UBS | The Unsubsidized Solar Revolution (January 2013)

The Unsubsidised Solar Revolution  (UBS Investment Research)

Unsubsidised solar era begins – utilities’ customers turn into competitors
Solar has turned from a heavily-subsidised marginal technology into a mainstream source of power generation. Thanks to significant cost reductions and rising retail tariffs, households and commercial users are set to install solar systems to reduce electricity bills – without any subsidies. The economics looks set to work best in Germany, Italy and, with a time-lag, Spain. We estimate up to 18% of electricity demand could be replaced by self-produced solar power in these markets.

Grid-supplied power demand to shrink by another 6-10% by 2020E
Assuming gradual penetration, we estimate 43GW of unsubsidised solar in those markets by 2020, reducing demand for grid-supplied power by 6-9%. This comes on top of shrinking demand due to energy efficiency and subsidised renewables.  The rise in power tariffs should accelerate, as grid fees and subsidies would have to be divided by less consumption. This could lead to a change in the pricing model.

Negative for generators; battery solutions to also shave the evening peak
The unsubsidised solar growth should drive wholesale power prices and load factors of conventional plants further down – we forecast the EBITDA pool to shrink c50% by 2020. Batteries will increasingly shave the evening peak, which further eliminates production hours of thermal plants that used to be attractive.

Central and southern European utilities affected, RWE key Sell idea
We reiterate our Sell ratings on RWE (key idea), E.ON and CEZ due to their high share of EBITDA from central European power generation. We also see additional earnings risk for Verbund and, in the long term, the southern European players.