EUROPE

4 March 2010
FLASH NOTE

SOLAR POWER
Uncertainty is over! Feed-in tariff cuts in line NEW INSTALLED CAPACITY (GERMANY)

with expectations.
Q German government agrees on feed-in tariff cuts 6000
61%
70%

Yesterday the German government reached agreement on solar feed-in 5000

5 000
60%
4 500
tariff cuts. The feed-in tariff for rooftop photovoltaic systems will be 4 000 50%
reduced by an additional 16% from 1 July, in line with market 4000
40% 40%
40%
expectations. For larger projects, depending on the type, the feed-in

in MW
3 000 33%
3000
tariffs will be cut by 11-15%, also from 1 July: 11% for so-called 27% 30%
1 860
conversion areas, such as landfill sites, and 15% for other areas. 2000
1 328 20%
13% 11%
950
Q No more subsidies for projects on arable land 1000 750
10%
As previously rumoured, there will be no further subsidies for solar parks
0 0%
built on arable land from 1 July. This decision constitutes a major threat 2 005 2 006 2007E 2008E 2009E 2010E 2011E 2012E
for Phoenix Solar (3/UP) as most of its projects have been on arable
land.
Q Flexible market mechanism – 3.5GW targeted
The German government has more than doubled its annual new NEW INSTALLED CAPACITY (GLOBAL)
installations target from 1.7GW to 3.5GW. For each 1000MW over and
above this target, the feed-in tariff will be cut by another 2% from end- 20000
Europe (ex Germany) Germany

2010 and by 3% from end-2011, on top of the standard 9% annual 18000 North America
ROW
Asia-Pacific 17 550

reduction. For example, assuming new installations of a total 3500MW 16000

in 2010, the feed-in tariff would be cut by 9% in 2011; however, in the 14000
13 750

case of new installations totalling 3501-4500MW, the overall tariff 12000

reduction in 2011 would come to 11% (9+2%) and assuming 4501- 10 145
in MW

10000
5500MW it would reach 13% (9+2+2). We view this flexible feed-in tariff
8000
adjustment system as a very efficient way of avoiding excesses without 5 925
6 510

6000
setting a fixed cap as in Spain in 2008.
4000
2 807
Q 4GW of new installed capacity expected 2000 1 231
1 674

We have lifted our scenario for demand in Germany from 2.5GW to

0
4GW for 2010E as we believe the expected IRR of >8%, which also 2 005 2 006 2007E 2008E 2009E 2010E 2011E 2012E

applies for H2-10E, will trigger strong demand. In 2009E 90-95% of the
total was residential demand.
Q Winners and losers
We expect SolarWorld, SMA and Roth &Rau to benefit most from strong
residential demand in Germany. SolarWorld is clearly the no. 1 in
Sector focus
Germany with almost 100% of its revenues generated in the residential
Sector Top Picks SolarWorld, VESTAS
rooftop market. At the same time, we see a major threat to Phoenix
Least favoured Conergy
Solar's business model due to its arable land project exposure.

Philipp BUMM
Research Analyst
pbumm@cheuvreux.com
(49) 69 47 89 75 27

www.cheuvreux.com
4 March 2010 EUROPE Solar Power

I— Tariff changes decided

The uncertainty is over. Yesterday the German government reached agreement on
feed-in tariff cuts, which came in broadly in line with expectations. 11-16% additional
cuts will be implemented from July 2010. There will be no further subsidies for solar
parks built on arable land, and a flexible market mechanism depending on growth
rates will be introduced. Hence, we view the changes as positive on the whole as they
should not hurt demand.

Q Details of the changes

Yesterday the German government (CDU/CSU and FDP) reached agreement on feed-in
tariff cuts to be implemented from July 2010.

Residential/commercial rooftop market: 16% cut, as expected

The feed-in tariff for residential rooftop photovoltaic systems will be reduced by an
additional 16% from 1 July, in line with market expectations. We expect demand in this
segment, which represented about 90-95% of total demand in 2009, to remain strong as
the IRR of >8% should prove a sufficient trigger.

Greenfield projects: 11-15% cuts, as expected

For greenfield projects, depending on the type, the feed-in tariffs will be cut by 11-15%
from 1 July 2010: 11% for so-called conversion areas, such as landfill sites, and 15% for
other areas. For all projects approved by the end of 2009 but not connected to the grid by
1 July 2010 there is a transitional rule, according to which the additional cuts will not apply
if the projects are completed by the end of the year. Hence, approved projects already in
the pipeline can still be executed based on the current feed-in tariffs. A new category will
also be defined and incorporated into the German Renewable Energy Law (EEG –
Erneuerbare-Energien-Gesetz) covering business and industrial projects as well as
projects in areas adjacent to motorways and railway lines.

