Green Wombat

The economy may be all trick and no treat, but you wouldn’t know it from First Solar, one of the few public solar cell makers and thus a bellwether for the industry. This week the Tempe, Ariz.-based company reported solid third-quarter earnings and unveiled two deals that mark a big expansion in the U.S. market.

It agreed to supply solar installer SolarCity with 100 megawatts of thin-film modules and made a $25 million investment in the Silicon Valley startup – which represents a 10% stake, valuing SolarCity at $250 million. The other deal didn’t get much attention – it was buried in the earnings report – but is significant nonetheless. First Solar (FSLR) will team up with utility giant Edison International (EIX)‘s power plant subsidiary, Edison Mission Energy, to develop large-scale solar power stations. (First Solar just completed a 2.4 megawatt project for Southern California Edison as part of the utility’s 250-megawatt commercial rooftop initiative and will finish by year’s end a 12-megawatt solar power plant in Nevada for Sempra (SRE).)

“By combining Mission’s extensive track record of power project development with First Solar’s low-cost systems and construction capability, we believe we’ve created a powerful engine for future growth in the U.S. utilities segment,” First Solar CEO Mike Ahearn said during the company’s earnings call Wednesday, according to a transcript published by the Seeking Alpha business blog.

But it was Ahearn’s comments on the European market – 85% of First Solar’s business is in Germany, for instance – that is of most interest to investors.

While he predicts the European market will remain strong – First Solar expects its 2009 net sales to range from $2 billion to $2.1 billion, up from $1.22 to $1.24 for 2008 – he did note some red flags, particularly for utility-scale solar power stations.

“Our review indicates that solar projects lending outside of Germany has essentially stopped for the time being,” Ahearn said. “Today, we have identified potential financial risk in our customer base that represent approximately 15% to 20% of our planned sales in Europe in 2009.”

“We believe most of our European customers outside of Germany have sufficient balance sheet strength to bridge any near-term projects delays,” he added.

During the Solar Power International conference in San Diego this month, there was much buzz that solar companies that had ramped up their production capacity over the past couple of years would be hit by an oversupply of solar modules just as customers get crunched by the credit crisis.

But Ahearn told analysts on Wednesday that First Solar’s thin-film modules – which are made by depositing solar cells on plates of glass and use minimal amounts of expensive silicon – would continue to sell for less than conventional cells and thus remain attractive to customers. “We therefore assume that any price competition is unlikely to have a sustained impact on First Solar,”  he said.

Despite First Solar’s moves into the U.S. market, Ahearn acknowledged the immediate future is uncertain. While Congress extended a key investment tax credit for eight years as part of the financial bailout package, investors have lost their appetite for tax equity partnerships that would buy those credits from solar companies in exchange for financing the construction of power plants.

“In the short-term, our review indicates that the traditional investors in tax equity – financial institutions – have largely stopped participating,” Ahearn said. “We assume some of these investors will return to the market in 2009, but the timing and future cost of this funding is difficult to predict. The possibility of more expensive tax equity and its impact on solar electricity prices for both new and pending projects remains a major uncertainty going into 2009.”