: Comparison of Solar IRRs versus Government Bond Yields

18. 1%

17.2% 17.4% 12.3% 12.0% 9. 4% 8. 5% 9. 1% 9.4% 6.4% 4. 0% 3. 2% 4.2% 4.3% 4. 4% 2.2% Belgium P ort ugal Czech Republic S wi tzerland A ust rali a Bond Yi el ds Spain I taly South Korea Greece I srael 4.0% 4.6% 5. 4% 4. 8% 5.6% 12.4% 13. 7%

3.7%

Germany

France

2009 IRRs (at $2.50/W AS P)

20.2%

19.6% 15.6%

19. 2%

14.1% 14. 8% 13.2% 13. 6%

9.8%

10. 7% 9. 4%

6.9%

6.4%

3 .2%

4 .0 %

4 .2 %

4.3% 4 .4 % 2.2% 4.0 %

4.6%

5 .4 % 4 .8 % 3.7% Greece Israe l Fran ce

Ge rmany

Bel giu m

P ortuga l

C zech Re pub lic

Swi tze rlan d

Australi a

S pai n

Ital y

Sou th Korea

2009 IRRs (at $2.00/W AS P)

Bond Yi el ds

Note: The implied time period varies based on the countrys Feed in Tariff policy. Source: Bloomberg, Barclays Capital research

May 01, 2009

35


Figure 36: Germany IRR Trends2012 16. 7% 2011 14. 2% 2010 10.9% 2009 8.1% 2008 7. 8% 2007 7.1% 2006 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18%

Figure 37: Italy IRR Trends201235. 5%

2011

2 8.7 %

2010

21 .3%

2009

15 .8%

2008

12 .1%

2007

10. 4%

2006 10%

15%

20%

25%

30%

35%

40%



2. New incentive programs from 200809. We expect new incentive programs announced in several markets in 200809 to act as potential major catalysts for demand from 2010. Global awareness of solar energy is increasing and we see that translate into attractive feed-in tariff in several markets over the next few years. For perspective, Spain emerged as the fastest growing market when a new law was passed in 2007. We believe Italy, U.S., Japan, China, India, South Korea, Greece, and Canada have the potential to emerge as large markets with new incentive program announcements made in 200809. Figure 38: New Incentives Announced in 2008Country Australia South Korea India Greece Israel UAE China Canada Japan FranceSource: Country Reports, Barclays Capita l research

Figure 39: Incentives News by Region20080925

New Incentive in 2008/2009

20

15

10

5

0 G erma ny A str alia u I ndia Rest of Eur ope Re st of t he Wor ld US

Source: Country Reports, Barclays Capita l research

36

May 01, 2009


Figure 40: Incentives News by Month (2008-09)10

Figure 41: Deals by Month (200809)

8

6

4

43

2

23 17 11 10 13 20 20 20

26 21 14 7

0 Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan

Jan

F eb

M arch

A pril

May

June

July

A ug

S ept

Oct

Nov

Dec

J n '09 a

Source: Company Reports, Barclays Capital research


Figure 42: Deals by Country ( in MW) 2008Jan. 2009)1,855

Figure 43: Deals by Country (2008Jan. 2009)

1,588

238

73 531 385 329 317 50 31 27

25 10

6

5

4

4 Cz ech Republic

2 J apan

60 Germany US It aly Rest of t he World Spain Franc e Belgium

47 South Korea

28 Japan

11 Greec e

3 Cz ec h Republic

US

Germ any

Spain

Rest of the World

It al y

South Korea

Greec e

Franc e

Belgium


Source: Company Reports Barcla ys Capital research

3. Potential resolution of permitting and financing bottlenecks. In general, solar energy project time ranges from nine months to three years. Factors that cause time difference include 1) maturity of solar energy marketsboth permitting and financing durations vary significantly among solar markets; 2) type of land required to build solar energy projects; and 3) type of financing required. We believe the permitting and financing requirements in several markets could become less stringent and more supportive of demand growth from 2010. How Large Is the Potential Solar Opportunity in the Second Growth Phase? We estimate $200 billion of government spending on gross subsidies in the second growth phase. Our calculations are based on a what we believe is a conservativeMay 01, 2009 37