Arable land – no more subsidies

As previously rumoured, no further subsidies will be given for solar parks built on arable
land as of July 2010. This constitutes a major threat for Phoenix Solar's (3/UP) business
model as most of the company's projects have hitherto been on arable land.

Government support for 'own consumption'

Subsidies for private households that consume the electricity they generate rather than
feeding it into the grid will not be cut: the 21 cent per kWh remains unchanged. On this
basis we calculate an 8 cent premium vs. the feed-in tariff (33 cent) based on a retail price
for residential home owners of 20 cent per kWh (21+20-33 = 8 cent). We therefore expect
a new market to develop. This option applies for photovoltaic systems with a capacity of
less than 800kWh, which also makes it interesting for small companies (e.g. hotels,
supermarkets) to consume solar energy generated during the day instead of feeding it into
the grid.

Flexible market mechanism implemented – 3.5GW targeted

The German government has more than doubled its annual new installations target from
1.7GW to 3.5GW. For each 1000MW over and above this target, the feed-in tariff will be
cut by another 2% from the end of 2010 and by 3% from the end of 2011, on top of the
9% annual reduction. For example, assuming new installations of a total 3500MW in 2010,
the feed-in tariff would be cut by 9% in 2011; however, in the case of new installations
totalling 3501-4500MW, the overall tariff reduction in 2011 would come to 11% (9+2%),
and assuming 4501-5500MW it would reach 13% (9+2+2). We view this flexible feed-in

2 www.cheuvreux.com
4 March 2010 EUROPE Solar Power

tariff adjustment system as a very efficient way of avoiding excesses without setting a
fixed cap as in Spain in 2008.
The following graph offers an overview of the potential feed-in tariff development in 2011,
depending on the level of new installed capacity in 2010.

FLEXIBLE FEED-IN TARIFF CUTS: DEPENDING ON THE NEW INSTALLED CAPACITY

6600

6000 5500
10%
4500

4000 3500

5501 5%
2000 4501
3501
2500

0 0%
Growth corridor 1 Growth corridor 2 Growth corridor 3 Growth corridor 4
in MWp

-2000
-5%
-4000
-9%
-11%
-6000 -10%
-13%
-8000 -15%
-15%
-10000

-12000 -20%

Max Min feed-in tariff reduction

Source: BMU, CA Cheuvreux

3 www.cheuvreux.com
4 March 2010 EUROPE Solar Power

II— IRR remains attractive

Based on the roadmap for feed-in tariff cuts, we expect the IRR for residential rooftop
systems to remain attractive at >8% – also in H2-10E and beyond.

Q IRR >8% will trigger demand, also in H2-10E

The calculation outlined below illustrates the potential impact of the newly agreed tariff
cuts beyond the annual 9% reduction (already implemented in January) on the IRR of a
typical 5kW solar system. As the table shows, even once the tariff is reduced by an
additional 16% from July 2010, the IRR should remain at an attractive 8%, in our view.
Thus, we should not see demand collapse as it did in Spain.
An additional 16% reduction implies a 25% cut vs. the 2009 feed-in tariff. This would still
leave an IRR of >8% in H2-10E, assuming total system prices drop by 10% compared to
the 2009 average. We have based our calculation on an average system price of
EUR2700 per installed kWp – down from EUR3000 on average in 2009E.

H2-10 RETURNS STILL ATTRACTIVE TO TRIGGER DEMAND

Total system cost reduction compared to 2009

8.4% -30% -25% -20% -15% -10% -5% 0%
800 8.8% 7.8% 6.8% 6.0% 5.2% 4.4% 3.8%
850 9.8% 8.7% 7.7% 6.8% 6.0% 5.3% 4.6%
output ker kWp

900 10.7% 9.6% 8.6% 7.7% 6.8% 6.1% 5.3%

installed

950 11.6% 10.5% 9.4% 8.5% 7.6% 6.8% 6.1%

1000 12.5% 11.3% 10.3% 9.3% 8.4% 7.6% 6.8%
1050 13.4% 12.2% 11.1% 10.1% 9.1% 8.3% 7.5%
1100 14.3% 13.0% 11.9% 10.8% 9.9% 9.0% 8.2%
1150 15.1% 13.8% 12.6% 11.6% 10.6% 9.7% 8.9%
1200 16.0% 14.6% 13.4% 12.3% 11.3% 10.4% 9.6%
Source: CA Cheuvreux

Q 10-15% drop in module prices sufficient to trigger demand

We doubt module prices will recover in 2010E, despite strong demand, as competition is
more likely to increase than decrease as new capacity becomes available. Hence, we
anticipate another 10-15% drop in module prices during the course of 2010E (Jan-Dec).

