Feb 13 - International Herald Tribune

Prospects for the solar power sector are puzzling investors juggling on the one hand a possible dot-com-style bust and on the other fresh support in Europe, home to one-third of the world's market.

The solar power industry uses the same raw material as the semiconductor industry, silicon, and may share a similar boom-bust path, according to some analysts. The semiconductor industry collapsed in 2000 amid a dot-com bust that pulled demand for electronic chips.

Solar companies saw their share prices skyrocket last year, but many endured a steep fall in January, halving in the case of one market leader, Renewable Energy, which is based in Oslo.

Such falls reflected a view that solar power valuations had run ahead of themselves. High profits plus low barriers to entry have attracted new manufacturers from China, and the prospect that more serious overcapacity looms is now dividing opinions.

"Alternative energy and solar energy are a very compelling growth opportunity, and that's going to be a multidecade phenomenon," said Gunnar Miller, global co-head of research at Allianz Global Investors. "It's going to be something on a par with volume growth of flat panel screens, PCs and handy phones."

Miller said some companies had become overvalued.

Thiemo Lang, senior portfolio manager at Sustainable Asset Management, has been snapping up solar power stocks on the ground that last month's falls were an opportunity.

He said he expected demand growth to outstrip capacity because of government support plus its tiny base, now at less than one-tenth of 1 percent of the world's electricity.

Governments subsidize solar power as one plank in their fight against climate change, fueling a boom, especially in Germany, the world's largest solar market.

That has enriched manufacturers like Suntech and LDK Solar in China and SolarWorld in Germany.

Growth is now led by markets like South Korea, Spain, France, Italy and Greece after the introduction of new subsidies.

These new markets are too small to swallow up prospective new capacity, especially given a possible consumer downturn, said one analyst, who predicted a solar silicon glut by the end of the year, followed by consolidation before a move to mass production.

"We don't own any solar stocks - we were cautious on valuations," said Bruce Jenkyn-Jones at Investors Impax. "People realize the margin they're making is not sustainable."

The European Commission, the executive arm of the European Union, detailed ambitious new national targets for renewable energy last month that will probably underpin solar subsidies for years to come in sunny Mediterranean countries.

But support may not remain as generous as now.

Germany recently revamped its renewable energy law to reduce subsidies starting next year, and that step could lead to a rise in demand this year as households bring investments forward before premiums fall.

Spain has offered generous, 25-year guaranteed price premiums paid for electricity produced from the sun. But that program attracted so much investment in large-scale plants that under new proposals, Spain will cut price support by a quarter starting in September.

Markets in Italy and France have trailed on administrative delays, despite generous support on paper.

Solar panel prices must fall if governments are to continue to back the industry, said Michael McNamara, an analyst with the investment bank Jefferies. "Otherwise," he said, "you're just financing wealth creation." He also said governments were worried that they might have made premiums too generous.

Installations are far more expensive in the United States and Britain than in Germany, illustrating the immaturity of the industry, he added.

Originally published by Reuters.

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