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Ardour Capital's 2009 Year-in-review, 2010 Look-ahead

Financial analysts look to the year past and the year ahead reporting on trends in the solar, wind, biofuel, energy storage and efficiency and geothermal sectors. They analyze the U.S. legislative landscape as well.

Solar: US & China.  Analysis provided by Adam Krop, Senior U.S. and Asia Solar Analyst

The Ardour Solar Index (SOLRX) was up 12.1% YTD in December (as of 12/29/09), compared to a 45.1% gain by the NASDAQ Composite. We attribute the weak relative performance of the SOLRX to disappointing margin and earnings results among the large western module manufacturers. In 2009, the solar PV market experienced a year-over-year decline in growth for the first time in the decade due to a dramatic subsidy cut in Spain. We look for Spain’s 2009 installations to fall 92% year-over-year from 2.46GW in 2008. In contrast, most other solar markets continued to grow despite the weak project financing environment and low natural gas prices.

The sudden reduction in Spain’s subsidies resulted in a module oversupply in 1H09 which put significant downward pressure on ASPs. The China-based module manufacturers used cheaper polysilicon prices to launch an aggressive price war and take European market share. Lower ASPs supported sales volumes in the industry, but hurt margins of most western module manufacturers.

In 2010, we look for the US to install close to 1GW of PV modules and become the world’s second largest solar market. The Treasury Department grants program is now fully operational, after months of uncertainty, and we look for it to have a positive impact on commercial installations. Solar stock prices may be impacted by the outcome of a US climate bill in the spring, but we do not see it significantly impacting 2010 installation levels.

We look for China to be another key geographic market for industry growth in 2010. Installations levels will likely be affected by any announcement regarding a feed-in tariff for ground-based systems, which we expect sometime in 2010. Both the U.S. and China are betting on utility-scale systems as key growth drivers in their market. In 2010, we expect a small number of systems in excess of 100MW will begin construction and be completed in 2011 and 2012.

Solar: Europe. Analysis provided by Ellis Acklin, Senior European Solar Analyst

We look for the 2009 dislocation in the solar market to dissipate somewhat in 1H10. Demand in 2009 was severely gated by tight financing especially for large projects; contributing to a collapse in panel pricing of up to 40% in key European markets. Demand exploded in Germany as solar operators fled the capped Spanish market. We estimate installed capacity in the German market exceeded 2.5GW in 2009.

We look for Germany to remain the focal point of global solar players this year. We expect a change to the German feed-in tariff in July to realign the subsidy with system pricing dynamics. The German Solar Association, BSW, (Bundesverband Solarwirtschaft) is proposing a special 4.5% cut on July 1, although the magnitude of a potential revision remains unknown. The expected mid-year cut will cause a strong German pull-forward effect in 1H10.

We believe Germany could breach 3.1GW of generating capacity installed in 2010, driven by the robust rooftop segment — approximately 70% of the overall domestic market. At the same time, we expect a strong pull-forward scenario in Italy ahead of FIT reductions slated for the end of CY10. Italy harbours the potential of installing up to 1GW in 2010.

Given our expectations for the aforementioned pull effects in 1H10, our prevailing 2010 ASP assumption for Asian Tier I panels in Europe remains €1.30/W with varying premiums for German panels. This premium will likely shrink throughout 2010 for many Western producers as Asian panels close the quality gap particularly for ground mounted installations. In our view, the European pull market scenarios in 1H10 will boost operating margins for German OEMs and relieve pressure on stressed balance sheets.

Wind. Analysis provided by Scott McCollister, Senior Wind Analyst

2009 proved to be an interesting year for the wind turbine sector. On the one hand operations were largely insulated from the recession as turbine manufactures entering the year with relatively full order backlogs. With those backlogs, the turbine producers were able to deliver strong results throughout the year. On the other hand, the contraction in lending led to a dramatic decrease in new orders. The book to bill ratio for many of the turbine producers we have under coverage was well below 1. At the end of 3Q09, Vestas’ book to bill ratio was only 0.62.

Positive 2009 legislation in the U.S. and China should act to ensure development going forward. The ITC cash grant system in the U.S. is proving to be a viable replacement to the PTC which lost its effectiveness as the tax equity markets evaporated. In China, the government implemented a feed-in tariff for wind turbines as well as ensuring that electricity produced from renewable sources has priority access to the grid.

2009 ended with the year’s largest renewable energy company IPO. China Longyuan Power Group Corp brought in $2.3b to repay bank loans, finance its new production facilities and upgrade existing facilities. The company is among the largest wind farm operators with over 3,000 MW of installed capacity. The IPO was oversubscribed, as investors showed a keen interest to take part in the fast growing Chinese wind market.

