U.S. Stimulus Bill: Renewables Implications

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Commentary by Barclay’s Capital Solar Energy Equity Research Analyst Vishal Shah. 
 
Although the House version of stimulus package has no specific details on solar, potential for incremental solar demand generation from several clean energy programs highlighted in the package is significant, in our opinion, and somewhat better than our expectations of 2GW incremental solar demand over 2 years.      
 
Summary
 
·          We believe the federal solar procurement program is likely embedded within $6.9 billion state/local government grants for renewable infrastructure projects. Additionally, we believe the $8 billion loan guarantee program has the potential to support $80 billion of renewable projects resulting in incremental 2GW solar PV demand by our estimates.
·          We expect the senate to propose a similar version of the stimulus package over the next week . The combined bill is expected to be sent to President-elect Obama by mid-February.
·          In general, the tax portion of stimulus bill is better than our expectations and could act as a potential positive catalyst for the renewables tax equity market. The stimulus bill includes provisions for extension of production tax credit (for wind, set to expire ’09), temporary conversion of PTC to ITC and tax incentives for businesses to invest in renewable energy projects.
·          Stock implications: Our current forecasts for the US market call for 475MW shipments in 2009 and 900MW shipments in 2010 – both these estimates have room for potential upside if the Obama plan is successful in creating incremental solar demand. We believe downside risk exists to 2009 shipment projections of a number of solar companies. However, assuming credit markets improve and US demand accelerates, we believe select solar stocks have room for further potential upside as stocks are currently trading between 5x and 10x conservative 2010 estimates (30% ASP decline in 2010 ~$1.80/W ASP). In our view, greater than expected demand in the US has the potential to positively impact SunPower, First Solar and low cost Chinese players.
 
$54 billion renewables package in stimulus bill – better than our expectations
Although light on details for solar specific programs, the overall package appears better than our expectations. First, the headline $54 billion number is better than the $25 billion reported by Sunday’s Washington Post article (Stimulus Bill May Include Energy Measures, 1/11/09). Second, we note that the package has elements that have multiplier effect on overall funding/renewable demand generation. For instance, the stimulus bill provides $8 billion for renewable loan guarantees that could support $80 billion worth of projects. Key elements of the package that could potentially result in incremental solar demand include:
 
·          $7 billion funding to increase energy efficiency in federal buildings – specifically, $6 billion focused on projects such as integrated solar roof, lighting systems, etc.
·          $8 billion loan guarantee program (see next section for further details).
·          $3.5 billion state/local government grants for energy efficiency and conservation. Funds are expected to be used for a wide range of renewable projects which also include onsite renewable energy generation projects.
·          $3.4 billion to fund renewable energy projects of state energy offices (we believe solar procurement program could be included in this portion of the bill).
·          $1 billion grants to institutions to implement sustainable energy infrastructure projects.
·          $500 million loan guarantees estimated to support $5 billion loans to implement sustainable energy infrastructure projects. 
 
Loan guarantee program to support $80 billion of renewables projects
The stimulus bill contains a new loan guarantee program which is a much bigger and better version of the current program, whereby $8 billion of funds are apportioned eliminating the requirement for the companies to pay any credit subsidy fee (which is the net present value of the likelihood of default). Our checks suggest that the current $10 billion loan guarantee program (which expires in Feb ’09) is self-funded where the companies are required to pay a credit subsidy fee. The current program is also designed only to promote near commercial technologies whereas the new $8 billion program includes all proven renewable technologies. In our view, the new program is designed to essentially reduce the cost of capital and also significantly improve the availability of capital.
 
Estimating the potential solar PV impact from $8 billion loan guarantee program:
Assuming 50% of the $80 billion loans are for renewable generation (remainder for transmission) and wind/solar receive 80% of the renewable generation investments, we estimate ~2GW solar PV capacity buying power (see chart below).

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