Oversupply Threatens Solar Revenues and Profits (FSLR, EIX, SRE, SPWRA, STP, YGE, LDK, TSL, TAN)

The story on solar energy in 2011 is manufacturing capacity. Or, more accurately, over-capacity. The termination of incentives in Germany and Italy are expected to slow solar installations in those countries, and higher demand from the US and China is not expected to pick up the slack.

It would be well to keep this in mind as press releases burn up pixels announcing new solar plants. This morning, for example, First Solar Inc. (NASDAQ: FSLR) and Southern California Edison, a division of Edison International (NYSE: EIX) announced the signing of a 25-year power purchase agreement for 250 megawatts of electricity from a new solar photovoltaic plant to be built in southern Nevada. Last week, a division of Sempra Energy (NYSE: SRE) signed on for 150 megawatts of solar PV from Suntech Power Holdings Co. (NYSE: STP). In January, Southern California Edison signed three power purchase agreements for 711 megawatts of solar PV-generated power with SunPower Corp. (NASDAQ: SPWRA).

These are all significant deals and shouldn’t be ignored. But on a macro level, global supply of solar PV panels, modules, cells, and wafers are expected to far outstrip demand in 2011. Forbes cites an analyst from Morgan Stanley who said in a research note to clients that global shipments should shrink 12% in 2011.  Add to that the analyst’s estimate that supply could reach 30,000 megawatts, nearly double expected demand of 15,500 megawatts. Prices, and margins, will be hit and hit hard.

Morgan Stanley isn’t alone. Investment bank Roth Capital Partners projects demand of 18,000 megawatts of global solar PV demand in 2011, although it sees supply capability of about 21,000 megawatts.  That’s not as much as Morgan Stanley, but will still affect margins. Average selling prices could fall as much as 30% according to Roth, though the bank believes a 15% drop is more realistic.

Chinese banks have agreed to lend more than $25 billion to the country’s solar makers, and the companies are expected to use at least part of the cash to increase capacity. Yingli Green Energy Holding Co. Ltd. (NYSE: YGE), LDK Solar Co. Ltd. (NYSE: LDK), Trina Solar Ltd. (NYSE: TSL), and Suntech have all received loans ranged from $4.4 billion to $8.9 billion.

It’s not like over-supply in the solar PV business is breaking news. The outlook for 2011, among more sober observers, has been lukewarm at best. But the combination of policy decisions to reduce incentives in Germany and Italy and the expected increase in manufacturing capacity can’t seem to overcome the near daily announcements of a new solar plant being built somewhere.

In 2010, some 15,000-17,000 megawatts of solar power are estimated to have been installed, and that pretty much soaked up capacity. Capacity additions even 6,000 megawatts represent a 40% increase in manufacturing capability while installation growth is estimated at no more than 20%. Prices have to fall, and with them revenue and profits.

The moral is earnings reports for the just-completed quarter are not necessarily good predictors of what’s happening in the solar PV market. Most companies will follow MEMC Electronic Materials Inc. (NYSE: WFR) which last week reported better than double fourth quarter revenue and positive earnings. MEMC even boosted its 2011 guidance, but the company has failed to meet EPS expectations, modest as they were, for four consecutive quarters.

With the exception of SunPower, the solar companies are trading down between -1% and -2% this morning. The Guggenheim Solar ETF (NYSE: TAN) is also down about -1%.

Paul Ausick