Analyst’s report: How will the FiT cut affect Germany’s PV market?

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Since the recent announcement of Germany’s FiT cuts, sector analysts have begun speculating on what the impact of this will be on the solar PV market. Vishal Shah of Barclays Capital Solar Energy reports that this could likely affect both volume and pricing trends in the German market, yet not necessarily in a negative way.

“We believe the current announcement is better than street expectations for several reasons.”

1) There will be no change to free-field subsidies until July. “With free-field installations accounting for roughly 30% of German demand, this proposal only impacts 70% of German demand in Q2 (vs. prior expectations of impact on 100% Q2 demand).”

Barclays also expects some of the Q2 weakness to be offset by demand from other markets such as Italy, France, Canada and the U.S. The positive aspect of Q2 free-field installations, since planning/permitting takes 4-6 months, is that most new projects can start now and expect to complete construction by July.

2) Subsidy changes in 2011 are less severe than previously anticipated.

3) Prospects of additional subsidy cuts from 2011 could likely lead to reacceleration of demand from 2H10.

In terms of IRRs, Barclays is currently modeling unlevered IRRs of 7.2% and 12.4% in the free-field and rooftop segments respectively. The analyst expects IRRs to decline to 6.2% and 10.2% in the new scenario (assuming pricing assumptions of US$1.75/W in Q2, US$1.65/W in Q3). At US$1.50/W module prices, they expect Q3 IRRs in the free-field segment to reach 6.7%.

Finally, assuming 2.5%/5% additional subsidy cuts in 2011, Barclays expects IRRs to decrease to 5%/4.7% respectively in the free-field segment (assuming US$1.50/W ASPs). “Within the rooftop segment, we expect unlevered IRRs to decrease from 12.4% in Q1 to 10.2% in Q2 (assuming current street models/pricing assumptions of $1.75/W). At $1.50/W module prices, we model Q2 IRRs in the rooftop segment of 11.8%. Finally, we expect 2011 IRRs to decrease to 9.7% and 9.3% assuming 2.5% and 5% additional subsidy cuts at $1.50/W ASPs.”

When speaking about supply and demand Barclays no longer expects a rooftop rush in Q2 and since free-field installations require 4-6 month lead times, it sees limited upside in this segment. “We expect a pause of new capacity additions by Chinese solar manufacturers (positive, in our view) and expect a faster reduction of uneconomic capacity in Europe, Japan and other parts of the world.”

Barclays also estimates that poly, cell, and panel pricing will be affected by the FiT cuts. “Panel prices could potentially decline to ~$1.50/W (vs. our prior expectation of ~$1.75/W) in order to reflect the reduction in rooftop subsidies from April. Cell pricing is likely to decline less meaningfully (perhaps $1.15/W) whereas poly prices could correct to ~$45/kg (vs. $50-$55/kg levels currently) in order to adjust to the new subsidies.”

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