scenario, where we assume that governments take note of the increasing subsidy burden and enforce annual cap on installations. We use this scenario to calculate the minimum growth of installations during phase 2 of solar industry growth. Our scenario analysis does not take into consideration potential upside from solar programs in new markets and possibility of no annual caps in several solar markets. Recall, our demand forecasting framework: subsidy equals customer profit plus solar industry revenue. We assume that $50 billion of the $200 billion incentives constitute profits for end customers and $150 billion constitute solar industry revenue. In addition to the subsidized markets, we see at least 5 gigawatts of utility scale market opportunity during the second growth phase. We see most of the demand coming from U.S. utilities with some initial traction from European utilities as well. Figure 44: Net Present Value of Subsidies in Select Solar Markets ($/W)$1 2

$1 0

$8

$6

$4

$2

$0Netherlands Canada A ustria India Portugal Belgium S w itze and rl Czech Republic A ustrali a Germany S pai n Ialy t Gr eece Israel S outh Kor ea France


Key assumptions in our subsidy-driven demand forecasting are as follows: We assume governments provide subsidies in three stages. We assume that in stage 1 most of the countries such as Greece, Italy, and South Korea meet the caps put in place by their governments for solar installations. We assume that these governments then put in place an annual cap in each of these markets from stage 2 (2011 in many cases) in order to reduce their subsidy burden and stabilize the growth in the sector. We calculate the cap for these markets by considering the examples of Germany and Spain and using the metric Solar subsidy as a percentage of GDP. This metric is calculated by using the net present value of subsidies for 2009 installations in Germany and Spain and comparing this metric with the current GDP of Germany and Spain. We assume Germany's solar subsidy as a percentage of GDP to represent the bull case scenario, Spain's solar subsidy to represent the bear case scenario and take the average of these to represent the base case scenario.

38

May 01, 2009


Using this metric we arrive at the base case, bear case and bull case estimates for the caps put into place by the various governments in stage 2. For smaller markets such as Austria, Australia, Switzerland, Belgium, and Netherlands we consider our shipments estimates as the base case; 20% downside to those numbers as the bear case and a 20% upside as the bull case. For stage 3, we assume that governments increase installation caps by 15% year over year. We further assume that governments reduce feed-in tariffs in these markets by 15% in stage 3 after a 15% reduction in stage 2. In our opinion, the solar industry would likely reach grid parity by the end of the second growth phase and as such this could potentially represent the maximum amount of subsidy burden for the government. Figure 45: Insta llations Used In Calculating Growth Phase 2 Subsidies9,000

8,000

S tep 37,000

6,000

M e ga a tts w

5,000

S tep 24,000

3,000

2,000

S tep 11,000

0 S tep 1 Germ any Italy Fran ce Fr ance S tep 2 S outh K orea Spain n i Ida Canada Step 3 Oth er

0

5,000

10,000Me ga wa tts

15,000 B ear Bas e B ul l

20,00 0

25,000


Figure 46: Total Subsidy Amount Allocated by Various Countries90 00 80 00 70 00 60 0050 0 45 0 40 0 35 0

G er man y

Po rt ug al

Ins ta ll at ions (MW )

I nsta ll at ions ( MW)

50 00 40 00 30 00 20 00 10 00 Ca na da 0 $0 S ou th Ko re a G ree c e $1 0, 00 0 $2 0 ,0 00 $3 0, 00 0 S ubs idy ($ M) $ 40 ,0 00 $ 5 0,0 0 0 $6 0, 00 0 Ind ia S pa in It aly

