Before boarding theme park roller coasters, riders typically see the following signs:
- For your safety remain seated with hands, arms, feet and legs inside the vehicle
- This is a high-speed roller coaster ride that includes sudden and dramatic acceleration, climbing, tilting, dropping and backwards motion
- Beware, you may lose your glasses and hats on this ride
- You must be this tall to ride
Similar signs are neon-light visible in the solar industry. Essentially:
- Proceed carefully and thoughtfully and keep your emotions in check when making solar business decisions
- This is a high-speed volatile, incentive-driven industry with sudden market changes due to withdrawal of government funding and painful downward price pressure
- Beware, you may lose a ton of money on this ride
- You must clearly understand and accept the difficulties of competing in an incentive-driven industry with severe downward price pressure for components and downward bidding pressure on tenders
The solar roller coaster is alive and functioning well as an excuse for constrained margins, unreliable incentives, low bidding during auctions, high debt and a host of industry behaviors. Examples include:
- Project delays because of inadequate transmission — blame it on the solar roller coaster
- Curtailment because of over deployment and inadequate transmission — blame it on the solar roller coaster
- Companies going on a buying spree ending in bankruptcy and failure (SunEdison) — blame it on the solar roller coaster
- Companies failing due to downward price pressure (too many to name) — blame it on the solar roller coaster
- Low tender bidding for tariffs leading to poor quality installations — blame it on the solar roller coaster
- Incentive-driven market bubble leading to market collapse (Spain, Italy and many more) — blame it on the solar roller coaster
At this point the solar roller coaster is a cliché used to explain the often heartbreaking ride taken by participants as they strive to make a profit in a commodity industry while selling against an entrenched competitor and relying on subsidies, incentives and mandates to continue doing business.
On top of all this there is the fact that participants in the global solar industry are also warriors in the battle for the environment. It is an industry where you get to participate in doing good while hopefully doing well in a business sense.
It is also an industry where many dreams of doing good while doing well have been dashed, often because of poor business or technical choices. Solyndra is an example. Suntech is an example. SunEdison is an example. Yingli is an example.
Those working in solar get to go to bed knowing they are part of the solution, until they are no longer part of the solution.
PV Industry Behavior – Anxiety Training 101
The thing is that roller coaster is an apt word for the experience of many, if not all, solar industry participants. It’s exciting. It’s fun. The difference is that real roller coasters are fun for most people while the solar roller coaster may be fun on the way up but once it swoops down and around it is definitely not fun. For those whose dreams are dashed along the way, it is tragic.
Globally most of the demand for solar is driven by incentives, subsidies and mandates that is, government policy. Government policies are historically unreliable. Today’s law is tomorrow’s reversed law. There is still relatively little pull for solar deployment from end users. This is because there are substitutes. End users of grid connected electricity in industrialized countries are disconnected from the source of the electricity. For most users, price is the key metric for choosing solar and other drivers, such as climate change, serve as after decision support mechanisms. Even climate change is, for many, an amorphous driver for making electricity product choices.
Decades-long reliance on incentives that time out or end abruptly has encouraged a certain behavior among solar industry participants. At this point in solar industry history this behavior is deeply ingrained and largely unconscious. It is, however, easily observable.
In case of incentives, whether rebates or tariffs, supply and demand participants ramp up activity in the beginning and towards the end of each decrease, panic as the end of the incentives’ life and rejoice if it is extended. During this process there is no time to develop a systematic approach to do business. There is only time to react to stimuli.
The current trend — in all markets — is to auction off a mandated tranche of megawatts. In this example, unlike an auction for fine art where the highest bid wins, participants bid downward. In the end, the lowest bid typically wins and is celebrated by the entire industry as a sign of progress.
If constrained margins and the potential of low quality installations because choices were made along the way to support the low bid is a sign of progress, then solar auction winners are very successful. The problem with this behavior is that it is counter the best interests of the participants. A caveat, not everyone in this process is losing money, but many are losing money.
Roller Coaster Riders
SunPower was founded in 1985 and has been riding the solar roller coaster for decades. Cypress Semiconductor invested in SunPower in 2002 and began divesting in SunPower in 2005 concluding the spinoff in 2008. SunPower acquired California-based commercial system integrator PowerLight in 2007. TOTAL acquired a 60 percent stake in SunPower in 2011 also offering it credit support. In August, TOTAL reduced its credit facility while extending it to 2018. Also in August, SunPower cut ties with some suppliers, closed its module assembly facility in the Philippines while indicating it would add capacity in Mexico and announced it would cut >1000 jobs.
