October 16, 2008 – We attended the Solar International Expo this week in San Diego and were amazed by the participation and attendance for the event by the industry trade, as well as Wall Street. On Tuesday, Lazard held a closed conference for the industry’s leading solar firms, attended by its institutional clients, and yesterday, Piper Jaffray held a Symposium of its own for leading solar firms, and we attended that event, with a client of ours Premier Power (OTCBB:PPRW). Other firms in attendance at Piper’s Symposium were JA Solar (Nasdaq:JASO), GT Solar (Nasdaq:SOLR), Canadian Solar (Nasdaq:CSIQ), Applied Materials (Nasdaq:AMAT), Energy Conversion Devices (Nasdaq:ENER), LDK Solar (NYSE:LDK), BP Global Wind and Solar (NYSE:BP), Suntech Power (NYSE:STP), ReneSolar (NYSE:SOL), Trina Solar (NYSE:TSL), Akeena Solar (Nasdaq:AKNS), Q-Cells (QWV.DE) and Solarfun (Nasdaq:SOLF). Here are some of our notes from the presentations:

Overall, one of the takeaways was that there are expectations for further commoditization in the wafer, module, cell and poly production segments of the market. There has been substantial expansion upstream from polysilicon manufacturers and entrance into the upstream markets from companies like LDK which will result in a substantial contribution to poly supply by mid-2010. GT Solar said its clients alone will being on about 60,000 metric tons of supply by that time. The additional supply and increased competition will be instrumental in helping to driving prices down. Another key factor in helping to drive prices down in the upstream channel is the introduction of new technologies from firms like GT Solar that will create further efficiencies for producers.

This is probably good news, because firms at the mid-stream channel are going to need better pricing because there is expected to be some oversupply for modules that will also be a downward pricing influence. Module supplies were a major topic of discussion at the tradeshow, and at Piper’s event, and the consensus was generally that, at least in the next 12 months or so, oversupply will likely be the dynamic in the market. A wild card here is the credit markets, and whether projects and production will begin to get cancelled and/or pushed out. The general take on this issue was cautious optimism.

Almost all firms, after reaffirming their own solvency and access to sufficient capital to manage their 2009 cap ex requirements, said that they hadn’t seen any significant cancellations or projects getting pushed back yet. But they generally acknowledged that this may become an issue next year if the recession deepens on a global basis. Anton Milner, CEO of Q Cells, was a bit of an exception here as he did acknowledge that he had seen some companies slowing down their plans, at least in the near term.

Our take here is that companies that have strong balance sheets and access to capital will likely be able to stay their course, and even ramp capacity plans, while weaker capitalized companies will get weaker in this environment and be forced either to sell, or go the way of consolidation.

This was another interesting topic at Piper’s Symposium – with producers’ stock prices being as cheap as they are in this market, have capitalizations gotten so cheap that it may make sense for larger players thinking about getting into the upstream production business to buy, rather than build. This was a question put to both Reyad Fezzani, CEO of BP Global Wind and Solar, and to Anton Milner. Both acknowledged that this is an ongoing discussion at their respective firms, while Milner disagreed that companies have gotten cheap enough to make this an actionable strategy for Q-Cells. Samuel Yang, CEO at JA Solar, said that he sees the current market environment being a good time to ramp his company’s capacity, and that JA Solar has the elasticity in its operating margins to withstand downward pricing pressure better than many of his peers.

There was also a substantial amount of interest in the downstream market, and the impact of the ITC. Rhone Resch President of the Solar Energy Industries Association said that lifting the cap on residential should be a key driver for the market, helping to unleash pent up demand. He also said the utility exemption repeal is important. Interestingly, he said that the SEIA is going back to Congress to work to fine-tune the legislation, perhaps requesting an adjustment for the credits to create rebates, making them refundable, which could be more effective in the current economic environment. He also said that in a couple weeks, industry leaders will be meeting to discuss and plan solar’s agenda with the next Congress in the form of what he calls the “Big Ask”. He added that we can also look for the next Congress to develop a Renewable Portfolio Standard, and in the process, he will be leading the SEIA’s efforts to help create more market certainty for solar. The 8-year extension was a first critical step in this process.

Two downstream companies presented at the Symposium, Akeena and Premier Power. An interesting topic of discussion in both of these sessions is the fact that installed solar in the U.S. runs about $8 per watt while it is about $6 in Europe and $6.60 in Japan. Why is the U.S. so much more expensive? Barry Cinnamon of Akeena and Miguel de Anquin of Premier agreed in their respective presentations that there is an administrative layer in the U.S. cost structure that is a materially more expensive contributor to installed cost than there is in Europe.

Another interesting point that came out of discussion in the downstream markets is that the rooftop systems in Europe, and in particular Germany and Spain are going to be much more attractive from an investment perspective than ground mount systems. This is a dynamic that plays particularly well into Premier’s business, which has opened two offices in Spain and is exploring other areas for expansion in the EU region.

So, again, the general take for the solar industry is upbeat, although tempered by a cautiously optimistic outlook for the near term. The ultimate impact of the global credit crisis on the near term demand for solar is still unclear. Or, more accurately, the demand is as strong as it ever has been, and growing, but the impact of the global credit crisis on budgets to pay for projects in the near term is still unclear. The good news is that there is a strong, and expectedly strengthening level of legislative support for the industry, and despite the rollercoaster that solar companies have endured in terms of Wall Street and stock prices, their access to capital for growth and production is still firmly in place.

Moreover, the trends at all channels continue to point to the progression of the solar industry to grid parity. Prices are coming down, efficiencies are increasing and when these dynamics hit the tipping point, adoption in the energy markets for solar will explode.

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