30 0 25 0 20 0 15 0 Au str ia I sr ae l Be lgiu m Au str alia Cze ch R ep ub lic

Fra nc e

10 0 50 0 $0 $ 50 0 $ 1, 00 0 $1 ,50 0 $ 2 ,00 0 $2 ,50 0 $3 ,00 0 Ne the rla nd s

Subsi dy ($ M)


May 01, 2009

39


How Much Would Subsidies Really Cost? In the previous section, we estimated the gross subsidy burden for all governments during the second growth phase to be $200 billion. Although this number seems very large, we believe a more appropriate number for the government to consider should be net subsidy burden which takes into consideration factors such as local fossil fuel generated electricity costs among other things. We estimate the net cost burden of solar subsidies assuming $0.10/kWh of traditional fuel costs to be $125 billion during the second growth phase. Figure 47: Net Present Value of Gross and Net SubsidiesCa na da

Neth er lan ds

In dia

Aus tria

Gr eec e

B elgiu m

Sp ain

Sw itze rla nd

Sou th Ko re a

Cze ch R ep ub ic l

Fr anc e

Au st ra ia l

Italy

Isr ae l

Ge rma ny $0 $1 0,0 00 $ 20 ,00 0 $ 30 ,00 0 $ 40 ,0 00 $ 50 ,00 0 $ 60 ,00 0

Po rt ug al $0 $ 50 0 $1 ,0 00 N et Sub sid y ($ M) $1 ,50 0 G ro ss Sub sid y ( $M) $ 2,0 00 $2, 50 0

Net Subs idy ($ M)

Gr os s Su bs idy ( $M)


In our opinion, a $125 billion cost burden is not that large especially after taking into consideration that it would be shared by more than 12 different countries. As shown in Figure 48, the net solar subsidies as percentage of GDP are significantly less than health care and education spending in all of these countries. Note that the Figure compares total subsidy cost over three to five years to GDP whereas health care/education spending estimates are for one year only. The bottom line is that we believe the net subsidy burden is insignificant for governments to potentially scale back solar programs. In our view, solars job creation potential and the promise of producing electricity at lower prices than natural gas once grid parity is achieved should lead to continued government support during the second growth phase.

40

May 01, 2009


Figure 48: Comparison of Net Subsidy Burden to Health Care and Education Spending14% 12% 10% 8% 6% 4% 2% 0% Germany Italy France So Korea uth Sp n ai Greece Indi a Canada Po rtugal Israel Au stral ia Czech R epubli c Sw tzerl and i Be gium l Net sub sidy % GDP Heal thca re spe ndin g % GDP Education spe nding % GDP

Ne t subsidy % GDP ca lcula ted using total subsidy amount ove r growth phase 2. N ote, subsidy is a lloca ted ove r 20-25 years and real spe nding pe r annum is likely to be 1/20th of the estimate d amount.

Source: EIA, Barclays Capital research

Below we present some details on subsidy burden in Germany. Germany Subsidy Scenario Analysis According to the German Electricity Association, the share of renewable energy (not just solar, includes wind, biofuels, etc.) in electricity prices is only approximately 4% or EUR0.80/kWh. In Germany, the monthly extra costs per consumer due to the premium tariff for solar electricity are currently EUR0.20. Other sources of taxes such as concession fee, electricity tax, value-added tax add up to approximately 36% of German electricity bill. More specifically, the costs to the electricity consumer resulting from the differential costs of electricity covered by the Renewable Energy Sources Act were estimated to be EUR5.5 billion in 2007 whereas the potential economic benefits of the Renewable Energy Sources Act were estimated to be EUR12.0 billion. In addition, the EUR5.5 billion includes all renewable energy types (wind, solar, biofuels, geothermal, etc.). Solar-generated electricity was estimated to be less than 2% of overall renewable electricity in 2007 and based on those estimates, we believe the proportion of government expenditure on solar was less than 20% of EUR5.5 billion (or less than EUR1,100 million).