Project financing is likely to remain meager over the first half of 2010, delaying projects in the U.S. and Europe. We expect this to negatively impact downstream demand and a looming equipment over-capacity could result in an unfavorable pricing environment. Results though the first part of 2010 are likely to come under pressure.

Visibility into the year remains poor and market leader Vestas’ 2010 guidance points to a possible contraction in sales. With the world’s economies appearing to have put the worst behind them, we will continue to monitor order intake to gauge the pace of recovery. In the mean time we maintain a cautious stance and prefer the wind farm owner/operators. We are attracted to them due to their stable business models and the lack of volatility in their stock prices compared to the wind turbine producers.

Energy Storage and Efficiency. Analysis provided by Walter Nasdeo, Director of Research and Senior Energy Storage and Efficiency Analyst

2009 was the year of stimulus for energy storage and smart grid companies. As part of its efforts to boost the economy, the U.S. government made $2.4b available for advanced battery and electric vehicle component manufacturing and made $4b available to spur the development of a US smart grid. In August, battery grant award recipients were named with the biggest winners being Johnson Controls which will receive $299.2m, A123 Systems which  will  receive  $249.1m  and LG Chem subsidiary Compact  Power, which will receive $151.4m. All recipients are required to match the amount of their award, creating a $4.8b investment. The ultimate goal of the program is to expand the U.S. advanced battery industry with an emphasis on lithium-ion battery production for vehicle electrification. Currently, the world relies on Asian manufacturers for lithium ion batteries. However, with more auto OEMs planning to scale up production of HEVs, PHEVs and EVs, the demand will increase for lithium ion battery packs.

Smart grid stimulus actually created an anti-stimulus effect for most of 2009 as applicants put projects on hold, waiting word on whether they would receive money. Smart grid equipment companies felt the impact of softer spending. Thus, 2009 was a wait and see year for most of the industry with an eye toward stronger growth in the coming years. In October and November, recipients of the $4b stimulus were announced for both smart grid deployment and developmental projects. After matching funds from recipients, the final investment will total $9.7b over the next 3 years.

Now that stimulus awards are announced, we look to 2010 to get an indication of what the future will be for both smart grid and energy storage companies. Smart grid stimulus dollars should start flowing to recipients in the first half of 2010 and make its way down to vendors in the second half of 2010 as projects begin deployment. Thus, we look for the latter part of 2010 to be the ramp up into a robust 2011 market for the smart grid sector.

As for energy storage players, while lithium ion is receiving stimulus, we look for lead acid to still be the preferred technology for large scale applications for the foreseeable future. We believe that the $2.4b stimulus is an important step toward launching a US lithium-ion battery industry which has been largely non-existent. In addition, the 2009 IPO of lithium-ion battery maker A123 Systems has stirred significant interest in larger scale lithium ion applications. However, we look for the cheap and reliable lead-acid battery to be the mainstay of industrial battery applications. To those ends, we expect lead acid sales to see recovery in 2010 thanks to improving economic conditions and stronger trends in the automotive markets, primarily for replacement batteries.

Biofuels. Analysis provided by JinMing Liu, PhD, Senior Bioenergy Analyst

The past year marked fundamental changes in the biofuel space. Pure-play corn ethanol producers were challenged, allowing major oil companies to acquire distressed corn ethanol assets, a trend that we believe will continue into 2010. Major oil companies have also shown interest in advanced biofuels evidenced by their participation in multiple joint development programs for cellulosic ethanol, algae, and other forms of biomass fuels. Advanced biofuels has also received strong support from the US government. 

The U.S. EPA is considering lifting the ethanol blending wall from 10% to 15%, an important intermediate step to accommodate the future increase in biofuels production. The DOE and USDA awarded $564m to 19 advanced biorefinery projects. Moreover, part of the $100m ARPA-E funding will be used to accelerate innovations in liquid transportation fuels — namely electrofuels, which directly converts CO2 with the aid of solar energy into liquid fuels without the involvement of biomass or petroleum.

Algae started to be a hot topic in the biofuels space in 2009, highlighted by ExxonMobil’s $600m investment. The main selling point for algae is its potential for producing high oil yields while avoiding “food vs. fuel” issues. We are encouraged by the positive movement in algae biofuels and expect more investments in the technology  in 2010. However, many myths about algae need to be dispelled and any meaningful production of algae biofuels is still many years away.

Geothermal. Analysis provided by Meghan Moreland, Senior Geothermal, Fuel Cell and Superconductor Analyst

2009 was a positive year for the U.S. geothermal sector from a legislative perspective, but the sector remained challenged by toughened financing conditions.

