Auriga Weighs In On Germany’s Solar Tariff Cuts

Following a press conference in Germany yesterday in which the solar industry and the Environment Minister outlined potential mid year feed-in-tariff cuts, Auriga posted its thoughts which I wanted to highlight for my readers.  The bottom line is that despite Germany’s expected cuts, they remain bullish on the sector and haven’t made any changes to their ratings or estimates.

Worst case tariff decline isn’t likely.  Auriga sees German solar installations this year at around 6GW corresponding to tariff cuts of 6-10%, not the full 15% which some analysts predict.

· Project returns still attractive.  Whether Germany sees a 9% decline or a 15% decline, Auriga believes project IRR in Germany should still approach 6%, which is similar to what it is in the US.

· The tariff cut is built in!.   I agree with Auriga that German cuts have been discussed for many months allowing companies to adjust far ahead of time and that current estimates already account for German cuts that could be lower than anticipated.

· More demand surprises. Auriga notes that the mini solar rush sparked by discussions of cuts many months was completely missed by its bearish competitors and that could continue this year.

· Recent checks confirm moderate 1H11 price declines. Discussions with vendors along with various quarterly reports continue to suggest moderate price declines in 1H11 ahead of the mid-year tariff revision. Companies admit uncertainty about prices in 2H11, but we believe price declines can be framed around the proposed revisions and that $1.40/w is a worst-case scenario for 4Q11. While we wait for company reports and guidance in February and March, we highlight upside potential to our 1H11 estimates considering more moderate price declines; we maintain our 2H11 estimates as reasonable with a worst-case mid-year tariff decline of 15%.

· Next cost leg down suggests 80c/w for 2013 season. The question of potential further cost reduction arises with each tariff decline. Investors were surprised when 3Q10 reports suggested leading cost structures could produce modules at $1/w cost when volume shipments begin in 2H11. We believe the next leg down for all-in module costs leads to 80c/w in 2013 on improvements in polysilicon, casting, and cells, while wafer and module processing improve slightly but still lag the pace in other portions of the manufacturing chain. Renesola’s (SOL, Buy) recent wafer product announcement suggests the beginning of such cost declines.

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