Power - up

In times of crisis, when access to capital is limited and stock indexes are plummeting, there is still one sector that keeps attracting investor interest and government spending. Green or cleantech stocks have performed in Gianni Tessitore, director, and Alessandro Leona, Milan office the double digits thanks to a growing concern for the environment and generous tariff schemes incentivising 1 Condition when renewable energy clean technologies that wouldnt otherwise be viable for power generation with the cost is comparable to conventional popromise to reach grid parity1 in a few years. wer prices accessing the grid But will everything connected to green or cleantech go through the same turmoil in the future as the dot-coms did in 2000? In November 2008, in the midst of the Internet stock boom, Eric Janszen founded iTulip, named after the Dutch tulip bubble of 1630s, to study the financial bubbles phenomenon. In his opinion, bubbles start with the kernel of something good (in this case, energy that causes less pollution) but then some people start to get rich really fast and the edge of a bubble is very quickly reached. In the meantime, other things have to happen, such as significant government involvement to focus attention and capital on a specific industry, and then a new source of credit is needed. In the housing bubble, it was mortgage-backed securities, in this case, it could be feed-in tariffs or cap and trade emission schemes. The signs of a green energy bubble are certainly visible: some stocks are registering uncommon multiples with price earnings ratios in the hundreds and regional government decisions are creating the first victims within the industry. If we take, for example, the revision of feed-in tariffs in the solar photovoltaic sector, we can highlight four main courses of action, in four different countries.

Green economy Cassandras: are we headed towards a solar photovoltaic bubble?

Spain

2 Study of the effects on employment of public aid to renewable energy sources

In Spain, a combination of factors diverted the attention of investors from solar photovoltaic. The first factor was the reduction of feed-in tariffs: an average of -22 percent from 2008 to 2009. The second factor was the introduction of a maximum cap of 500MW accessing incentives each year. The effect is clearly identifiable in the stock performances after mid 2009. Even the promise of green jobs creation was not fulfilled. A study from Universidad Rey Juan Carlos2 reports that for every four green jobs created, another nine are lost. Recently, at least three companies that were planning to IPO this year have put their decision on hold. Moreover, as a consequence of deficit control needs, the government announced it could reduce incentives even for power plants already in operation. Germany, with a cumulative photovoltaic power of almost 10 GW, including around 3.8 GW installed in 2009, alone, remains the worlds largest photovoltaic market. Recently, the government reduced feed-in tariffs a move that caused confrontation between the government and industrial photovoltaic associations. The highest cuts have been for larger plants (above 1 MW plants will receive a -25 percent feed-in tariff), while the medium and small installations received lower revisions (-10 percent and -8 percent, respectively). This reduction aims to force producers of photovoltaic modules and components to achieve efficiencies and consolidate in order to reduce prices. At the same time, the reduction will keep investors in the game by ensuring sector attractiveness in the mid-term. Italy is fifth in the world (after Germany, Spain, Japan and the US) in terms of installed photovoltaic power. This massive growth was the consequence of introducing a new generous tariff scheme. The government in France has recently declared its intention to stop financing ground photovoltaic plants, in favour of roof installations from now on, to reduce feed in tariffs by 20% and to put a maximum cumulative cap of 500 MW on new installed power per year. This decision has totally upset the sector players and a revision of this drastic cut is strongly requested by companies that have heavily invested and created new green jobs.

Germany

Italy France

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Fast take off after the Introduction of the new incentive scheme

3.000 2.500 2.000 1.500 1.000 500 0

Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

Cumulated installed photovoltaic power (MW)

First Conto Energia incentive scheme New Conto Energia incentive scheme Source: GSE Gestore Servizi Elettrici Italy

This is unique in the sense that, on top of the energy incentive (around 0.4-0.43 kWh), the plant owner can sell the power to the grid at market price or exchange it in place, thereby creating an extra revenue flow. The incentive scheme is being revised and industry associations are pushing hard to keep the reductions within reasonable ranges. The government intends to confirm its commitment to the development of photovoltaics in Italy in the hope that the country will be able to create investment opportunities, employment and the development of a national chain, although foreign investments are certainly welcome. As for the new Conto Energia, the new decree, effective from 1st January 2011, provides for a reduction of tariffs in line with the decrease in the cost of modules (around 20 percent). However, incentives will be reduced less for small residential systems, and the incentive system will remain among the most generous in the world. The target will be a capacity of 3,000 MW over the next three years a goal that may require the use of tariffs for a further 14 months. Another target is to simplify, but also give certainty, to the rules for accessing incentives. This is the case in the Apulia region, which has seen an impressive boom of photovoltaic systems and applications, but now requires a careful handling of the authorisation process. Terna, the Italian TSO, and the distributors are receiving requests for connections in excess of 152,000 MW, three times more than the highest ever registered power peak in Italy. This is a clear signal that there are no investors involved and that many people are creating an authorization market. A piece of land with a solar photovoltaic plant authorised could trade for 100,000 authorized megawatt. So what are the differences between the green/cleantech sector and the dot-coms, and how can a green bubble be avoided? The first difference is that with dot-coms, evaluations were based on the promises of future, uncertain profits, the number of subscribers and unique website visitors while the revenues of green developers are guaranteed for a certain number of years, and in most cases they are drawn not from government funding but from taxes on consumers energy bills. Governments should avoid interrupting virtuous circles (as was the case in the Spanish photovoltaic feed-in tariff) and instead progressively reduce the tariffs according to the rate of cost decrease per MW installed.

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NEWSLETTER

Power - up

The second difference is that, through the incentive schemes, some countries were able not only to develop power plants at a faster pace than others (e.g. Germany, Spain and Italy for solar photovoltaic) but at the same time, create an industry. As a result, they now possess leading edge technology (e.g. QCELL and SMA in Germany or Ingeteam in Spain). So the incentives should be also directed to researching new technologies, in order to capture a larger portion of the value chain inside the country. Last, but not least, authorisation procedures have to be simplified to encourage the adoption of renewable generating technologies. At the same time, there must be a clear commitment from investors, such as a personal bank guarantee on the request for authorisation, to avoid easy money, coming from the trading of authorisations. What we expect to observe in the near term is a time shift in the solar photovoltaic market due to the financial crisis and to the limited access to capital, together with an oversupply of cells and components coming from countries where the government has cut incentives. The combination of these effects could introduce a market shift from supply constricted to demand driven, with a beneficial effect on prices for end users.

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