Solar, Utility Scale

FSLR, sustainable markets, and a word about the solar bubble

First Solar’s reduced expectations and strategic shift away from subsidized markets reminds us that the road to solar’s future will be expensive, painful, and require commitment and courage, says Navigant Consulting’s Paula Mints.

December 15, 2011 – The market for electricity is sustainable. That ~2 billion people globally go without electricity is a tragedy. The potential for business in the developing world is significant, but the problems that need to be addressed to do so are difficult to overcome, as the problems include basic affordability.

Markets without subsidies are indeed sustainable. These markets are also smaller than the markets with incentives.

Sometime around the year 2004, just as Europe’s feed-in tariff incentive model began to drive stronger market growth, First Solar chose to focus on that market, shutting operations elsewhere. This strategy was obviously very successful; it was the first thin-film manufacturer to be No.1 on the annual top ten shipment lists, a historic moment for solar. To get there, First Solar had to endure a period of entry pricing, but it emerged strong and profitable. When the US began to show signs of emerging, the company entered with a vertical strategy in which it installed its own panels, allowing it to install at manufacturing cost plus transfer costs. During the early years of its strategy, the company was highly competitive in this regard.

And then, as we all know, in 2009 manufacturers from China and Taiwan (primarily China) began pricing aggressively for share, a practice not unheard of in the photovoltaic industry; in fact pricing for entry and aggressive pricing for share were essentially business as usual. At megawatt levels of demand, this strategy is annoying but not particularly dangerous — at multi-gigawatts of demand, well … when the bell tolls, it tolls for thee.

During the heady period of profit, and even after aggressive pricing began, demand for solar ballooned. It was a party that no one could afford to believe would end. Looking back at the dot-com (Internet) bubble and eventual collapse, there are similarities. Generous FiT rates that came with no controls (caps) and aggressive pricing worked together to create a situation that simply could not continue. This is because:

  • Globally, the utilities and the grids were not ready for all of this solar;

  • Someone (the ratepayers) have to pay for electricity at a higher rate;

  • This only really works when the global economic machine is running smoothly — judging by the current global high debt levels, the regions are still in recession; and

  • The fact that the banks (necessary for large scale solar) are still unstable.

At the end of the dot-com bubble many experts were still saying that all the unlit fiber would indeed be used because the Internet and all of its companies (many of which never made a profit) simply had to go on and on and on. The correction that came was painful.

At the peak of the housing bubble, investment continued and people in the US (in particular) took more and more value from their home equity, because they believed that housing would never ever lose significant value. And, the correction that came was painful.

Incentive-driven markets are inherently unstable, and a market built on an unstable instrument will eventually go through a correction — call it a bubble if you want. This is hardly a new fact; unfortunately, it was ignored by many manufacturers throughout the heady blip of 2004-2008 profitability. Even when aggressive pricing began to effect the competitiveness of manufacturers outside of China and Taiwan (and eventually Taiwan), most refused to believe that the beast they were feeding (the FiT model) would ever change. Ignored was the fact that incentives are not assured; in fact, these market develop tools are intended to fade away. The designers of these instruments failed to study industry behavior over time when FiT plans were put into place — if they had, they would have clearly seen the danger of overheated markets, as real as the potential of aggressive pricing turning deadly. (Which it clearly has — reasons for insolvency are likely myriad, but at the core is the inability to compete with artificially low prices. Even the manufacturers at the forefront of these prices are at risk of failing. Riffing off the classic holiday movie It’s A Wonderful Life: “Every time a bell rings, a PV manufacturer declares bankruptcy.”)

By moving away from unsustainable/incentivized markets to sustainable/unincentivized markets, First Solar is executing a strategy very similar to the one that led directly to its success. It will likely have to accept lower or even negative margins for a while (entry strategy) while developing a strategy for areas where there may be a) no grid, and b) no money. In the end, the company may find that even in these markets, some degree of incentives are required in order to compete. Meanwhile, it will need to go into areas where CPV (higher efficiency) is already highly competitive without subsidies. As to the company’s decision to shutter its not-so-stealth CIGS R&D, this is unfortunate but not a surprise given the current market.

No matter how you divide up the pie chart, solar is in for a correction year or two. During this time, the industry (all solar technologies) will need to learn to work with no or low incentives. Vertical integration is a solid strategy for this new reality (rather, a back-to-the-past reality). It will also require new business models and likely, lower margins for all — even the demand side.

The healthy margins currently enjoyed by some on the demand side (though by no means all) will unfortunately get slimmer, but for the industry to recover higher prices for technology are required. As incentives decrease or simply disappear altogether, the ability to raise prices would seem an almost insurmountable task. However, if prices and margins for manufacturers do not increase, the slow painful march to bankruptcy will continue.

In the end, manufacturers with the lowest cost of production will win — because these manufacturers have more cushion in the margin and thus flexibility with strategic choices. First Solar truly has the lowest manufacturing costs. Here’s hoping that they can be nimble enough, quick enough and stalwart enough to survive the current, painful correction.

Solar is the future — but the road to the future will be expensive, painful, and it will require commitment and courage to follow through during these tough times.