German solar industry steamrolls ahead but outlook fuzzy

(ADPnews) – Oct 12, 2010 – Subsidy cuts in Germany’s solar sector are spurring tremendous demand boosting new installs and companies’ full-year outlooks but signs are mounting up that the market may lose steam.

By Julia Komitova

Demand for photovoltaic (PV) installations in Germany skyrocketed more than 300% year-on-year in the first eight months to 4.8 GW, according to Germany Trade & Invest, the nation’s foreign trade and inward investment agency. The jaw-dropping performance surpassed the full-2009 figure of 3.8 GW, solidifying the country’s position as the world’s hottest solar energy market. In response to buoyant growth, local manufacturers are dialing up capacities and uplifting sales targets. But analysts sound the alarm that the effect of the recent and upcoming reductions in lavish feed-in tariffs (FiTs) could ease off next year, meaning the end of Germany’s solar boom could be lurking around the corner.

Germany's generous incentives have sparked massive growth for the global solar industry in the past years, accounting for more than half of the EUR 12 billion (USD 17bn) market in 2009, according to Ernst & Young.

BSW-Solar, Germany’s solar industry association, claims that around 50% of the PV production technology used globally originates from German machine and installation producers. In 2009, solar cell manufacturing capacity in the country surged by 15% to 1,850 MW, showed figures by solar magazine Photon International.

However, fearful that fuelling the red-hot market with taxpayers’ money could cause the sector giving job to 60,000 to overheat, Germany’s ruling Coalition came up with a four-phase cutback of support leading up to January 1, 2012. Estimates by BSW-Solar show that the total reduction could reach 50%.

The amendments are aimed at slowing down the expansion of solar installations and reducing the implementation of new installations, which, according to the legislator, have reached excessive dimensions. Already installed capacities got away with the reduction but there will be controlled expansion of the existing capacity of around 9 GW to around 42 GW until 2020. The PV capacity target was set at 65 GW by 2030. The move is expected to slash the costs for electricity from solar installations to an average of EUR 3.4 billion each year.

Retroactively from July 1, 2010, the feed-in tariff was curtailed by 13%, followed up by a further 3% cut as of October 1. On January 1, 2011, there will be a reduction of another up to 13%, and on January 1, 2012 by up to 21%, with the exact amount hinging on the scale of market growth. The faster the market grows, the faster support will be decreased. At the moment, rates range between EUR 0.24 and EUR 0.33 per kWh.

Initially, the Bundestag aimed to axe the feed-in tariff by 11% and 16% as early as July but a mediation committee decided to postpone the move.

While it gave the industry some sort of temporary reprieve, the three-month delay was slammed by BSW-Solar, which described it as a mere “cosmetic measure.” The trade group noted that prices for solar energy systems have already plummeted by 40% since 2006, and there was an average decrease of 13% over the past twelve months alone.

The short-term outlook for the German solar industry is very optimistic though thanks to the cheaper equipment combined with the expected drastic cut in FiTs from January 1, 2011. Different estimates peg the market’s full-year growth at between 6.6 GW and 8 GW. According to IMS Research, Germany accounted for 48% of global demand in the first three quarters of 2010, up from 40% a year earlier, driven by the intense speculation and debate over the country’s feed-in tariff reductions and the subsequent three-step cuts in 2010. “"High demand has been seen from almost every part of the German market and these results up to August solidify our prediction that the German market could reach up to 8 GW in 2010,” said Ash Sharma, PV Research Director at IMS Research.

Bumper demand has already prompted a slew of companies to ramp up capacities. Centrosolar (ETR:C3O) in end-September snipped the curtains off a modernised and automated production line that can crank out 200 MWp of solar modules. The company is now mulling over setting up a second manufacturing facility. Conergy (ETR:CGY) unpackaged plans to pour some EUR 5 million in new solar-cell production capacities at its plant in Frankfurt (Oder). Earlier the same month, Solarwatt AG said it has earmarked EUR 35 million to double its module production capacity to 400 MWp.

Foreign manufacturers are also being lured into the German solar market. US thin-film photovoltaic (PV) modules maker First Solar Inc (NASDAQ:FSLR) in end-September got planning permission for a EUR 170 million, second PV module factory in Frankfurt.

Companies’ books also look set to benefit from robust demand for solar projects. Centrotec (ETR:CEV) earlier this month upgraded its full-year earnings forecast, seeing earnings before interest and tax (EBIT) at EUR 36 million to EUR 37 million, and earnings per share (EPS) of EUR 1.50 to EUR 1.60 in the full 2010. Before that the company projected full-year EBIT of between EUR 30 million and EUR 32 million and EPS from EUR 1.30 to EUR 1.40. This is the second EPS guidance update from an original EUR 1.10 to EUR 1.20.

Q-Cells SE (ETR:QCE) -- Germany's largest cell maker by estimates of Germany Trade & Invest -- also sweetened its 2010 sales outlook, to between EUR 1.2 billion (USD 1.615bn) and EUR 1.3 billion from EUR 1.1 billion to EUR 1.3 billion. Third-quarter sales are projected to outrun the second-quarter performance.

Furthermore, SMA Solar increased its 2010 forecast for the second time this year on the back of the rapid growth in demand, anticipating revenue in the range of EUR 1.7 billion to EUR 1.9 billion, up from the EUR 1.5 billion to EUR 1.8 billion expected in July 2010.

However, the company is less upbeat for its 2011 performance, when it says its revenue will, in the best-case scenario, stagnate in the range between EUR 1.5 billion and EUR 1.9 billion under the weight of an expected market slowdown.

Some analysts also say that slowdown is on the cards for 2011. “With production capacity being massively ramped up, it is very possible that this overcapacity will lead to big falls in prices through the supply chain. This could delay buying, and result in market revenues and margins indeed falling next year,” says Ash Sharma, PV research director at IMS Research.

A number of manufacturers are girding themselves for a decline as soon as this year. German solar technology company Solar Millennium has cut to EUR 30 million from EUR 45 million its earnings before interest and tax (EBIT) target for the fiscal year ending October 31, 2010 after slipping to a loss in the first eight months of the fiscal year.

Systaic AG (ETR:SJK) has lowered its 2010 revenue forecast to between EUR 25 million (USD 31.7m) and EUR 35 million as the execution of several major projects was no longer possible.

Conergy voiced concerns last week that Germany’s solar boom will abate in 2011 as FiT cuts will cause a decline in newly installed capacity in the country to 4 GW per year from the record 7 GW it expects to come onstream in 2010.

The pain from lower government incentives is aggravated by stiffening competition from Asian competitors, who already undercut their European peers' prices between 30% and 40%, according to researchers. Solar magazine Photon last month cautioned that Korean rival Dasstech might leapfrog to the inverter market lead, toppling Germany’s SMA Solar (ETR:S92).

To add insult to the injury, regulatory uncertainty was stoked by analyst warnings that Germany might impose a fixed cap on PV installations within the next year or two. Robin Batchelor, manager of Black Rock’s New Energy Fund, said in end-September that a deeper-than-expected FIT cut or a hard cap by 2012 “cannot be ruled out”. Others, however, have dismissed this possibility after such a move adopted in Spain in 2009 sank the country from prior to ninth place.

(EUR 1.0 = USD 1.387)

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