Should Solar Stocks Fear a Weakening European PV Market?

Europe has played a large role in creating demand growth in the global photovoltaics (PV) market through costly feed-in tariff (FIT) programs. But with expensive aid packages for Greece, Portugal, and Ireland and a waning economy, European governments could no longer sink millions into the solar (NYSE:TAN) industry. Even supporter Germany cancelled mid-year incentive tariff reductions just as the PV market was strengthening.

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The FIT program allowed the PV industry to rapidly expand, but now a downturn in major European markets has left module shipments well in excess of demand. So production has slowed while manufacturers try to simulate growth by lowering the cost of crystalline silicon modules to €0.75-1.00/W, a record low.

In 2010, the market grew 169% thanks to Germany, Italy, and the Czech Republic, which combined represented 89% of European demand. While Italy’s market share is expected to rise from 32% in 2010 to 39% in 2015, making it the largest market in Europe, the combined share of Italy and Germany is forecast to fall from 80% to 71% by 2015.

Last year the Italian market managed to grow despite the price of installed systems being 33% higher than that in Germany. It was the generous level of incentive tariff rates and room for future tariff reductions that allowed the Italian market to grow despite higher prices.

But incentive tariffs for residential systems are expected to fall by at least 17% over the next 18 months, commercial roof-mounted systems of 100 kW are expected to fall by 23% over that same time period, and ground-mounted 1 MW installations are expected to decline by 34%. While residential tariffs in Greece and the U.K. are expected to decline only slightly, tariffs for large-ground mounted systems in Belgium, Spain, and France are expected to fall to their lowest levels ever. In the next five years, the residential segment in Europe is supposed to double its share while investor groups’ share is expected to halve. But commercial customers will remain the dominant market segment.

Prices for crystalline silicon modules have also been falling in China, down 20% to €1.28/W after a slight upturn in pricing in late 2010. European and Japanese prices, on the other hand, began their decline in July 2010, when Chinese prices were still rising, and have continued to fall since.

So with tightening PV incentive policies in Europe, many companies are now facing over-valued inventories and weaker sales. Business models are being re-assessed with focuses on channel positioning, geographical diversification, acquisitions, and a focus on higher product quality. But before the PV industry can become self-sustaining, it will have to improve electricity storage and smart-metering technology, which will be costly, in order to remove risks to grid stability posed by large PV systems.

Solar Stocks to Watch: Suntech (NYSE:STP), JA Solar (NASDAQ:JASO), First Solar (NASDAQ:FSLR), Yingli Green Energy Holdings (NYSE:YGE), Trina Solar (NYSE:TSL), Canadian Solar (NASDAQ:CSIQ), BP Solar (NYSE:BP), SunPower Corp. (NASDAQ:SPWRA), Evergreen Solar (NASDAQ:ESLR), and Kyocera (NYSE:KYO).