December 15, 2008 ndash; We recently had the opportunity to ask Darryl Nakamoto, CFO of Hoku Scientific some questions about what he is seeing in the solar sector:

Aspire: What surprised you about the solar markets in 2008? Were there any significant developments (political, technological, consumer-driven and/or industry-driven) that occurred which you werenrsquo;t anticipating?

Nakamoto: We were pleasantly surprised by the extension of the Federal Renewable Energy ITC. We did not foresee its inclusion in the legislation aimed at stabilizing the credit markets.
In our local market, we were also very pleased by the progress represented by the Hawaii Clean Energy Initiative, which lays out a specific plan of action for the broad and rapid deployment of renewable technology throughout the state.nbsp;

Aspire: Solar/PV energy costs between 21 and 38 cents per kWh to produce. We are still a ways off from reaching grid parity. When do you think that happens?

And do you think this will be the key inflection point that will need to be reached to see solar production and consumption become a more significant part of the U.S. (and global) energy pie? What are other key factors?nbsp;nbsp;

Nakamoto: By virtue of geography, Hoku Solar, our PV integration and installation business in Hawaii, is already operating in a near-grid-parity environment. (Grid electricity costs in Hawaii range from $0.20 per kWh to more than $0.40 per kWh in some areas.) This effective price parity certainly helps drive demand, but from our perspective, it seems that prices must still continue to come down before the PV market reaches a true inflection point.nbsp;For example, even with high electricity prices in Hawaii, we find that the market still requires government intervention to drive growth in PV consumption. Both State and Federal tax credits continue to provide a meaningful incentive for individuals and corporations to invest directly in their own PV systems.

However, it is also worth mentioning that the tax credits do not seem to have inspired a corresponding amount of third-party investment into PV generation capacity. Based on the results achieved in other markets, it seems that a feed-in tariff may create the most favorable conditions for PV investment financing. To this end, we are again encouraged by the Hawaii Clean Energy Initiative, which includes a provision for a clean energy feed-in tariff.nbsp;

Aspire: Conventional views in the industry expect polysilicon prices to plunge this next year with all of the new production coming online which will help supplies double while demand is only expected to increase about 30% to 40%. As a result, manufacturers of poly will see margins erode. Meanwhile, expectations are also for module oversupply to create ASP erosion in the midstream channel. At some point, shouldnrsquo;t all of this price erosion ultimately benefit the end consumer and stimulate demand? From a manufacturerrsquo;s perspective, what is your outlook on this dynamic, and what measures can you (and other manufacturers) take to adjust and protect your margins? Do efficiencies created by newer technologies at the poly plant level help compensate for erosion in poly prices?nbsp;nbsp;

Nakamoto: We anticipate prolonged and extensive downward pressure on pricing (and margins) throughout the PV value chain. Notwithstanding current market externalities, the falling prices should eventually help stimulate market demand. And, considering the heavily fragmented nature of the solar manufacturing marketplace, this pressure could also create a compelling case for consolidation and vertical integration throughout the industry. nbsp;In any case, we believe that companies who have good controls and stabilized COGS will succeed in passing cost efficiencies along to their customers while still maintaining healthy margins.

The recent volatility in polysilicon pricing poses a severe challenge to producers whose businesses were focused on spot market sales. This, in turn, could cause some new market entrants to delay initial production and create a situation where much of the planned new capacity is unlikely to come online when promised, if at all.nbsp;nbsp;

Aspire: Some industry experts and analysts have lowered their expectations for solar growth in 2009 based on lower demand as a result of less government support in Europe. How big of an impact do you think that will have on overall growth, and to what extent do you think renewed support in Japan, as well as increasing legislative support in the U.S. will offset the situation in Europe?nbsp;nbsp;

Nakamoto: We believe demand in the U.S. remains relatively untapped, and are optimistic that continued emerging domestic demand will offset potential reductions abroad.nbsp;nbsp;

Aspire: What are the key issues, challenges and opportunities that you see storage playing in the progression of solar energy as a more meaningful energy source in the overall energy ecosystem?nbsp;

Nakamoto: While distributed generation and storage will continue to play an increasingly important role in defining firm and resilient renewable power grids, near term strategies include the removal of net energy metering (NEM) limitations and/or the introduction of feed-in tariffs, like the ones contemplated by the Hawaii Clean Energy Initiative. Taking the cap off NEM addresses the local storage issue by allowing property owners to sell extra power back to the grid.

At scale, this is useful ndash; particularly on a grid with low-renewable penetration ndash; because it encouraging the installation of large-scale PV systems at suitable locations and guarantees corresponding savings to the property owners in the form of credits for power fed back to the grid.nbsp; nbsp;Over time, as utilities approach RPS goals and the grid penetration of distributed renewable generation systems increases, more sophisticated distributed storage systems may be required to firm up the clean power during the peak/off-peak cycle.nbsp;nbsp;

Aspire: What is your broader outlook on the solar industry in 2009 and for the next few years? Navigant Consulting, in a research report it provided the SEIA, said it expects that the 8-year extension of the ITC could ldquo;unleash $325 billion in private investment in the solar industryrdquo; over that time frame. To be sure, this would bode well for the industryrsquo;s growth ndash; but do you think that we should temper expectations based on the current financial crisis, and if so, how much?nbsp;nbsp;

Nakamoto: We concur with many analysts who believe the fundamentals for the industry are intact and that the demand for clean, renewable energy will continue growing in 2009 and beyond.nbsp; nbsp;We expect the extension of the ITC will help inspire this continued growth, and that the impact of the current credit market constraints may be too slow, but not stop, market expansion.

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