May 01, 2009

41


Figure 49: Annual Solar Incentives in Germany (EUR Millions)2004 Cumulative Installed Capacity (MW) Solar Electricity Generated (BkWh) Feed-in tariff ( cents/kW h) Differential cos ts ( cents /kWh) Incremental Electricity (BkWh) Incentives Burden (EUR MM)Source: Barclays Capital research

2005 1715 1.28 48.4 38.4 0.61 325

2006 2675 2.00 46 36 0.72 651

2007 4003 3.46 43 33 1.46 1101

900 0.67 51 41 0.23 95

Analyzing Potential Impact for Every 1GW Increase in Shipments We believe every 1GW increase in solar shipments could result in approximately EUR200 million of incremental annual incentives in Germany. Our analysis assumes that 1GW of shipments generate 1.1 billion kWh of electricity and our calculation for the potential impact from incentives takes into account the differential costs of solar electricity. We believe the present value of cash flows over the 20 year period is EUR3.0 billion, assuming solar panel efficiencies decline at 2.5% per annum and assuming a discount rate of 5%. Another way to look at is to understand the potential impact of 1GW increase in shipments on the German electricity bill. We believe the impact of every 1GW increase in shipments on the German electricity bill is about EUR0.05/kWh. Figure 50: Potential Increase in German Elec tricity Bills for Every 1GW Increase in PV Shipments (2009E)PV Shipments (GW) PV Utilization (Hours) PV Electricity Generation (billion, kWh) Feed-in tariff (/kWh) Replaced fossil fuel costs (/kWh) Differential costs (/kWh) Incremental funds (, Million) German Electricity Output (Billion, kWh) Incremental Impact (/kWh)Source: Barclays Capital estimates

1.0 1100 1.1 0.368 0.10 0.268 295 540 0.05

42

May 01, 2009


Figure 51: 2009 German Incentive Program: Net Present Value A nalysis for 1GW Shipments2 009 E 200 9 In centives (ce nts/kWh) Sola r El ectricity (GWh/yr) In cremen ta l fu nds (Eur M) 36 .8 1 095 29 3 2 019 E 200 9 In centives (ce nts/kWh) Sola r El ectricity (GWh/yr) In cremen ta l fu nds (Eur M) Net Presen t Val ue of In cremen ta l Fu nds (EUR Mil lio ns) 36 .8 85 0 22 8 20 10E 36.8 10 68 286 20 20E 36.8 829 222 $3,02 4 201 1E 3 6.8 1041 2 79 202 1E 3 6.8 8 08 2 17 20 12E 36 .8 10 15 272 20 22E 36 .8 788 211 201 3E 36.8 9 90 2 65 202 3E 36.8 7 68 2 06 2 014 E 36 .8 96 5 25 9 2 024 E 36 .8 74 9 20 1 20 15E 36.8 941 252 20 25E 36.8 730 196 2 016 E 3 6.8 91 7 24 6 2 026 E 3 6.8 71 2 19 1 20 17E 36.8 894 240 20 27E 36.8 694 186 201 8E 3 6.8 9 72 2 34 202 8E 3 6.8 6 77 1 81


Scenario Analysis for German Electricity Bills We have outlined a few scenarios for solar incentives in Germany, where solar could potentially become a larger-than-expected proportion of overall electricity generation in 2009. In each of these scenarios, we have evaluated the impact of incentives on an electricity bill of a German consumer. In the base case scenario, we assume that solar electricity represents about 1.4% of German electricity generation with 2.4GW of annual shipments in 2009 and EUR0.39/kWh impact on German electricity bill. In the bull case scenario, we expect 9.0 billion kWh of solar electricity generated representing about 1.6% of German electricity market and resulting in EUR0.45/kWh impact on the German electricity bill. In the bear case scenario, we assume solar represents 1.1% of electricity generation with 1.2GW of annual shipments in 2009 and EUR0.33/kWh impact on German electricity bill. Figure 52: 2009 Solar Electricity Scenarios (Germany)2009 Solar El ectricity Scenarios (Germany) Solar elec. (Billion kW h) Overall elec. (Billio n kW h) Solar % of overall e lec. Solar Shipments (M W) Potential Incentives (, MM) Cumulativ e Solar Subsidies in Ele c. Bill (/kWh)Source: Barclays Capital research

