Solar power is great, unless you make the equipment behind all the solar power.  The insatiable and endless growth in demand for solar panels and materials used to make them has posed an investor conundrum for quite some time.  Most players saw endless share price gains as the price of oil went to $90, then $100, and then toward $150… The boom was followed by a double-bust as the oil drop coincided with The Great Recession.  Many key solar stocks have seen their shares prices fall by half and some have seen shares drop about 90%.  The trends today are acting against First Solar, Inc. (NASDAQ: FSLR), MEMC Electronic Materials Inc. (NYSE: WFR), Solarfun Power Holdings Co. Ltd. (NASDAQ: SOLF), SunPower Corporation (NASDAQ: SPWRA), Applied Materials Inc. (NASDAQ: AMAT), Claymore/MAC Global Solar Energy (NYSE: TAN) and the PowerShares WilderHill Clean Energy (NYSE: PBW) are all issues to watch.

iSuppli has data out today showing that PV installations in 2011 will slow somewhat compared to the blistering pace of 2010.  The data noted, “Assuming the U.S. dollar/euro exchange rate remains above $1.20/€, iSuppli predicts crystalline silicon solar cell prices will not increase in 2010 and instead will decline by 5 percent compared to 2010.  Prices for installations in 2011 will fall slightly more, decreasing by approximately 10 percent on average in Europe. Installation prices will decline to compensate for reduced subsidies in the largest markets of Germany, Italy and France.”

There is a lot more to this story.  First, there are some positives for PV-makers and the companies that supply parts and materials around them.  Growth is expected to remain.  Just like the argument over an expansion continuation or a double-dip recession, it is the contraction of the growth that makes it seem so muted.

The other issue at hand is that this still leaves a growth in 2010 and in 2011.  We are now in the second half of 2010 and stock markets try to act as discounting mechanisms that try to factor in the economic trends for six months to twelve months out.  If that is the case, then in just six months or from now the stock market is going to be factoring in significant slowing of growth trends in the sector.

A last issue is the notion of pricing.  With a $1.20/Euro rate holding, iSuppli predicted that crystalline silicon solar cell prices will not increase in 2010 “and instead will decline by 5 percent compared to 2010.  Prices for installations in 2011 will fall slightly more, decreasing by approximately 10 percent on average in Europe.”

Last week we saw First Solar, Inc. (NASDAQ: FSLR) beat earnings and raises 2010 guidance from a range of $6.80 to $7.30 EPS to a new range of $7.00 to $7.40 EPS.  Shares fell from over $135.00 down to under $130.00.  The stock now is around $126.50.  The company has what iSuppli feared working against it: subsidy cuts in Europe.  It leads the race in the price to lower and lower costs for utilities and power companies.  That may lead to more market share, but this is a race to see who can keep their operating margins at a rate of decline that is less than the decline in prices.  It claims 18% share or so and has produced over 26 million solar modules.  First Solar said gross margin compressed to 48.3% from over 56%, but it cut approximately $0.05 off of its PV per-Watt module manufacturing cost to about $0.76.

MEMC Electronic Materials Inc. (NYSE: WFR) was also recently downgraded by Jefferies with 2010 acting as a peak earnings year and peak margin year.  Too bad considering a price drop in shares from $90 to $10… ouch.  Its last earnings report failed to enthuse investors and shares are danger-close to 52-week lows.

Solarfun Power Holdings Co. Ltd. (NASDAQ: SOLF) announced plans last month to increase its cell capacity by 50 MW via more manufacturing capacity while also converting 160 MW of its existing cell lines into high-efficiency selective emitter technology by early 2011.

SunPower Corporation (NASDAQ: SPWRA) was downgraded in the middle of last month over at Jefferies because of its leveraged balance sheet and higher cost structure despite a brand-premium and price-premium.

Applied Materials Inc. (NASDAQ: AMAT) recently announced that it would restructure its solar energy division by cutting jobs and effectively closing down unprofitable thin-film solar panel production lines.  What does that tell you on margin expectations elsewhere ahead?

ETF-trading has not offered much solace for Green Investing.  Claymore/MAC Global Solar Energy (NYSE: TAN) is up Monday but the $7.84 price compares to a 52-week trading range of $6.02 to $11.47.  The PowerShares WilderHill Clean Energy (NYSE: PBW) is more diversified and up 1.4% at $9.29 its 52-week trading range is $4.00 to $11.95.

Barron’s recently panned First Solar (FSLR) shares, although much of the reasoning behind that was a secular-issue around being a solar company.  Germany, Italy, and Spain have all either cut subsidies or are expected to.  China is a wild card, but the Chinese solar panel makers are going to win there if it is even a financial win situation.

What appears to be happening is the reality that green energy lovers have hoped would come or would get close: pricing parity, and ultimately price discounting.  For solar investors that is not a good thing.  That means that solar modules can be bought cheaply enough that the price for the same watt and megawatt becomes the same cost as conventional energy solutions.  Or cheaper.  Guess what happens to margins for solar panel manufacturers there.  At least power companies, residences, and businesses will be able to get around some at least of the high costs and uncertainties around the pricing of traditional power.

JON C. OGG

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