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By Vishal Shah, Barclays Capital Solar Energy

Investment Conclusion

Yesterday's Senate version of the stimulus package included a new grant plan that would enable renewable energy producers to claim a 30% cash grant from the U.S Treasury Dept. in lieu of the 30% investment tax credit. This proposal, aimed at addressing the challenging conditions in the tax equity market, is a significant positive, in our view, as investor expectations were very low for any inclusion of refundable ITC in the Senate package. Since the House version of stimulus package also includes a 30% grant by the DOE, we believe the probability that some version of refundable ITC could likely get passed by the Congress is high. Our analysis presented in the note suggests that potential solar PV opportunity resulting from the inclusion of refundable ITC and government loan guarantee program could be as large as 5.5-7.5GW over 3 years, with majority of the growth likely to occur in 2010 and 2011. In our view, companies with large US market exposure and especially addressing the large scale commercial/utility markets (SPWR, FSLR) are likely to be the primary beneficiaries of the stimulus package. Report published with permission of Barclay's Capital Solar Energy.

- Two major proposals to solve the renewables financing problem: Both the House and Senate have made proposals to address the financing challenges impacting solar PV and renewable projects in the U.S. Solar projects need debt (~30%-40%) and equity (~60%-70%). The debt

markets are frozen and equity investors such as banks and insurance companies have limited appetite to take advantage of the 30% investment tax credit. In order to address the debt issue, a proposal for government loan guarantee program has been made that could potentially reduce the cost of capital and increase the availability of capital. In order to address the tax equity issue, both the House and Senate have proposed some version of refundable ITC. We estimate that if both these proposals are approved, incremental solar PV demand in the U.S through 2011 could be as large as 5.5GW to 7.5GW. We see 4.4GW of commercial solar PV demand and 1.1GW of solar PV utility demand in the base case scenario and additional 1.5GW demand from federal solar roof-top program, 500MW utility demand from Federal RPS in the upside scenario. Even if the commercial solar PV opportunity turns out to be 50% below our estimate, the US solar market could still grow between 3.5GW and 5.5GW through 2011."

- Commercial Solar Opportunity: In our view, commercial solar projects can generate IRRs in excess of 10% (assuming refundable ITC, $4/W system ASPs) in 9 states in 2010 and IRRs between 5% and 10% in 6 additional states. In 2011, we expect commercial solar projects to generate competitive IRRs in 5 additional states (assuming $3.50/W system ASPs). Assuming 0.5% solar energy penetration in these states, total incremental solar PV opportunity over the next 3 years could be as large as 4.4GW or 10x the size of current annual installations in the U.S and almost comparable to the size of the global solar market. Our analysis does not include potentially lower cost of capital resulting from the loan guarantee program. We believe the $8 billion loan guarantee program proposed by the House has the potential to support nearly $80 billion worth of projects and can facilitate low cost financing for the 4.4GW worth of commercial solar projects through 2011.

- Utility Solar Opportunity: According to SEPA, approximately 1.5GW worth of solar PV projects were in various stages of contract cycle (announced contracts, RFPs, proposals) as of September 2008. Additionally, during the recent earnings call, SunPower management highlighted that their pipeline of opportunity in the US utility market is nearly 1GW. Assuming additional 1.5GW worth of utility contracts were being discussed in 2008 and not included by SEPA, we believe approximately 3GW of utility scale solar PV are likely in various stages of negotiation. We assume that roughly 40% of these projects are completed by 2011 timeframe resulting in incremental 1.1GW of demand. 

- Federal Solar Rooftop Program and Federal RPS - Potential Sources of Upside: President Obama has proposed a Federal RPS program mandating all states to generate up to 10% of electricity from renewables by 2012 and 25% by 2025. Assuming 500MW incremental demand from Federal RPS program and 1.5GW incremental demand from Federal rooftop program - we see up to 2GW of incremental upside over the next 3 years.

- Cost to the taxpayer: We estimate the cost to the government in the 5.5GW to 7.5GW demand scenario to range between $5 and $7 billion (assuming 30% debt ratio in projects, loan guarantee program and 30% refundable ITC for 70% of the equity portion)

- With respect to 2009 demand impact, taking SunPower's guidance ($2B assuming financing improves, $1.6B assuming financing does not improve) and assuming $5/W system ASPs, we believe potential demand upside from refundable ITC could be nearly 85MW for SunPower, 80MW for First Solar and 100MW for other solar PV companies.