Nrc

August 14, 2009

Industry Report

Think Greentech Takeaways From Call With Charles Gray, Executive Director Of NARUC

Reason for Report: Industry Update Colin Rusch 212-468-7015, [email protected]

THINK SUMMARY: Yesterday, we hosted a conference call with Charles Gray, Executive Director of The National Association of Regulatory Utility Commissioners (NARUC). Key takeaways from Mr. Gray's thoughts included the following: KEY POINTS: • Despite currently stable prices and the potential for some portion of reduced demand from the recession to be permanent, Mr. Gray forecasts significant cost increases in electricity over the next decade. • In Mr. Gray's opinion, the chance of Senate passage of a modified Waxman-Markey bill in this Congress is less than 50%, and such a bill would likely have to include Senate energy provisions on RPS, transmission, and cyber-security. • Mr. Gray believes that investments in renewables will not be affected significantly if the federal RPS does not pass, given state-level portfolio standards and programs. • Mr. Gray identified the September timeline to complete NIST standards, the stimulus bill funding, and state-level processes as the key drivers for smart grid growth. • Mr. Gray noted that many commissioners and consumer groups remain skeptical of decoupling utility revenues from electricity sales volume. • Mr. Gray identified planning, siting, and cost allocation as the three main regulatory issues that federal legislation is currently attempting to address. According to Mr. Gray, the Senate's actions, beginning in September, will determine the course of transmission legislation. Conclusion: While Mr. Gray's commentary indicated a relatively slow-moving process for regulatory change in the electricity industry, his comments pointed to strong long-term growth for renewables and progress on standard-setting that will facilitate renewables penetration into the U.S. energy mix, in our view. We continue to remain relatively cautious on the rationalization of the solar industry but highlight the growing regulatory support and potential for significant demand for survivors. In our coverage universe, we believe FSLR, SPWRA/B, RSOL, and ENER are best-positioned to benefit from solar growth in the United States. Our full takeaways continue on page 2.

Please see analyst certification (Reg. AC) and other important disclosures on pages 4-7 of this report.

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Industry Report

Electricity Cost Drivers • Despite currently stable prices, Mr. Gray forecasts significant cost increases in electricity over the next decade, driven by the following factors: (1) routine investment in a cycle of new generating plants to meet load growth; (2) transmission investment driven by state and federal policy; (3) investment in "smart" technologies in the grid infrastructure and behind the meter; (4) upgrades to protect the grid against cyber-security attacks; (5) renewables growth driven by renewable portfolio standards; and (6) carbon pricing. • According to Mr. Gray, these cost drivers will increase the political, economic, and educational pressures on regulators. State commissioners will face pressure from state legislators and consumer groups unhappy about rate increases. He said that regulators will also need to develop new skills and modes of analysis to evaluate potential investments in areas not in their traditional domain, such as cyber-security. Personnel capacity is a significant challenge here; like the utilities, the commissions are experiencing a "graying" of the workforce and will need to develop new expertise. Funding in the stimulus bill will help address this concern, in Mr. Gray's opinion. • According to Mr. Gray, some portion of reduced demand for electricity as a result of the recession could be permanent, creating uncertainty in forecasting future investment levels. Passage of climate legislation, however, would kick-start significant investment in the near term, in his view. Climate Legislation • In Mr. Gray's view, the chance of Senate passage of a modified Waxman-Markey bill in this Congress is less than 50%, and such a bill would likely have to include Senate energy provisions on RPS, transmission, and cyber-security. With respect to the Copenhagen negotiations, Mr. Gray suggested that negotiators might have a stronger position with Waxman-Markey having passed the House, rather than trying to push a bill through the Senate and have it fail. Renewables • Mr. Gray believes that investments in renewables will not be affected significantly if the federal RPS does not pass, given state-level portfolio standards and programs. On the flip side, he suggested that if the RPS does pass, there will be litigation and questions about compatibility of state and federal RPS, which could hinder development. • Regarding potential conflicts between renewable energy development and environmental issues, Mr. Gray believes that the Obama administration and Congressional leadership would ultimately side more with renewables given the strong traction on the issue and the emphasis on "green jobs." However, he suggested that environmental and other parochial concerns might push for the development of more localized renewable energy solutions, such as the push from several Northeast governors to develop offshore wind rather than build long transmission networks to the Midwest. Smart Grid • Mr. Gray identified the September timeline to complete NIST standards, the stimulus bill funding, and state-level processes as the key drivers for smart grid growth. • Mr. Gray said that regulators were becoming increasingly concerned about the prudence of smart metering investments. According to him, some regulators believe that investments in upstream network elements—substation and distribution automation, for example—are more cost-effective at present. Furthermore, Mr. Gray said that regulators are concerned about potential consumer blowback and opposition to time-differentiated pricing, and about the potential near-term obsolescence of meter technology. He suggested that future developments will depend largely on how interoperability standards are developed and on the experience of smart grid demonstration projects such as the Boulder, Colorado, experiment. Decoupling/Utility Restructuring • Mr. Gray noted that many commissioners and consumer groups remain skeptical of decoupling utility revenues from electricity sales volume. He said that the push for decoupling appears to be a high priority for some members of the Obama Administration, as well as advocacy groups such as the Center for American Progress and the Natural Resources Defense Council. • Mr. Gray noted that earlier drafts of the stimulus bill would have required that states adopt decoupling and governors certify the change, but this was opposed by the states. He thinks that some states would move to adopt decoupling in a push for energy efficiency, and that passage of climate legislation would likely hasten adoption, but in the absence of federal mandates, the decoupling process would take a long time. Similarly, he said that the climate bill has the potential to expand FERC's authority into historically state-level filings such as energy efficiency, demand response, and transmission siting, but that states would likely continue to resist this possibility. • Mr. Gray cited several European countries that are transitioning to a services-based utility business model. He suggested that deregulation could lead to a significant restructuring of the utility business model in the U.S., noting that Vermont has created a separate utility for energy efficiency. He believes this is unlikely to materialize on a large scale in the near future, Page 2