Positive legislative developments included $350m in ARRA funding to develop and demonstrate geothermal technologies (announced in May), followed by the DOE awarding $338m of ARRA funds to support 123 projects concentrated primarily on innovative exploration and drilling techniques (announced in October). The game-changer, in our opinion, was the allowance of ITC cash grants for geothermal projects, with application acceptance beginning in August.

Nevada Geothermal Power was the first developer approved to monetize the ITC and it received ~$58.0m in November, approximately 1/3 of the cost to develop its 49.5MW Faulkner project. Other developers can also qualify for ITC cash grants, as long as their project begins construction by the end of 2010 and goes on line by the end of 2013.

Market activity was slow over the first half of 2009 but picked up in the second half. New market entrant Magma Energy completed its IPO in July 2009, raising ~$100m amid significant fanfare. The IPO created momentum for the whole sector, and was followed by the consolidation of four geothermal developers in October 2009 to form Ram Power Corp.  

In spite of these positive developments, access to project financing was poor over the year, delaying pipeline expansion. Larger developers, like Ormat Technologies (ORA/NYSE-HOLD), have had continued access to project financing, however the smaller players were forced to either issue new shares or place shovel-ready projects on the backburner.   

Project financing for mid to small-sized developers is likely to remain meager over the first half of 2010, delaying project realization. We expect this, in turn, to negatively impact downstream demand, particularly for geothermal power plants.

Additional grant and loan guarantee announcements should act as a positive catalyst to the sector and begin improving access to financing. Ormat is likely to be the next to receive an ITC cash grant, for its North Brawley project, scheduled to come online by the end of 2009. We also expect some DOE loan guarantee announcements in the New Year, very likely beginning with U.S. Geothermal for its Neal Hot Springs project.

Looking at technology trends, we expect heightened focus on coproduction and decreased interest in enhanced geothermal systems (EGS). Coproduction utilizes the significant amount of hot water produced by many oil and gas wells and turns it into electricity using binary technology. Approximately 40b barrels of hot water are  produced  as a  by-product of  functioning  oil and  gas  wells in the U.S. each year, and could add between 3,000 MW to 14,000 MW to the U.S. geothermal power supply (currently ~3,000 MW). 

As for EGS, negative news flow surrounding projects in Switzerland, Australia and California will likely dampen enthusiasm for the technology over coming quarters. EGS remains largely unproven, faces significant NIMBY (not in my backyard) hurdles, and requires technological advancements in both drilling and rock fracturing to become a viable alternative to conventional geothermal, which taps naturally occurring reservoirs.

Legislation. Analysis provided by Robert Lahey, Senior Legislative Analyst

We believe the U.S. will not pass cap and trade in 2010 due to concerns by Democrats over midterm election losses. The Senate had a narrow window to pass a climate bill in the fall of 2009; that opportunity has now passed. Senators Kerry and Boxer aim to have a bill ready by March, but it is nearly 20 votes short of the 60 required for passage. The Democratic holdouts include Senators: Baucus (MT), Bayh (IN), Begich (AK), Brown (OH), Byrd (WV), Cantwell (WA), Conrad (ND), Dorgan (ND), Levin (MI), Landrieu (LA), Lincoln (AR), McCaskill (MO), Nelson (NE) Pryor (AK), Rockefeller (WV), Specter (PA), Stabenow (MI), Tester (MT), and Webb (VA). Those Senators represent states where Democrats are vulnerable in the midterm elections. Current polls and the November 2009 election results indicate that voters are far more concerned with the 10% unemployment rate than they are with global warming. 

A viable “plan B” has yet to emerge, but there are several possibilities to expand current subsidies for cleantech. First, we expect a jobs bill to be passed in 1Q10 that is likely to include several billion dollars in tax credits to cover 30% of the capex of renewable energy manufacturing facilities in the U.S. Second, we look for a climate bill to be presented in the Senate. If cap and trade is cut, the remaining provisions including a federal Renewable Portfolio Standard (RPS) and increased authority for an interstate smartgrid infrastructure may still have a chance of being signed into law. We note that the Federal RPS targets will likely be below most existing state programs in order to get the support of 60 Senators. Still, even a weak national RPS would pressure the 31 states without one, and benefit commercially viable renewable electricity project developers and power producers.

Founded in 2002, Ardour Capital is the leading research and investment-banking firm exclusively focused on energy technology, alternative energy and power, and clean & renewable technologies. Ardour Capital publishes in-depth company coverage and industry specific research. Ardour Capital offers private and public companies a full range of corporate finance, investment banking and capital market services. Ardour Global Indexes is a family of pure play alternative energy indexes that is the primary measure of cleantech equity performance.

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