Base 7.62 550 1.4% 2400 2123 0.39

Bull 9.00 550 1.6% 3660 2643 0.45

Bear 6.19 550 1 .1% 1200 1792 0.33

May 01, 2009

43


Growth Phase 3: Solar Investments Post Grid Parity We expect the third growth phase for the solar industry to be characterized by the period from when solar achieves grid parity or the point at which solar electricity price matches fossil fuel generated electricity price. Figure 53: Solar System Price versus Natural Gas Price6000 5000

Solar System Pri ce ($/M W)

4000 3000 2008 N atural Gas Price $5W system cost required to reach grid parity

2000 1000 0 1.6 2.0 2.4 2.8 3.2 3.6 4.0 Current Natural Gas Price $3/W system cost required to reach grid parity

Natural Gas Price ($/MM BTU)

4.4

4.7

5.1

5.5

5.9

6.3

6.6

7.0

7.4

7.8

8.2

8.5

8.9

9.3


Given the sharp decline in oil and natural gas prices, we are often asked if solar is still a feasible alternative to conventional fossil fuels. We believe the prospects for solar are still promising and our grid parity outlook has not deteriorated for the following reasons: 1) although we agree that average natural gas electricity prices are likely to decline by nearly 50% year over year in 2009 due to a decline in fuel costs, price premium of solar electricity over natural gas electricity is likely to remain constant or even decrease somewhat if module prices decline to $2/W. More importantly, forecasts from Barclays Capital commodities and utilities teams suggest, power prices are likely to increase during 201015 timeframe, potentially leading to grid parity by 2012 in a scenario where no carbon tax is implemented in the U.S.; 2) if we assume a $15/MWhr carbon tax is implemented in the U.S. from 2011, we believe grid parity for California utilities is likely by 2011; and 3) we note that several utilities generally purchase renewable energy at a premium to conventional energy using the Market Price Referent (MPR) (which is typically $20/MWh premium to the natural gas generated electricity price) and by applying a Time of Delivery (TOD) multiplying factor. As shown in Figure 54, assuming PG&E purchases solar using TOD / MPR, solar has the potential to reach grid parity by 2010.

44

May 01, 2009


Figure 54: Grid Parity Timeline2 50 Power Pr ic es ($/MWh) Solar Pr ic e ($ /MWh) 2 00 Power Pr ic es with Ca rbon Tax ($/MWh) MPR Including TOD ($/MWh) 1 50

$/MWh1 00 50 0 2 006 2007 20 08 2 009E 201 0E 20 11E 2 012E 201 3E 20 14E 2 015E


We see two different grid parity price points: 1) grid parity at the utility level; and 2) grid parity at the residential level. In general, the two grid parity price points are likely to be differentutility price point is likely to be lower than residential price point. We expect residential markets to have a much higher solar energy price point due to elimination of transmission and distribution costs. Grid Parity at Utility Level Several countries generate the bulk of electricity from natural gas and coal. We expect grid parity at the utility level to be reached in the 201012 time frame depending on the development of fossil fuel generated electricity prices. The common belief is that solar energy is not competitive without government subsidies and would never be used by utilities for large-scale electricity generation. In fact, we believe that solar electricity is already competitive with peak power generation capacity in a number of regions. Base-load power generation capacity meets approximately 65% of global electricity demand. Because baseload generators, which are mostly coal-based generators, run at 100% utilization, baseload electricity costs are very low. Solar is unlikely to compete with base-load generation capacity anytime soon. However, utilities must provide the more expensive intermediate load power using part-time natural gas generators. Approximately 30% of global electricity supply is estimated to be met by intermediate-load generators during the daylight hours, when solar economics are the best. Solar PV in the sunnier locations of Europe, where sunlight totals more than 1,800 hours a year, is already competitive with intermediate and peak load power requirements. In the United States, several utilities have announced deployment of large scale solar panels from 2010.