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Industry Report

but that passage of climate legislation could hasten the transition. • On a similar note, Mr. Gray observed that many European nations are migrating toward "micro-grids" or smaller, more self-sufficient power networks. He noted that the 2007 energy bill provided for studies on integrating combined heat and power (CHP) into a more-modular network structure. However, he suggested that in some regions of the U.S., particularly areas with low population density, there may be no substitute for high-tension transmission lines and transporting power over long distances. Transmission • Mr. Gray identified planning, siting, and cost allocation as the three main regulatory issues that federal legislation is currently attempting to address. He noted that the DOE is working to develop interconnection-wide planning regimes. He expressed the view that transmission development will have long lead times even if FERC gains full siting authority, which the states oppose. He also noted a recent decision by the Seventh Circuit Court of Appeals reversing FERC's finding that the cost of high voltage systems should be socialized (as opposed to allocated on a beneficiary basis) and suggested that Congress could provide FERC with a legal basis to make decisions about cost allocation. • According to Mr. Gray, the Senate's actions, beginning in September, will determine the course of transmission legislation. If the climate bill does not gain critical support, there is a potential to pass the Senate Energy Committee's legislation as a stand-alone bill. Potentially, that bill could then enter conference with Waxman-Markey. However, Mr. Gray thinks that this scenario is unlikely to result in passage of transmission legislation. • Mr. Gray expressed his view that high costs would likely continue to make below-ground siting for transmission impractical, and that further technology breakthroughs were needed. He also said that direct-current transmission lines were being considered, but that technical challenges of integration with a regional AC system remained.

Valuation And Risks To Price Targets For Companies Under Coverage Mentioned In This Report First Solar (FSLR): We rate the shares Accumulate with a $180 price target, based on 20x our 2010 EPS estimate of $8.99. Risks: global macro risk, financing risk, customer concentration risk, subsidy risk, technology risk, and increased competition. Energy Conversion Devices (ENER): We rate the shares Source of Funds with a $16 price target, based on our 1x Book Value estimate. Risks: Global macro risk, financing risk, customer concentration risk, subsidy risk, technology risk, and increased competition. Real Goods Solar (RSOL): We rate the shares Accumulate with a $3 price target, based on .8x EV/2010 revenue forecast. Risks: Global macro risk, financing risk, corporate governance risk, credit risk, supply risk, customer risk, subsidy risk, and increased competition. SunPower (SPWRA, SPWRB): We rate the shares Source of Funds with a $23 price target, based on 18x our 2010 EPS estimate of $1.29. Risks: Global macro risk, financing risk, customer concentration risk, subsidy risk, technology risk, and increased competition. RISKS: See above.

