DEUTSCHE BANK: We're About To Witness The 'Second Gold Rush' In Global Solar

We just told you about the four major U.S. companies that now dominate the domestic solar sector.

But while the U.S. story remains highly compelling, there are further tectonic shifts occurring in the rest of the world.

Deutsche Bank's clean tech team of Vishal Shah, Jerimiah Booream-Phelps, and Susie Min is calling it the Second Gold Rush.

DB write:

While we have been generally constructive on the global demand outlook, we are raising our 2014 and 2015 demand expectations to ~46GW and ~56GW respectively. [For comparison, U.S. states on average used about 9,000 GwH of total electricity in 2012.] We believe upside demand surprises from the US, Japanese and Chinese markets could continue in 2014.

We expect streamlined incentive programs in China, additional subsidy cut signals in end 2014, and decreasing financing constraints to act as catalysts for upside. Similar to the '05-07 capacity rush, we expect another gold rush by downstream installers to add recurring MW ahead of policy changes over the next 2-3 years. Moreover, we expect grid and financing constraints to improve from 2014.

Let's unpack this.

The first "rush" came in 2005-2007, when the entire world thought getting into solar manufacturing was a great idea, thanks to massive subsidies from Europe and states' renewable fuel standards. It didn't really end up turning out that great, at least for the companies themselves, as the world became flooded with excess supplies of solar panels. This was great news for consumers, though, and helped pave the way for the explosion of solar growth we've seen in the U.S.

There are few signs the momentum from the initial boom has slowed, at least on the consumer end. Rather firms in the sector went through a period of contraction and consolidation that saw the number of manufacturers decline sharply.

So what will the new rush look like? DB says it will be fueled by three elements: ongoing low system prices, more robust financing and government policy changes.

If the first gold rush was all about the cost of solar panels themselves coming down, the second rush will be about "balance of system" costs, which include all other parts of the supply chain, from wiring to customer acquisition, seeing reductions. This is mainly thanks to sheer experience or, a more steady learning curve the surviving solar companies now. And it will mainly impact "downstream" firms - the service providers - instead of "upstream" ones, the manufacturers.

"Solar module prices are likely to remain at record low levels for the next 18 months...overall financing costs have room to decline as solar moves down the risk curve and innovative financing structures drive down costs."

Solar is currently competitive without subsidies in at least 19 markets globally, DB says, and the firm expects more to achieve that milestone this year.

That leads us to the next element, financing. This one mostly applies to the U.S. There are two types of genuinely interesting financing mechanisms that are helping drive solar: solar bonds, and yield cos. Solar bonds are being pioneered by SolarCity, the service firm chaired by Elon Musk, and as we discussed yesterday, they've received a huge response. Developer SunEdison, meanwhile, has announced it plans to form a yield co in the next few months. These are publicly traded firms that are spun off as title holders to revenue from major projects. They pay a dividend and are not subject to standard corporate taxes.

For comparison, the average U.S. household uses about 1,000 kwh per month. DB:

"We believe the broader acceptance of yieldco type structures could lower solar financing costs by ~200-300 bps in addition to providing significant amount of liquidity within the solar sector. Every 100 bps reduction in financing costs results in 1 c/kWh reduction of LCOE, in our view."

Finally, major policy changes will result in a surge of new installations coming online as government subsidies expire. We'll go to China first.

"We see upside to consensus 2013 estimates of 6-7 GW and our 2014 estimates of 10GW in light of recent policy changes which will likely drive a rush of installations in 2H13 and 2014."

The U.S. could see a similar jolt as its incentives sunset:

"Current forms of federal investment tax credits are set to expire in 2016... Consequently, we expect to see a big rush of new installations ahead of the 2016 ITC expiration."

Japan too:

"While ~1.1GW of solar was installed under the FiT scheme last year (April to December), ~2.8GW was installed in 1H 2013. This rapid acceleration will likely continue and into 2014 as projects start to run into a likely FiT reduction in April 2014 (announced in March)."

India, Australia, and Mexico are also poised to see three straight years of solar growth thanks to friendly government policies. But China and Japan will really be the real key to the rush: DB says they could represent ~45-50% of 2013 demand. "We expect demand from both markets to remain a major swing factor," the team writes.