July 28, 2014 MORGAN STANLEY BLUE PAPER MORGAN STANLEY RESEARCH Global Stephen Byrd1 Timothy Radcliff1 Simon Lee2 Bobby Chada3 Dominik Olszewski3 Yuka Matayoshi6 Parag Gupta4 Miguel Rodrigues5 Adam Jonas1 Peter J. Mackey3 Paul R. Walsh3 Mary Curtis7 Roy Campbell7 Solar Power & Energy Storage Dimple Gosai7 Policy Factors vs. Improving Economics We have developed a model that calculates solar economics around the world *See page 2 for all contributors to this report based on local regulatory dynamics and solar conditions. We project combined solar growth for China, Japan, the US, Europe, India, and Brazil of 39 GW per year through 2020, and global demand of 47 GW. We are bullish on US demand growth due 1 Morgan Stanley & Co. LLC 2 Morgan Stanley Asia Limited+ to improving solar economics. In Europe, we highlight the German “solar slowdown.” In 3 Morgan Stanley & Co. International plc+ China, we are below industry forecasts because we believe that the Chinese government 4 Morgan Stanley India Company Private Limited will keep solar growth to rates similar to nuclear and wind to achieve emission reduction 5 Morgan Stanley C.T.V.M. S.A. 6 Morgan Stanley MUFG Securities Co., Ltd.+ goals. In Japan, our projected demand is below industry estimates due to our bearish 7 RMB Morgan Stanley (Proprietary) Limited view of the pending government review of solar subsidies. Energy storage, when combined with solar power, could disrupt utilities in the US and Europe to the extent customers move to an off-grid approach. We believe Tesla’s energy storage product will be economically viable in parts of the US and Europe, and at a fraction of the cost of current storage alternatives. Potentially advantaged: Solar power “integrators” (SUNE, SCTY, NRG), renewable Yieldcos (NYLD, NEP, ABY, and TERP), and Tesla (TSLA) as a result of its energy storage product. Facing downside risk are solar panel and polysilicon manufacturers (Wacker Chemie, First Solar, GCL Poly, Trina Solar, Yingli Green Energy, Xinyi Solar, Morgan Stanley Blue Papers focus on critical and Jinko Solar), given our expectation of bearish demand in China and Japan. US investment themes that require coordinated utilities in sun-rich, and/or rate-high states (HE, PNW, PCG, EIX, SRE) may be affected perspectives across industry sectors, regions, by the growth in both solar power and energy storage. or asset classes. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. * = This Research Report has been partially prepared by analysts employed by non-U.S. affiliates of the member. Please see page 2 for the name of each non-U.S. affiliate contributing to this Research Report and the names of the analysts employed by each contributing affiliate. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. MORGAN STANLEY RESEARCH July 28, 2014 Solar Power & Energy Storage Contributors to this Report US Utilities Stephen Byrd1 +1 (212) 761-3865 [email protected] US Clean Technology Timothy Radcliff1 +1 (212) 761-4139 [email protected] US Autos Adam Jonas1 +1 (212) 761-1726 [email protected] Europe Utilities Bobby Chada3 +44 20 7425-5238 [email protected] Emmanuel Turpin3 +44 20 7425-6863 [email protected] Anna Maria Scaglia, CFA3 +39 02 7633-5486 [email protected] Carolina B. Dores, CFA3 +44 20 7677-7167 [email protected] Anne N. Azzola Lim3 +44 20 7425-6230 [email protected] Timothy Ho3 +44 20 7425-4267 [email protected] Dominik P. Olszewski3 +44 20 7425-7238 [email protected] Europe Chemicals Paul R. Walsh3 + 44 20 7425-4182 [email protected] Peter J. Mackey3 + 44 20 7425-4657 [email protected] China Utilities Simon H.Y. Lee, CFA2 +852-2848-1985 Simon.Lee @morganstanley.com Sheng Zhong2 +852-2239-7821 Sheng.Zhong @morganstanley.com Japan Utilities Yuka Matayoshi6 +81 3 6836-5414 [email protected] Japan Technology Masahiro Ono (Consumer Electronics)6 +81 3 6836-8410 [email protected] Shoji Sato (Electronic Components)6 +81 3 6836-8404 [email protected] India Utilities Parag Gupta4 +91 22-6118-2230 [email protected] Satyam Thakur4 +91 22-6118-2231 [email protected] Latin American Utilities Miguel F. Rodrigues5 +55 11 3048-6016 [email protected] Consumer/Retail Girish Achhipalia4 +91 22 6118-2243 [email protected] South Africa Industrials Mary Curtis7 +27 11 282-8139 [email protected] Roy D. Campbell7 +27 11 282-1499 [email protected] Dimple Gosai7 +27 11 282-8553 [email protected] Middle East Infrastructure Saul Rans8 +971 4 709-7110 [email protected] 1 Morgan Stanley & Co. LLC 4 Morgan Stanley India Company Private Limited 7 RMB Morgan Stanley (Proprietary) Limited 2 Morgan Stanley Asia Limited+ 5 Morgan Stanley C.T.V.M. S.A. 8 Morgan Stanley & Co. International plc (DIFC 3 Morgan Stanley & Co. International plc+ 6 Morgan Stanley MUFG Securities Co., Ltd.+ Branch) See page 57 for recent Blue Paper reports. 2 MORGAN STANLEY RESEARCH July 28, 2014 Solar Power & Energy Storage Table of Contents Executive Summary ................................................................................................................................................................ 4 Analytical Approach.......................................................................................................................................................... 9 Global Solar Market Landscape ....................................................................................................................................... 10 Implications for Polysilicon ............................................................................................................................................... 14 Growth Potential by Region China................................................................................................................................................................................ 20 Europe.............................................................................................................................................................................. 26 United States.................................................................................................................................................................... 36 Japan ............................................................................................................................................................................... 41 India ................................................................................................................................................................................. 48 Brazil ................................................................................................................................................................................ 52 3 MORGAN STANLEY RESEARCH July 28, 2014 Solar Power & Energy Storage Executive Summary We have developed a model that calculates solar We are relatively bullish on solar demand growth in the US, economics around the world based on local regulatory driven by strong and improving rooftop solar economics and dynamics and solar conditions. We believe investors can the likely continuation of favorable net metering subsidies for use this analytical framework to better understand solar solar, which together more than offset a likely reduction (from economics in the context of local regulatory dynamics, solar 30% to 10%) of the solar Investment Tax Credit (ITC) in 2017. installation costs, and solar operating conditions. In the long term, we believe solar power will be economic in some US states without any form of subsidy. We project combined solar growth for China, Japan, the US, Europe, India, and Brazil of 39 GW per year through In Europe, we see a mixed bag: a slowdown in additions in 2020, or 47 GW including Rest of World. We expect growth Germany, but with solid growth in other regions. Overall we to be heavily driven by China, which we forecast will account expect European capacity additions to remain flat vs 2013, for 27% of new demand globally. We are bullish on US but with a different regional mix. demand growth due to improving solar economics. In Europe, What sets our solar analysis apart? We believe our global we see a risk of a “solar slowdown.” analysis benefits from the close integration of local utility Exhibit 1 regulatory dynamics (subsidies, as well as explicit renewables Solar Installation Forecast through 2020 (GW) goals set by government entities), solar operating conditions, and future trends in the local installed cost of solar. Each of - 20 40 60 80 100 these factors has a significant impact on solar