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Industry Report

COMPANIES MENTIONED IN THIS REPORT: Company

Exchange

Symbol

Price

Rating

Price Target

Energy Conversion Devices, Inc.

NASDAQ

ENER

$13.65

SoF

$16.00 $180.00

First Solar, Inc.

NASDAQ

FSLR

$144.76

Acc

Real Goods Solar, Inc.

NASDAQ

RSOL

$2.99

Acc

$3.00

SunPower Corporation

NASDAQ

SPWRA

$28.32

SoF

$23.00

SunPower Corporation

NASDAQ

SPWRB

$23.83

Acc

$23.00

Important Research Disclosures Analyst Certification I, Colin Rusch, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total revenues, a portion of which is generated by investment banking activities. ThinkEquity LLC makes a market in First Solar, Inc., Energy Conversion Devices, Inc., SunPower Corporation, SunPower Corporation, and Real Goods Solar, Inc. securities; and/or associated persons may sell to or buy from customers on a principal basis.

Rating and Price Target History for: First Solar, Inc. (FSLR) as of 08-13-2009 12/27/06 I:B:$35.00

02/05/07 B:$38.00

02/14/07 B:$50.00

04/02/07 B:$68.00

05/04/07 B:$80.00

07/03/07 B:$115.00

07/17/07 B:$145.00

11/09/07 B:$310.00

05/01/08 A:$340.00

07/31/08 B:$350.00

10/30/08 B:$175.00

320

240

160

80

Q3

Q1

Q2

Q3

Q1

2007 12/12/08 SoF:$105.00

02/25/09 S:$60.00

2008 05/29/09 A:$188.00

07/08/09 B:$180.00

Q2

Q3

Q1

Q2

0

2009

07/31/09 A:$180.00

Created by BlueMatrix

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Rating and Price Target History for: Energy Conversion Devices, Inc. (ENER) as of 08-13-2009 05/29/09 I:SoF:$16.00

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Rating and Price Target History for: SunPower Corporation (SPWRA) as of 08-13-2009 04/02/07 B:$60.00

04/27/07 B:$70.00

07/18/07 B:$85.00

10/19/07 B:$120.00

11/12/07 B:$155.00

09/16/08 B:$89.00

01/28/09 A:$35.00

05/29/09 SoF:$24.00

07/08/09 SoF:$21.00

07/24/09 SoF:$23.00

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Industry Report

Rating and Price Target History for: SunPower Corporation (SPWRB) as of 08-13-2009 01/30/09 I:B:$35.00

05/29/09 SoF:$24.00

07/08/09 SoF:$21.00

07/24/09 A:$23.00

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Rating and Price Target History for: Real Goods Solar, Inc. (RSOL) as of 08-13-2009 06/18/08 I:B:$10.00

11/05/08 B:$7.50

05/29/09 A:$3.00

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Created by BlueMatrix

Rating Definitions The ThinkEquity LLC rating system is based on a stock's expected total return over a 12-month investment horizon. Ratings on coverage are defined as follows: Buy: Appreciation potential of 20% or more over the next 12 months. Analyst has a high level of conviction that the company's business fundamentals are intact and that the company will meet or exceed earnings projections. Valuation is considered reasonable considering the company's potential. Accumulate: Appreciation potential greater than 0% and less than 20% over the next 12 months. Typically good companies, with fundamentals and earnings visibility intact, but current valuation limits upside potential.

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Source of Funds: Stock is expected to decline as much as 20% over the next 12 months, due to a single or combination of factors including excessive valuation, negative sector sentiment, and/ or reduced earnings expectations. Sell: Stock expected to decline 20% or more over the next 12 months. Company fundamentals are deteriorating, leading to material downward revisions in earnings projections and valuation. Distribution of Ratings, Firmwide ThinkEquity LLC IB Serv./Past 12 Mos. Rating

BUY [B] HOLD [Acc] SELL [S/SoF]

Count

Percent

Count

Percent

103 77 23

50.70 37.90 11.40

13 5 0

12.62 6.49 0.00

This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients of ThinkEquity LLC. Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial advisors before making any investment decisions based on this report. Additional information on the securities referenced is available upon request. In the event that this is a compendium report (covers more than six ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies by reference. For more information regarding these disclosures, please send a request to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unless otherwise mentioned. Member of the FINRA and SIPC. Copyright 2009 ThinkEquity LLC, A Panmure Gordon Company

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