MODULE PRICES (YEAR AVERAGE)

4 -35%

-30% -30%

3.00
3
-25%

0.96 -19%
2.20 -21%
EUR per Watt

-20%

2 0.37
1.70
0.74 -15%
0.24 1.40
0.69 -11%
0.15
0.36 0.61 -10%
1 0.31 0.57

0.51 0.27
0.48 0.25 -5%
0.30
0.29
0.42 0.34 0.29
0.14
0 0%
2008 2009E 2010E 2011E

Silicon costs Wafer Cell Module Margin Module selling price y-o-y

Source: CA Cheuvreux
4 www.cheuvreux.com
4 March 2010 EUROPE Solar Power

As can be seen from the above chart, we expect module prices to drop by about 20% this
year vs. 2009 (average price). We anticipate an additional 10-15% drop in 2011E.
At the same time, we believe system integrators have actually increased their prices (and
margins), thus raising balance of system (BoS) costs, as demand outstripped installer
capacity in H2-09E. However, we expect this situation to change after the feed-in tariff is
reduced from 1 July 2010, with installers likely to reduce their price offers for total system
costs in H2-10E in order to trigger demand. BoS costs have historically represented about
30% of the total system costs for a typical small rooftop PV system. In view of the
significant price erosion for solar modules in 2009, however, the relative proportion of BoS
costs has risen and we believe future cost reductions will affect primarily this segment of
total costs. Assuming a decline in demand during the course of this year, we expect the
installation and component market to become more competitive than it was in H2-09 and
we foresee a reduction in installation prices to trigger orders.

EVOLUTION OF TOTAL SYSTEM COSTS RELATIVE SYSTEM COST SPLIT

5
100% 100% 100% 100%
4.1 100%
4
3.4 27%
1.1 35% 37%
80% 44%
in EUR per Watt

3 2.7
1.2 2.5
60%
1.0
2 1.1
40%
3.0 73%
65% 63%
2.2 56%
1
1.7 20%
1.4

0 0%
2008 2009E 2010E 2011E 2008 2009E 2010E 2011E

Module BoS costs System price Module BoS costs

Source: CA Cheuvreux Source: CA Cheuvreux

5 www.cheuvreux.com
4 March 2010 EUROPE Solar Power

III— Demand estimates: up

On a global scale, we anticipate about 10GW of new installed capacity in 2010E – up
from roughly 6GW in 2009E. For Germany we now predict 4GW. We have increased our
expectations for Germany from 2.5GW as the uncertainty is now gone and IRR will
remain attractive in H2-10E.

Q 4GW demand in Germany in 2010E

As the uncertainty generated by ongoing talks regarding feed-in tariffs has now been
removed, we have increased our estimates concerning demand in the German market
substantially, from 2.5GW to 4GW for 2010E and further to 4.5GW for 2011E. The chart
below shows the trend in terms of monthly installations in Germany in 2009. As can be
seen, new installations in November totalled almost 500MW and we estimate that more
than 600MW were installed in December 2009E.

2009 MONTHLY INSTALLATIONS

700 660 3500

600 3000
497
500 2500

378
400 2000
in MW

in MW
332
308 321
300 1500
195
200 1000
133
102
100 500
56
17
3
0 0
Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09E

Monthly installed capacity Total installed capacity Total installed capacity

Source: Bundesnetzagentur , CA Cheuvreux

Based on these monthly figures, the total new installed capacity could easily outstrip our
forecast of 4GW for 2010E. Assuming a run rate of 500-600MW on a monthly basis, we
would arrive at potential installations of 5-6GW in 2010 despite the harsh winter
conditions seen in January and February. Nonetheless, we consider 4GW a more
reasonable assumption as we anticipate a dip in demand following the 1 July cuts before
monthly installations pick up again towards the end of the year. As explained above, we
think the anticipated IRR of about 8% in H2-10E will prove sufficient to trigger demand.

6 www.cheuvreux.com
4 March 2010 EUROPE Solar Power

The following chart shows our estimates for the coming years in Germany:

GERMAN DEMAND ESTIMATES (VOLUMES + Y-O-Y GROWTH)

6000 70%
61%
5 000
5000 60%
4 500
4 000 50%
4000 40%
40%
40%
in MW

3 000 33%
3000
27% 30%
1 860
2000
1 328 20%
13% 11%
950
1000 750
10%

0 0%
2 005 2 006 2007E 2008E 2009E 2010E 2011E 2012E
Source: CA Cheuvreux

Q Global demand likely to reach 10GW in 2010E

Having increased our expectations with regards to demand in Germany, we now arrive at
a global demand estimate of 10GW for 2010E – up from 9GW previously. We have
reduced our expectations slightly for the Spanish market as well as for Italy, as Italy has
also announced plans to adjust its feed-in tariffs. In 2011E we expect US demand to
come through, followed by strong domestic demand in China, bringing us to an estimated
global demand of 13GW for that year.

