Markets

First Solar's Future is Uncertain As It Expands Beyond Europe

By David Phillips

Updated on: February 25, 2010 / 3:32 PM EST / MoneyWatch

First Solar (FSLR) is expanding beyond Europe, home to its largest thin-film solar module customers, due to planned subsidy cuts for solar projects. But its longer-term performance could be hampered by obstacles in other markets too.

In 2009, the cadmium-telluride (CdTe) thin-film module manufacturer generated almost 65 percent of its $2.06 billion in sales from German photovoltaic (PV) projects, from roof-top panels to arrays of solar panels on farms, according to its annual regulatory filing. In 2010, the company will still derive about 40 percent to 50 percent of module sales from German customers, despite best efforts to open windows to other sunshine markets. Most of its business from Germany will be front-loaded, CEO Robert Gillette said on the fourth-quarter ending 2009 earnings call, to beat the planned June 1 subsidy cuts.

Feed-in tariffs (FiT) are production incentives that offer guaranteed (ROI) payments to generators of renewable energy that "feed into" electric grids, usually for a contractual length of 20 - 25 years, with the end-game to effectively stimulate demand for photovoltaic (PV) initiatives.

The biases of competing interest groups aside, FiT benefits are only meant to stimulate end-user demand short-term, with a football kicked through the uprights when an inflective, stand-alone is near: where the renewable energy source is close to attaining grid parity. Feed-in tariffs aren't meant to be sustainable in perpetuity, as demonstrated by Spain capping out Fit-based projects in early 2008:

Initial surge in PV projects leads to supply - demand imbalance, where cheaper imports flood market to capitalize on subsidies;
Artificial supply imbalance ensues;
Ironically, utility customers end up subsidizing the stimulus package(s) through higher monthly electric bills; and,
Debt-ridden municipalities (either at state or national level) can no longer afford incentive programs, cut subsidies before stand-alone commecial viability assured.

Like other European Union states with "cradle to grave" welfare programs, Germany's still-wounded economy and growing public spending deficits forced the Minister (of this or that department) to slash incentives -- the country could no longer afford to subsidize renewable energy growth within its borders. Though specifics have yet to be worked out, cuts ranging from 11 percent to 16 percent are being planned to FiTs, with amounts to be determined by location of PV arrays (such as rooftops vs arable farmland).

Contrary to optimism expressed by First Solar management on its earnings call, installation volume capacities in other European markets, such as France (12 percent of its business) or Italy (6 percent of sales), were too small to absorb lost mega-watt sales from Germany. "For the big players, there is no real way around Germany, to be honest," SES Research analyst Karsten von Blumenthal told Reuters.

Where, if not Germany?

Although not organic growth, First Solar's acquisition of financially-strapped OptiSolar's North American utility solar power projects for $400 million in March 2009 -- complete with more than 1.4 gigawatts of coveted utility-scale projects in its development pipeline -- could prove prescient in design, and provide a captive (and predictable) demand pool for inventory that might otherwise have collected dust in warehouses until sold at steep discounts down the line.

First Solar plans to engineer and construct two solar facilities under contract with SCE, or Southern California Edison, using its proprietary CdTe thin-film photovoltaic solar modules. Total nameplate capacity is 550 megawatts of PV solar electricity, or enough to power 170,000 homes. However, the power purchase agreements (PPAs) still have to be approved by the California Public Utilities Commission. Pending network upgrades and receiving government permits, construction is expected to start in 2012 for the Desert Sunlight project and 2013 for the Stateline job.

Scheduled completion date(s) in 2015 are not without market risk and could prove too optimistic a time-line:

Environmental or other public interest group protests could delay Bureau of Land Management's environmental impact assessment of the project's expected topographic footprint.
California's Renewables Portfolio Standards (RPS) goal of 33 percent of electricity from renewable sources by 2020 is currently the most aggressive RPS program in the United States. Southern California Edison -- and other utilities in the state -- faces a daunting challenge in meeting state deadlines for getting its power from alternative energy sources, especially in finding the requisite funding! So much so, SCE has already admitted other of its scheduled projects will not finish on schedule.

The SCE utility project underscores another fundamental weakness in First Solar's business modeling -- assuming it was acquiring "shovel-ready" projects. To wit:

The biggest challenge has been trying to find sites for -- and then building -- transmission lines to connect the remote renewable power plants to SCE's customer base. Transmission lines can take a decade to plan and build -- years longer if there's opposition.
The state Public Utilities Commission has concluded that SCE would need to build 1 l transmission lines to carry all the renewable power it needs to meet the 33 percent mandate. Yet only one -- a $2 billion line from the Tehachapi mountain range to SCE facilities in the Santa Clarita area -- has been approved to date, and construction hasn't begun. [Source: Los Angeles Business Journal, September 21, 2009]

First Solar expects to ramp up aggregate manufacturing capacity to 34 production lines by 2012, with annual worldwide production capacity of approximately 1.8 gigawatts. Although the company has delivered on prior annual promises, such as lowering the average manufacturing cost per watt (total cost declined quarter-quarter 1.2% to 80 cents per watt) and improving conversion efficiencies, how it responds to (1)unexpected changes in customer trends and (2) competitive challenges to its dominance of thin-film markets could ultimately decide the fate its own survivability in what's increasingly becoming a commodity end-game.