As the Solar Power International conference continued Wednesday in San Diego, solar stocks continue to lose ground in the face of ongoing concerns about both the ongoing credit crunch and the possibility of a steep drop in pricing in 2009.

Deutsche Bank’s Steve O’Rourke observed in a research note Wednesday morning that while companies expect some negative impact from tighter credit in 2009, “quantification is presently impossible.” On pricing, he notes that most solar module companies continue to forecast a price decline in 2009 of under 10% - but he says that a drop of more than 20% is “increasingly likely.”

Writes O’Rourke: “The over-arching, unanswerable question is one of potential demand destruction in 2009 due to the present credit crisis. No one knows, and no company was willing to offer any kind of quantification. The common belief seems to be that it will be slightly to moderately negative.”

UBS analyst Stephen Chin wrote Wednesday morning that solar projects are largely on track, with financing still available given attractive internal rates of return of over 8%. But he agrees with O’Rourke that pricing is likely to drop 20% in 2009.

Gordon Johnson, an analyst with Hapoalim Securities, said many of the solar module suppliers he talked to continue to say that there will little impact on their business from the credit crisis - and that ASPs next year are likely to drop less than 10%. But Johnson thinks the companies are too optimistic: like the Deutsche Bank and UBS analysts, he sees pricing coming down 20% next year. He also advises not reading too much into Q3 results, given the lower availability of credit and higher risk premiums being demanded by project finance companies. “We are not drinking the Kool-Aid.”

One other point: Johnson in a report Tuesday took note of a presentation at the conference by Ed Feo, a partner at law firm Milbank Tweed who co-chairs its project finance and energy practice. Feo gave a talk at the Solar Power conference on the state of the alternative energy project finance sector which has some negative implications for the solar sector.

In an e-mail in response to a query from Tech Trader Daily, Feo notes that the tax equity market for renewable energy projects is currently constrained by the credit crisis. He points out that some of the institutions that provided such financing are out of business - like Lehman - or have reorganized - like AIG - while others are either capital constrained or now have such a reduced tax position that they are no longer participating in the market, like Morgan Stanley.

Feo notes that in the tax equity market, the financing providers are limited to U.S. public companies with federal tax bills. They invest in companies which own the qualifying assets - whether solar or wind - and receive the allocation of virtually all of the tax benefits, both tax credits and accelerated depreciation. “If the proposed investor doesn’t expect to have a tax appetite, it won’t invest,” he explains, potentially leaving a big hole in a given project’s capital structure.

Feo says a number of tax equity investors are backing away from the market. Feo says he has heard estimates that the capacity coming into next year will be about $3 billion, compared with actual funding of $6 billion last year, and what was an expected funding this year of $11 billion, though that number now appears to high. Next year, projected demand is for funding of $8 billion to $12 billion. “So it’s a problem,” he says.

So what does that mean for the solar sector? Feo says that since the economics of PV electric production “is already tight,” he believes one or more of the following will occur:

  • Manufacturers will reduce their costs.
  • Installers will reduce their costs.
  • Developers will reduce their returns.
  • Or fewer projects will get built.

In Wednesday’s trading:

  • First Solar (FSLR) closed down $19.59, or 13.7%, to $123.52.
  • Evergreen Solar (ESLR) closed down 60 cents, or 14.6%, to $3.51.
  • Energy Conversion Devices (ENER) closed down $7.37, or 16.3%, to $37.78.
  • SunPower (SPWRA) closed down $8.79, or 17.7%, to $40.94.
  • Suntech (STP) closed down $4.15, or 16.6%, to $20.85.
  • Canadian Solar (CSIQ) closed down $2.21, or 17.6%, to $10.37.
  • LDK Solar (LDK) closed down $2.89, or 13.2%, to $18.97.
  • Solarfun (SOLF) closed down 88 cents, or 12.1%, to $6.41.
  • GT Solar (SOLR) closed down 90 cents, or 15%, to $5.11.
  • MEMC (WFR) closed down $4.35, or 18%, to $19.85.