67 WALL STREET, New York - February 23, 2012 - The Wall Street Transcript has just published its Alternative Energy & Utilities Report offering a timely review of the sector to serious investors and industry executives. This Alternative Energy & Utilities Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Outlook for Biofuels and Biochemicals - Asia Pacific Demand for Solar Energy - Grid Parity Timelines for Alternative Energy - Regulatory Headwinds for U.S. Utilities
Companies include: Gas Natural (EGAS); LDK's (LDK); Power-One (PWER); American DG Energy (ADGE) and many more.
In the following brief excerpt from the Alternative Energy & Utilities Report, interviewees discuss the outlook for the sector and for investors.
Chris Kettenmann has been responsible for the primary work covering renewable energy for Kevin Simpson since joining Miller Tabak + Co., LLC, in 2007. Mr. Kettenmann published an industry review piece on solar and wind in 2008, and in the same year, commenced official coverage on select solar stocks. Currently, he is expanding the firm's energy efficiency coverage list. Mr. Kettenmann has a B.A. in international relations/political science from Carleton College.
TWST: In your last interview with us, you said that the U.S. is the biggest growth driver for solar right now, and financial incentives in the form of tax credits for installation were in place until the end of 2011. How did that play out, and how much of a boost did investors see?
Mr. Kettenmann: You can say that the U.S. market grew about 100% in 2011. A lot of that was back-end loaded in front of the federal cash grant expiration, which was in lieu of the tax credits that still are in place until 2016. So basically, investors lined up to monetize the cash that the government had promised them for the 30% ITC.
A lot of that volume was utility-based, larger-scale deployments in the U.S. Southwest, California, some in the U.S. Southeast, and also ironically, New Jersey happens to be a very growthy market. It was a very growthy market in 2011 because of a production incentive offered at the state level. So I think that our forecast played out. The growth was as expected. Numbers are still being tallied, but I think roughly 2 gigawatts are what people are looking at for what was put in the ground in 2011.
TWST: Where do we go from here? What is the outlook for 2012?
Mr. Kettenmann: With these tax credits still in place, I think there's still a meaningful appetite for solar in the U.S. The cost of solar modules declined about 40% to 50% depending on who you talk to over 2011, so the capex requirement is much less than it was a year ago with the same tax incentive in place.
For large institutional funds, you can point to Warren Buffett's MidAmerican Energy, for example, who can really monetize these tax credits; on a dollar basis, it's almost the same as the cash grant. The utility pipeline in the U.S. is still a very robust multigigawatt. I think we could see another 2 gigawatts installed in 2012. That's a conservative outlook, I would say. With projects, it gets a little tricky to forecast timing on the utility-scale side since weather delays can be an issue in some of the places they're putting these projects in, and in-field execution is always a risk. But I think the growth is still there in the U.S. for 2012 and beyond.
TWST: What are your thoughts at this point about when solar will reach grid parity?
Mr. Kettenmann: I'll start off by saying two years ago, natural gas was more than double where it lies today. Right now, gas is roughly $2.50 per million Btu. Actually, five minutes before I picked up the phone, the consensus for 2013 was just brought down by $1 to $3.99 from $4.93. With cheaper gas, grid is decreasing and the power markets are becoming more and more competitive. With subsidies, many markets in the world, they are already there, however, and a lot of these markets have already begun to ramp. I can point to Italy, who imports LNG from North Africa and who doesn't have a meaningful coal resource. Commercial retail rates there are 21 euro cents, so you've seen a strong push for solar in the last two years in Italy.
In markets like Hawaii and Japan, who again have to import higher liquids fuels for baseload power gen, you can see a steady push toward solar as well. In markets in Asia, where so much of the GDP growth is fueled by low-cost energy consumption, coal being the primary driver there, the push for economic growth has actually driven the price of coal up. In markets like India, energy has actually gotten more expensive, and it's made the bidding process for solar projects a little more economic. The market there is also very fragmented though in terms of the actual utility grid reliability, so solar because of its distributed footprint makes reasonable sense. Also, the off-grid diesel power generation that a lot of markets, like India and places in Southeast Asia, rely on make for good solar comps at current diesel prices.
Solar is already competitive with diesel generation without subsidies, so that's been a strong positive for off-grid demand and a proliferation of demand throughout Southeast Asia. For more mature energy markets like the U.S., I think it's going to take a little more time to get the grid parity, especially with the peaking profile of solar competing directly with natural gas and gas prices haven't pulled in. But we're still very bullish on the broader cost-reduction trends in solar. All companies, thin film and crystalline, have shown incredible strides over the last two years in getting those costs down and not just the module manufacturers. We've actually seen cost reductions throughout the entire value chain where financing, the cost of money, has come down with more mature players coming to the space.
Financing solutions from downstream players and more efficiencies in terms of installation methods have taken cost out of the balance of systems so all the components that go into the module side. Permitting and regulatory costs are also being streamlined as markets mature. So I think you're seeing just the whole industry push toward a more efficient model, and we expect to see cost continue to come out of the delivered energy cost. I think 2015 is a reasonable timeline for competitiveness with grid parity in these more mature markets.
TWST: You expect to see consolidation in solar during 2012. What is consolidation going to look like? What types of deals and maybe possible transactions should investors be keeping an eye out for?
Mr. Kettenmann: We already started to see a little bit of it early in the year. LDK's (LDK) Sunways AG (SWW.DE) acquisition was just approved by German regulators earlier this week. I think that was strategic to take some of their technology as well as market share in what is, right now, kind of a bedrock of the solar industry in Germany. Ultimately, I think the space is waiting for a shakeout in the Chinese names. Back in 2007-2008 there was just a string of Chinese solar IPOs, and since then every one of them has doubled capacity. One of the things pushing cost down is price coming in an oversupplied market.
So I think it's going to be critical for players to keep on being focused on innovation and getting conversion efficiencies higher and people are going to pay up for that. So I think you're going to see some Chinese players buy high-quality technology to keep their efficiency high, and some of the other players fall by the wayside. I think, one, smaller downstream players are going to be acquired, and two, there's going to be a shakeout among the Chinese companies. We also already saw Total S.A. (TOT), oil and gas major, take a majority stake in U.S.-based SunPower (SPWR). I think probably the most speculative but plausible idea is that somebody would have make a bid for First Solar (FSLR), which had a tough 2011, and at the current valuation, given the visibility they have on earnings, seems very attractive.
TWST: You don't believe the current valuations are pricing in what you believe will be a strong second half of the year from increased China and Asia Pacific demand. Please tell us the factors you believe that are going to grow increased demand in China and Asia Pacific.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Alternative Energy & Utilities Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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