7 www.cheuvreux.com
4 March 2010 EUROPE Solar Power

GLOBAL DEMAND ESTIMATES

20000 Europe (ex Germany) Germany

North America Asia-Pacific 17 550
18000
ROW
16000
13 750
14000

12000
10 145
in MW

10000

8000
6 510
5 925
6000

4000 2 807
1 674
2000 1 231

0
2 005 2 006 2007E 2008E 2009E 2010E 2011E 2012E
1 231 1 674 2 807 5 925 6 510 10 145 13 750 17 550
ROW 50 125 175 100 300 500 800 1 000
Asia-Pacific 306 367 339 635 930 1 995 3 700 5 100
North America 80 140 220 360 700 1 200 1 500 2 500
Germany 750 950 1 328 1 860 3 000 4 000 4 500 5 000
Europe (ex Germany) 45 92 745 2 970 1 580 2 450 3 250 3 950

Source: CA Cheuvreux

8 www.cheuvreux.com
4 March 2010 EUROPE Solar Power

IV— Winners and losers

From our perspective, the end of uncertainty regarding feed-in tariffs is likely to have a
positive impact on almost all solar stocks. We expect SolarWorld, Roth & Rau, Manz
Automation and SMA to benefit most from strong German demand, whilst we remain
negative on Phoenix Solar due to its high exposure to arable land projects.

Q Winners:
SolarWorld (2/OP): We see SolarWorld emerging as a clear winner following the
moderate subsidy cuts as the company has no exposure to arable land solar projects and
we therefore do not expect its business to feel any negative impact at all. On the positive
side, the company should benefit strongly from the rush for residential rooftop systems as
it is the market leader in Germany, thanks to its strong branding. SolarWorld has already
announced plans to offer complete systems including battery storage. Hence, it is also set
to benefit from the unchanged subsidies for private households and small companies that
consume the electricity they generate rather than feeding it into the grid. We reiterate our
2/Outperform rating on the stock.
Roth & Rau (2/OP) and Manz Automation (2/OP): As we anticipate a rise in demand for
solar power generation systems in Germany, we expect continued strong order intake for
cell production equipment, especially from Asia (i.e. China), to expand production
capacities further. Roth & Rau already recorded a strong order intake of EUR112.5m in
Q4-09, which represents an increase of 515% q-o-q and 134% y-o-y. We maintain our
2/Outperform rating on Roth & Rau with a target price of EUR36. We also reiterate our
2/Outperform rating on Manz Automation with a target price of EUR69.
SMA (3/UP): We have increased our estimates for SMA to reflect stronger global market
demand in 2010E and 2011E based on our upward revisions for the German market. As
SMA can be seen as a volume play, we believe it will benefit from strong demand in
Germany. Nonetheless, we stick to our 3/Underperform rating as we also expect the
company to face margin pressure and continued problems concerning supplies of
electronic components, which could lead to a lower than expected production output. We
estimate a 48% market share for SMA in 2010E and a 46% share in 2011E, though we
believe this level will not prove sustainable going forward due to increasing competition.
We have raised our DCF-based target price from EUR68 to EUR81.

Q Losers
Phoenix Solar (3/UP): From our perspective, Phoenix Solar is likely to be the most heavily
impacted stock in our universe due to its high exposure to projects on arable land. We
regard its status as a pure downstream player with 95% of its revenues generated in
Germany in 9M-09 (60% in 2008) as rather negative in light of the feed-in tariff cuts.
Phoenix Solar's power plant division, which accounted for 64% of revenues in 9M-09, will
be hit hard by the total withdrawal of subsidies for solar projects on arable land. We
estimate that this division generated at least 50% of its revenues with such projects. If the
company should fail to compensate for the drop in this revenue stream (e.g. via
internationalisation, projects on commercial rooftops, projects in conversion areas), we
see significant downside to our current estimates. The company will host an analyst
conference call with the release of its preliminary 2009 results on 9 March and we will then
incorporate any potential news into our model. We reiterate our 3/Underperform rating on
the stock.

9 www.cheuvreux.com
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product without first contacting MSCI to determine whether MSCI’s permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
SM SM
The Dow Jones GCC Index , or other applicable index, are calculated, distributed and marketed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones Indexes © 2009 Dow Jones & Company, Inc.
No part of this report may be reproduced in any manner or redistributed without the prior written permission of CA Cheuvreux.

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