Feb 12 - International Herald Tribune

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

The solar power industry uses the same silicon raw material as the semiconductor industry 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 down 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 of Norway.

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 of more serious overcapacity is 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 mobile phones, he said. But he also said that some companies had become overvalued.

Thiemo Lang, senior portfolio manager at Sustainable Asset Management, which is based in Zurich, was snapping up solar power stocks, saying the sell-off last month was an opportunity.

He said he expected demand growth to outstrip capacity because of government support. Plus he noted its tiny base, which is at less than 0.1 percent of the world's electricity.

Some governments subsidize low carbon-emitting solar power as one plank in their fight against climate change, fueling a boom, especially in the market leader, Germany.

That has made manufacturers like the Chinese companies Suntech and LDK Solar and SolarWorld of Germany rich.

Growth is led by expanding markets in South Korea and Spain, France, Italy and Greece in Europe, after the introduction of new subsidies there.

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 this 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 Union's executive Commission last month detailed ambitious new national targets for renewable energy which will probably underpin solar subsidies for years to come, even in sunny Mediterranean countries.

But support may not remain as generous as now.

Germany recently revamped its renewable energy law to reduce subsidies from next year.

That could lead to a rise in demand this year as households bring investments forward before the inducements expire.

Spain has recently blazed a solar trail on the back of generous, 25-year guaranteed price premiums paid for electricity from the renewable power source.

But that attracted so much investment in large-scale plants that, under new proposals, Spain will cut price support by a quarter from September. At present rates the country may also hit a 1 gigawatt cap on big installations by then.

So far markets in Italy and France have trailed because of administrative delays, despite generous support on paper.

Solar panel prices must fall if governments are to continue to back the industry, said a Jefferies investment bank analyst, Michael McNamara. "Otherwise you're just financing wealth creation." Governments are worried they may have made premiums too generous, he said.

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

A Reuters poll of four companies showed that the British installers Solar Century and Dulas charged euro 7 to euro 8 per watt, compared with euro 5 by two counterparts in Germany, or more than euro 4,000 more for a small, household unit.

Originally published by Reuters.

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