Solar stocks have had a nice bounce this week after Japan unveiled its new pricing structure for solar installations. The $0.53 feed-in tariff rate is so generous, that estimates are that Japan could triple solar installations this year. If the boom of installations in the Czech Republic and Spain were any indication, I think the growth could be tremendous. The problem is that booms in those countries were quickly followed by busts, and the solar market never built a sustainable base.
Four giant markets emerge
Japan can now count itself as one of the major solar markets in the world after the recent announcement. In three of the four, growth is expected to be extremely strong this year, a good sign for the industry.
| 2011 Installations | 2012 Estimates | Growth | |
|---|---|---|---|
| Germany | 7.5 GW | 6.5 GW | -13% |
| U.S. | 1.9 GW | 3.3 GW | 74% |
| China | 1.8 GW | 3 GW to 5 GW | 67% to 178% |
| Japan | 1 GW | 3.2 GW | 220% |
| Worldwide | 26.5 GW | 29.9 GW | 12.8% |
Source: Greentech Media and Bloomberg New Energy Finance
Each of these markets are very different, and investors should understand who will win in each. Below, I’ve outlined my take on each of these markets.
Germany
For years, Germany has dragged the solar industry forward and, for years, there have been concerns that solar power has grown so big in Germany that it couldn’t handle the growth. Cuts to the feed-in tariff have been followed by more cuts, but still the industry grows. Currently, feed-in rates are below the average rate for power, and the market may be reaching a sustainable pace.
A recent report from GTM Research says that it now costs just $2.24 per watt to install solar in Germany, on average. Rooftop installations account for 72%, and that could be compared to $5.89 per watt to install residential solar in the U.S., a remarkable difference.
Since rooftop installations are so inexpensive, and overcast skies are common, it stands to reason that First Solar (Nasdaq: FSLR) has seen higher than expected demand there. Thin-film performs better in German conditions and, if it can survive, this would be one of the best locations.
The United States
The U.S. market is really a number of markets put together. On high-value land in southern California, high efficiency modules from SunPower (Nasdaq: SPWR) are the way to go. First Solar is building giant utility scale projects at very low costs in the U.S,. so there’s a place in the market for them. And let’s not forget about Chinese suppliers who offer costs approaching First Solar and a higher efficiency product.
If any country had a mish-mash of opportunities, it would be the U.S. No single company will dominate sales here, so overall growth is good for everyone.
China
The Chinese market has yet to take full shape, but the driver behind its growth is two-fold. First, China needs energy, and takes the security of its energy supply very seriously. That’s why solar makes a lot of sense, because it can supply secure energy and add to the plants that are already being built.
Second, a growing market for domestic solar will help support manufacturing in China. Suntech Power (NYSE: STP), Yingli Green Energy (NYSE: YGE), and Trina Solar (NYSE: TSL) have emerged as global powers, but supply has outpaced demand. China is hoping to pick up some of the slack for these manufacturers with domestic demand.
Japan
This island country is defined by one thing when it comes to land: high cost. There aren’t sprawling deserts like there are in the southwestern U.S., so efficiency will be a premium for Japanese installers. Local brands will also be important, so Sharp and Mitsubishi Electric will have a leg up on the competition at first.
Low-efficiency modules will definitely have a tough time competing, but it’s unclear right now if companies like SunPower and Canadian Solar will be able to take market share easily. If Japan grows as expected, I think there will be plenty of sales to go around.
Foolish bottom line
Solar is no longer a one-trick pony, relying on Germany for demand. Four major sources of demand have emerged this year, and India and Saudi Arabia may be the next to emerge, as well. If these countries perform as expected, or better, I think some manufacturers have a fighting chance to return to profitability near the end of this year. If that’s the case, solar stocks may finally see their losing days turn around.
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