2013 - A Pivotal Year for First Solar
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The International Energy Agency has reported that there is little confidence in the ability of the global economy to recover in any meaningful way which has dampened oil demand. So far in 2012 demand had a year on year decline of 5.6% with lower consumption over all fuel categories. In the instance of heat and power generation, there has been some movement to alternative fuel sources such as geothermal, wind and solar.
The support of the solar industry has seen that industry gaining a small foothold in the U.S. with the aid of government subsidies for the manufacture of panels to installation tax credits for consumers who convert to solar and credits from utilities commissions for the amount of power saved by the existing grid.
The last three years has been particularly brutal on U.S. manufacturers, with gigaom.com reporting the demise of over a dozen older and newer solar companies. The bankruptcies are a result of global over supply of solar panels in 2011 leading to a decrease of over 50% in panel prices for just about every solar cell and panel maker outside of Asia. General Electric (NYSE: GE) laid off workers while trying to improve thin film solar technology it had planned to manufacture in Colorado. Q-Cells, the German manufacturer which was once the largest solar cell maker in the world, is filing for bankruptcy. BP's (NYSE: BP) subsidiary BP Solar did not file for bankruptcy, but is winding down its solar equipment and installation business.
In response to the heavy price erosion, a preliminary decision has the U.S. government imposing tariffs on silicon solar cells and panels from China. The decision came in response to a complaint filed by seven U.S. manufacturers in October 2011 alleging Chinese silicon solar companies have received unfair government subsidies that allowed the sale of products at lower prices than companies from other countries.
Recent price declines in panels have seen consumers driving record breaking installations, but have put most manufacturers’ margins into negative territory to the extent that negative margins cannot be corrected with volume of sales.
The delay of the GE plant in Colorado, the falling prices resulting in crippling margins are causing manufacturers to regroup and revamp manufacturing technologies and methods to get ahead of the declines in the market. These improvements are crucial for manufacturers to make it through this grim time in the industry.
Current price leaders are First Solar (NASDAQ: FSLR), Renesola (SOL), Trina Solar (TSL), Yingli Green Energy (YGE) and Jinko Solar (JKS). First Solar, Trina and Yingli have the advantage of products that are bankable, meaning projects using their modules are easier and cheaper to finance.
None of the foregoing really matter in terms of having any positive impact on the solar industry and the performance of First Solar’s shares. The simple facts are, large traditional power generation and fuel companies are exiting the solar business or furloughing planned expansion. New and relatively new solar manufacturers are dying on the vine. BP and General Electric have the financial wherewithal to conduct research and development of alternative energies and have decided to leave solar behind, not because it doesn’t work as an alternative fuel source, but because it is not a cost effective form of energy generation and storage. Companies who have entered the business are struggling because the business makes no economic sense.
North American solar manufacturers cannot compete on a global scale because it simply costs too much to manufacture, install and replace solar energy generating systems. The tariffs and subsidies afforded to the industry will not make it an economically sustainable business in the current economic environment or in the long term. Commercial building and housing starts have just entered positive territory in the U.S., but growth is now and will continue to be slow until there is some confidence in a sustainable economy. Consumers and contractors will opt for the more economical power generation options to make building endeavors make economic sense. Using solar does not. While we would all like to be more conscious and make the world a better and more energy efficient place, it makes little or no sense to convert to a power source that cannot sustain the cost of manufacturing it.
The price of natural gas liquids make far more sense as there is abundant supply, it is a clean burning energy source and it is cheap and it does not help the solar industry at all. Some homeowners have installed solar panels in their homes at a price of around $21,000 anticipating that it would take up to eight years to recoup the cost. A decrease in the price of solar energy credits added another seven years to the payback period. Electricity rates are not increasing as much as originally thought, in part as a result of low natural gas prices adding another two years to the payback period and that is without any maintenance or if the system breaks down entirely and has to be disposed of. A lot can happen in 17 years. Average installation costs for the highest capacity natural gas furnace, including all installation, is around $12,750 with a similar recoupment period of 18 years.
First Solar’s press releases in 2012 announce several installations in the U.S. and partnerships with French and Australian counterparts as well as a testing and demonstration program in Saudi Arabia. It has announced a new CEO and COO in 2012 and a new CFO in 2011. The company has made efforts to reach out of the domestic sphere and has re-configured the executive team to adapt to the current, challenging environment for solar manufacturers.
There are many alternative energy projects that are not being put into production because producing with cheaper, natural gas is more attractive to investors. The energy business, in all facets, both traditional fossil fuel and alternative energy always puts forth the sustainability argument when pushing agendas. What happens in practice is that energy considerations by consumers are always and forever done in a knee jerk fashion in reaction to what the best cost option is at the present time. Energy companies know this and act accordingly, going wherever the demand wind blows. There will be a grand push to utilize natural gas to drive every form of energy from home heating to tankers running on the fuel for transport. Solar will have to wait its turn again, when either natural gas prices rise or there is a way to make solar cost effective.
The next year is a building block year for First Solar. It has cleaned house at the executive level, while that does not instill confidence in some, I look at it as an opportunity to get new eyes and minds in the mix to guide the company through this period. If First Solar can make the necessary adjustments to manufacturing costs, it stands a chance at survival. If not, we can just pick out a plot in the ever expanding solar energy graveyard.
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