May 01, 2009

45


Figure 55: Levelized Cost of Energy (LCOE)Combined Cycle Gas Plants versus SolarInstalled capacity Constr uction cost Plant life Load factor Pr oduction Expected ROCE Required investment Required return Return EUR per MWh Fixed Costs Fixed O&M USD per MWh produced CO2 Costs CO2 Conver sion rate Total emissions % of pass through Pr ice per ton Tot. Cost USD per MWh produced Fuel Costs Fuel Price Heat Rate USD per MWh produced Total Generation Cost Distribution & Transmission Permanent Cost Total Electricity Cost Units MW $ / MW Yrs % GW h $M % $M $ / MW h $ / MW $ / MW h Tons / MWh Metr ic Tons % $ / tn $M $ / MW h $ / MM BTU BTU / MW h $ / MW h $ / MW h $ / MW h $ / MW h $ / MW h CCGT - Now 100 1005 40 40 350 100.5 7 7.0 20.1 2.5 7.2 0.40 140 100% 37.5 5.3 15.0 3.5 10,500 36.8 79.0 25.5 15.0 119.5 CCGT @ 25%100 1005 40 40 350 100.5 7 7.0 20.1 2.5 7.2 0.40 140 100% 37.5 5.3 15.0 2.6 10,500 27.6 69.8 25.5 15.0 110.3 CCG T @ 25%+ 100 1005 40 40 350 100.5 7 7.0 20.1 2.5 7.2 0.40 140 100% 37.5 5.3 15.0 4.4 10,500 45.9 88.2 25.5 15.0 128.7 Solar TF - '08 100 4050 25 35 307 405 7 28.4 92.5 16.2 52.8 Solar c Si - '08 Solar c Si- '09 100 100 8000 5600 25 25 35 35 307 307 800 7 56.0 182.6 32.0 104.4 560 7 39.2 127.9 22.4 73.1 Solar c Si - '10 100 3920 25 35 307 392 7 27.4 89.5 15.7 51.1

0.0

0.0

0.0

0.0

0.0 145.3 0.0 0.0 145.3

0.0 287.0 0.0 0.0 287.0

0.0 200.9 0.0 0.0 200.9

0.0 140.6 0.0 0.0 140.6


The bottom line is that we see an increasing number of utilities using solar to generate renewable electricity.

46

May 01, 2009


Figure 56: Levelized Cost of Electricity Using Various Technologies (Total Electricity Cost)In sta ll ed cap acity Con stru ction co st Plan t l ife Loa d fa ctor Produ cti on Expecte d ROCE Req uire d inve stm ent Req uire d return Return USD per MWh Fixe d Costs Fi xed O&M USD per MWh produc ed CO 2 Costs CO 2 Con versio n rate To ta l emi ssion s % of pass throu gh Price pe r to n To t. Cos t USD per MWh produc ed Fuel Costs Fu el Pric e Hea t Ra te USD per MWh produc ed Total Ge ne ration C os t Distribution & Tra ns mission Perm anent Cost Total Ele ctricity Cost U nits MW $ / MW Y rs % GWh $M % $M $ / MWh $ / MW $ / MWh To ns / MWh Me tri c Ton s % $ / tn $M $ / MWh $ / MM BTU BTU / MWh $ / MWh $ / MWh $ / MWh $ / MWh $ / MWh CC GT 100 10 05 40 40 350 10 0.5 7 7 .0 20.1 2 .5 7 .2 0.40 140 10 0% 37.5 5 .3 15.0 3 .5 1 0,500 36.8 79.0 25.5 15.0 11 9.5 C oa l 100 27 00 40 7

Solar Energy Handbook Barcap

Documents

Transcript of Solar Energy Handbook Barcap