It also announced that, due to YieldCo uncertainty, it would reduce focus on the international utility-scale sector and refocus on DG. Job cuts will primarily come from closing its module assembly facility in the Philippines and from cuts in its system’s business.
What does it all mean?
SunPower finds itself in the difficult position of competing with less expensive premium module products that also have lower cost structures. Concerning its systems business, it finds itself in the highly competitive downward spiraling tender and power purchase agreement biding sector. With the residential application facing net metering headwinds in the US and DG also highly competitive, SunPower may not find itself with an advantage.
First Solar bought its ticket to the solar roller coaster in 1987 when it was founded by Harold McMaster, CEO of Glasstech Corp. as Solar Cells Inc. In 1999, True North Partners, an investment group chaired by John Walton, son of Wal-Mart founder Sam Walton, bought the struggling CdTe manufacturer — just in the nick of time — renaming the company First Solar. In 2004 First Solar received a $5-million loan from the state of Ohio to expand capacity from 6-MWp to 25-MWp.
In 2006 the company raised $400 million in its IPO. Along the way First Solar has made unsuccessful forays in other technology directions toying with CIGS and crystalline without bringing either to commercial production. In the early feed-in tariff days First Solar correctly read the market and focused its business on the rapidly growing market in Europe for large-scale deployment. Reading price competition correctly, it refocused on the systems side of its business right as crystalline prices began falling and the market in Europe began softening. Recently it shuttered its crystalline start up Tetrasun and announced a restructuring indicating that it would focus more on module sales and less on its EPC and O&M business.
What does it all mean?
No one can guess right forever, and luck always runs out. Module sales are not the high margin area of the PV industry. Concerning module sales, overcapacity is pressuring price and prices for higher efficiency Chinese product are currently below First Solar’s cost of production. More concerning, backing away from its EPC business may indicate that years of competitive bidding has caught up with the company in terms of tight margins and potentially unprofitable system sales. As for O&M, as this area is traditionally underfunded, stepping away seems a good direction to take.
Q-Cells climbed aboard the solar roller coaster and took a wild ride swooping around every curve, climbing ever higher and finally swooping down into bankruptcy and acquisition by South Korea-based Hanwha. Q-Cells was founded in 1999 as one of the PV industry’s first pure solar cell manufacturers. The company’s first goal was to be a cell provider, currently the basis of almost the entire solar PV industry in Taiwan. In 2001, it had 12-MWp of cell capacity. In 2005, it went public.
From 2005 through 2008, it bought or invested in an amazing array of PV technologies: CSG (silicon on glass), VHF (a-Si), Solaria (low concentration), Solibro (CIGS), Brilliant 234 (silicon tandem junction), Calyxo (CdTe) and Solar Fields (CdTe). It formed a joint venture with Evergreen Solar, EverQ, to manufacture crystalline ribbon technology. Good Energies invested in Q-Cells, and Q-Cells invested in REC. In 2008, the company planned to build a cell manufacturing facility in Mexico. Along the way the company put on one of the solar industry’s biggest and most highly anticipated parties at the annual EU PVSC conference. In 2010, pricing for solar cells and modules crashed. In April 2012, Q-Cells declared bankruptcy and in August 2012, it was acquired by Hanwha.
What does it all mean?
Sometimes it pays to be a little circumspect when on a shopping spree. Q-Cells spent and invested money freely dipping its fingers into just about every available PV technology apparently on the theory that the market would decide and that it, meaning Q-Cells, would be nimble enough to take advantage of the market’s choice. The market chose lower price and Q-Cells could not outlast the downturn.
Boarding the Ride
Enter the solar industry at your own risk as it is a wild, fun and often heartbreaking ride filled with steep downward price dives and neck-breaking shifts in government policy.
At its best the PV industry marries the opportunity to profitably contribute to the climate change solution.
At its worst, industry pressures leads to prices for modules that are too low and bids on large projects that are unprofitable.
Too often new entrants enter blindly, certain that they have the market or technology solution that will overcome all the cost, price and market barriers. In many cases the realities of what it takes to survive and thrive are ignored, in the cases of many companies, wearing blinders or … riding the roller coaster with your hands over your eyes.
It is not always true that the best business plan and the best technology will win, but it is true that the solar industry and all of its technologies and participants is crucial to the future. The way the world’s population sources its electricity must change and solar is part of the solution. So, for your safety, remain seated with hands, arms, feet and legs inside the vehicle and beware of high speeds and sudden, dramatic acceleration, climbing, tilting, dropping and backwards motion. Beware, you may lose your glasses and hats on this ride and remember, you must be this tall to ride.