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Solar power boom faces first big test

London, February 11, 2008

Prospects for the solar power sector are puzzling investors juggling on one hand a possible dotcom-style bust and on the other fresh support in Europe, home to a third of the world's market.

The solar power industry uses the same silicon raw material as the semiconductor industry and may share a similar boom-bust path, according to some analysts.

The semiconductor industry collapsed in 2000 amid a dotcom bust which pulled demand for electronic chips.

Solar companies saw their share prices skyrocket last year but many endured a steep fall in January, halving in the case of one market leader Oslo's Renewable Energy Corporation.

Such falls reflected a view that solar power valuations had run ahead of themselves. High profits plus low barriers to entry have attracted new manufacturers from China and the prospect of more serious over-capacity looms is now dividing opinions.

"Alternative energy and solar energy are a very compelling growth opportunity and that's going to be a multi-decade phenomenon," said Gunnar Miller, global co-head of Research at Allianz Global Investors (AGI).

"It's going to be something on a par with volume growth of flat panel screens, PCs and handy phones," he said, while adding some companies had become over-valued.

Thiemo Lang, senior portfolio manager at Sustainable Asset Management (SAM) was snapping up solar power stocks, saying last month's falls were an opportunity.

He said he expected demand growth to outstrip capacity because of government support plus its tiny base now at less than 0.1 percent of the world's electricity.

Governments subsidise low carbon-emitting solar power as one plank in their fight against climate change, fuelling a boom especially in market-leading Germany.

That has made manufacturers like China's Suntech and LDK Solar and SolarWorld rich.
Growth now is led by expanding markets such as in South Korea and Spain, France, Italy and Greece in Europe, after the introduction of new subsidies there.

These new markets are too small to swallow up prospective new capacity, especially given a possible consumer downturn, said one analyst, who predicted a solar silicon glut by end-2008 followed by consolidation before a move to mass production.
"We don't own any solar stocks. We were cautious on valuations," said Bruce Jenkyn-Jones at investors Impax. "People realise the margin they're making is not sustainable."         

The European Union's executive Commission last month detailed ambitious new national targets for renewable energy which will likely underpin solar subsidies for years to come in sunny Mediterranean countries.

But support may not remain as generous as now.  Germany, the world's largest solar market, recently revamped its renewable energy law to reduce subsidies from next year, which could lead to a rise in demand this year as households bring investments forward before premiums fall.

Spain has recently blazed a solar trail on the back of generous, 25-year guaranteed price premiums paid for electricity from the renewable power source.

But that attracted so much investment in large-scale plants that under new proposals Spain will cut price support by a quarter from September. At present rates the country may also hit a 1 gigawatt (GW) cap on big installations by then.

So far markets in Italy and France have trailed on administrative delays despite generous support on paper.

Solar panel prices must fall if governments were to continue to back the industry, said Jefferies investment bank analyst Michael McNamara. "Otherwise you're just financing wealth creation. Governments are worried they may have made (premiums) too generous," he said.

Installations are far more expensive in the United States and Britain compared to Germany, illustrating the immaturity of the industry, he ad


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