As solar manufacturers struggle to regain their footing after demand evaporated in the wake of the financial crisis, companies like First Solar are looking to under-penetrated geographies holding the promise of government subsidies to reignite sales. Solar demand was dominated by Germany and Spain in 2008, with the two countries contributing more than two thirds of global demand due to generous government feed-in tariffs. In 2009, though, pressure on Spain’s budget forced the country to cap its total subsidized capacity at a level that was about one sixth of its 2008 demand. Germany, and the rest of the world, are now forced to pick up the slack.

Two countries that were barely on the map in terms of solar installations in 2008, the US and China, however, are now the fastest growing and most promising future geographies for solar activity. The US solar market was about 350 MW, or only about six percent of the 5.5 GW market in 2008. China’s share was even less. New renewable energy goals and government subsidies, though, are expected to ignite growth in both countries. The US currently has in place an Investment Tax Credit, which pays for 30 percent of a solar installation in cash or tax credits, and China is in the process of enacting its Golden Sun Program, which will support the installation of 500 MW of solar farms over the next two to three years. The Chinese government will subsidize as much as 50 to 70 percent of the costs of a solar project through the program, and there are plans to initiate a feed-in tariff as well.

The Chinese solar market is still in its infancy, but there is an increasing level of deal activity in the region. While we previously expected the Chinese market to be confined to mainly China-based solar companies, First Solar has signed a Memorandum of Understanding with the Chinese government to build a two gigawatt solar plant in Mongolia. To put this into perspective, one gigawatt is enough energy to power roughly 800,000 homes depending on the location. Though this is not a near-term catalyst for FSLR’s demand, we see this as a move to establish a solid footprint in a growing solar market. Other companies have also signed preliminary plans for large installations in China: Suntech signed letters of intent for 1.8 GW of projects in the country, and ReneSola has a pipeline of about 505 MW.

Several companies have begun efforts to open up the US market as well. First Solar signed a contract with the Los Angeles Department of Water and Power (LADWP) to build a 55 MW project in California in August. First Solar also expanded its relationship with Southern California Edison, agreeing to build two installations in Southern California with a total capacity of 550 MW. These projects add on to the company’s already impressive pipeline of 650 MW worth of utility deals with Sempra Generation, Pacific Gas and Electric, and others, as well as 1.3 GW worth of utility deals in negotiation. With these projects First Solar is building important US relationships, which we think will prove to be valuable as companies compete for solar subsidies. The deals should position the company for a larger share in the market as it evolves. SunPower is also positioning itself to win US business, with a 600-800 MW deal with Florida Power and Light and a 200 MW deal with PG&E.

As the solar market evolves and matures, companies will begin to target high-growth, under-penetrated geographies like the US and China, especially as government incentives solidify. Though many of the large deals being signed by companies like First Solar will not necessarily spark near-term demand, we think it will allow them to develop a footprint in these emerging markets and gain share as the markets grow.