Solar Sector Set to Shine Through Credit Crunch

FRANKFURT(Reuters) – Solar power will be a bright investment prospect as theappetite for green energy grows, even though the global credit crisisis making banks more wary of providing financing.

In the short term, the sector will also have to contend with ashortage of silicon, a key ingredient for solar cells that turnsunlight into electricity, and possible changes in political support aselections take place.

"This year will be a very volatile year," said Sven Hansen, chiefinvestment officer at clean technology investor Good Energies, whichhas about 7 billion Swiss francs ($6.38 billion) under management.

"The industry will see fantastic growth, but it will be a bumpy ridein terms of how financial markets value photovoltaic companies."

The number of new large-scale solar energy plants has been growingrapidly particularly in sun-drenched countries like Spain and Italy,but also in Germany and the United States, where regulatory conditionsoffer incentives and stable returns for investors.

Conditions could change because of a presidential election in the United States and general elections in Spain in March.

"Whether there are support programs in place has a strong impact on markets’ development," Hansen said.

Growth is still expected to be strong, driven by increased interestfrom institutional investors, such as pension funds and insurers, whichare seeking alternative stable and long-term opportunities.

Experts also expect the silicon shortage to ease next year as silicon makers hike up capacities and production.

"Leverage ratios are more difficult, but we will ride out the storm.The business is not shut," said Peter van Egmond Rossbach, director ofinvestment at Impax Asset Management.

The firm provides finance for renewable energy projects around the world and has $2 billion under management.

Thirty percent is invested in solar, 40 percent in wind and the rest in other renewable energy projects, it said.

"It just means that (project financing) is getting more expensive and we have to bridge with equity," he added.

RISK AVERSION

Tighter liquidity on global financial markets resulting from acrisis in the U.S. subprime mortgage market last year has made banksmore risk-averse.

As a result, conditions have become tougher, pushing up interestpayments for loans and other financing costs, which reduces thecashflow and leads to higher purchase prices for investors.

"We notice it in the purchase prices," said Barbara Flesche, head ofequity sales at Epuron, a project developer, which is fully-owned byGerman solar group Conergy (CGYG.DE: Quote, Profile, Research).

Epuron develops, finances, develops and operates large-scalerenewable energy projects, bringing together investors, banks andequipment producers.

It has completed deals worth about 800 million euros ($1.18 billion) since 1998, it said.

Banks were less willing to provide high gearing for such majorprojects, which dampened investor hopes of a higher return on equity,Flesche said.

But she added: "The risk for purchase prices is not something that’s hurting us dramatically — so far."

Flesche said demand from institutional investors for suchlarge-scale renewable portfolios was still strong and was now alsoreaching into new markets such as Turkey, Greece or Italy.

"It will become more difficult to get bank financing, but not impossible," Epuron’s Flesche said.

The European Photovoltaic Industry Association (EPIA) expects theglobal market to be five times bigger than it was in 2007 within thenext five years.

It said it expected annual installations to reach a 10.9 gigawattpeak by 2012 globally, up from a peak of about 2.2 gigawatts in 2007,adding that annual growth rates of well above 25 percent could beexpected.

The European Energy Council has forecast that by 2010 about 1.6percent of total energy generation will derive from photovoltaicsources, which compares to a share of 0.01 percent in 2003.

By 2010 the council expects about 19 percent of generation willderive from renewables, 15 percent from nuclear and 66 percent fromfossil sources.

(editing by Barbara Lewis)