First Solar: What This Analyst Missed

I read an article Friday morning where Porter Stansberry, of Stansberry & Associates, gave an interview to The Energy Report. I know Porter, and often enjoy reading his analysis. He's a smart guy and has made a lot of good calls throughout his career. But Friday morning, I couldn't help but shake my head when I read the following question and answer...

The Energy Report: We have the big push to go to “green,” non-carbon-based fuel alternatives. But with this abundance of natural gas, why would we expect any alternatives—solar, biofuels and so on—to take off?

Porter Stansberry: I agree completely. I’ve been shorting solar stocks regularly. For instance, First Solar Inc. (Nasdaq:FSLR) is a fantastic short for several reasons. The dead giveaway is that First Solar makes solar panels only because it gets huge government subsidies to do so. And it sells solar panels only because the people who buy them get huge government subsidies for doing so. Solar energy is not economically practical. First Solar’s technology, in particular, is much less efficient than the newer versions of solar technology, but First Solar is the largest of the solar stocks by far in terms of market cap. It’s worth $16 billion right now—which, in my opinion, is completely insane. So if you want to talk about alternative energy, why would you make the investment in a large amount of solar panels when you can simply tap into natural gas at very, very low cost in most places in the U.S.?

Let's break this one down, as I must respectively disagree with a couple of points in this analysis...

The dead giveaway is that First Solar makes solar panels only because it gets huge government subsidies to do so.

It is true that First Solar, as well as any solar company relies heavily on government subsidies. But what few fail to mention when making this argument is that ALL forms of energy are subsidized one way or another.

According to an Energy Information Administration (EIA) report, which analyzed federal energy subsidies associated with electricity production, energy subsidies and support in FY 2007 came to just over $3.3 billion for coal, about $1.2 billion for nuclear, and $2.1 billion for natural gas and petroleum liquids. The subsidies identified in the report focused on direct expenditures, tax expenditures, R&D, and electricity programs serving targeted categories of electricity consumers in different regions.

There are also subsidized health costs that can be associated with the burning of fossil fuels. Of course, these costs are difficult to accurately quantify, but to disregard them in any analysis would be irresponsible.

If you're going to call out the renewable energy industry for being subsidized, then you must call out the entire energy industry for being subsidized.

First Solar’s technology, in particular, is much less efficient than the newer versions of solar technology.

First Solar's technology boasts efficiencies of just under 11%. For thin-film, this is nothing to shrug off. And we typically don't count anything that hasn't been deployed in the field yet, either. Sure, it's significantly less than the 23.4% that SunPower (Nasdaq:SPWRA) boasts, but you have to be careful when making these comparisons.

You see, while First Solar's thin-film maintains lower efficiencies than traditional, silicon-based solar, it's also significantly cheaper. This cost advantage favors large-scale installations where you have more roof space to accommodate more of the less-efficient panels.

Of course, if you're looking to install solar on your home, then you'd likely be better off with a company like SunPower. After interviewing a number of installers, we have found that SunPower is often the panel of choice, mostly because of the higher efficiencies the company offers, as well as an easier, and sometimes quicker install.

Now I will certainly admit that many solar stocks have absolutely soared over the past few months. When we picked First Solar up at $88 last November, we set an initial price target of $140. Today the stock trades around $190. Is it a case of too much, too fast? Perhaps, which definitely makes it an excellent target for those wishing to short solar. But for the sake of long-term sustainability, I wouldn't disregard a company like First Solar.

Disclosure: No positions currently held in FSLR or SPWRA.

Comments

[jimp:]

Any thoughts on Trina Solar- TSL?

May 10 07:57 AM

[Fred W:]

FSLR is going to run into raw material supply issues in less than 3 years...assuming the growth rate stated by fslr.
For the next few months fslr will still hold a pricing advantage but Si costs are dropping so rapidly that the LCE # will no longer be the lowest price option for utility scale development.

May 10 10:32 AM

[Wisdom vs. ...:]

i am no materials expert, but Fred W is dead-on about the CSi price difference. FSLR is RELATIVELY uneconomically inefficient. it costs an extra $1/kWh BOS; the only reason to install it is that CSi costs more than $1/kWh extra. Why choose a physically larger project if two cost the same?
more importantly, as CSi moves within $1/kWh, then it becomes cheaper to install CSi. every expert i have ever read thinks CSi will drop below +$1/kWh thin film. When it does, there will be no economic reason to buy thin film even with subsidies, and FSLR will be SOL, and i do not mean the chinese solar company. unfortunately, this is the most likely scenario.

i would like to install SPWR panels; unfortunately, they are so expensive that the ROI on a sunpower system is lower than the ROI on slightly less efficient, much-lower cost competitors.

May 10 12:36 PM

[Windsun33:]

I have yet to figure out this love affair that has been going on with FSLR. At $16B cap, it is "worth" more than all of the solar panels sold in the US in 2008 - from all companies combined.

The First Solar panels are not as economical as they look - while the raw cost per watt is less than most, the installation costs are quite a bit more than for conventional silicon panels with higher efficiencies. And with Si prices dropping drastically, it has lost a lot of the price advantage that it once had.

Two years ago we were paying $5 a watt for Si panels, while the FSLR were selling for around $2 a watt. but now we are paying under $3 a watt for those same Si panels, and FSLR panels are the same price or slightly more.

The big problem with solar right now is not the cost of the panels, it is the cost of the red tape and the lack of credit. (We just last week got an RFQ for a ~$30,000 system that would have cost us over $15K just in paperwork to bid on.)

May 10 01:27 PM

[frflyer:]

The subsidy figures from EIA don't tell the whole story on subsidies for conventional energy.

Natural gas isn't just used for electric production, but for heating and cooking and industrial uses. Their numbers are just for electricity production from gas.

While oil isn't used much for electric production, if we are considering replacing the ICE vehicles we have now with electrics and PHEVs, then it is also fair to consider the subsidies for oil, which are huge.

www.heatisonline.org/c...

"subsidy programmes from 1918 are still in place"
"I'm not aware of any oil and gas subsidy that has ever been phased out," said Koplow, the leading expert on U.S. energy subsidies"

"in a time of skyrocketing oil prices and profits, why did the George W. Bush administration in 2005 authorise an additional 32.9 billion dollars in new subsidies over a five-year period?"

"Koplow's 2007 report to the Organisation for Economic Cooperation and Development puts the annual U.S. subsidy at an average of 39 billion dollars a year, when the costs of guarding oil lanes in the Persian/Arab Gulf, and the Alaska Pipeline are included. This does not include any costs from the Iraq war"

"Estimating U.S. oil and gas subsidies is very challenging. Subsidies rarely involve cash payments. Instead scores of U.S. government agencies and departments create hundreds of programmes to support the U.S. energy sector. And there is no requirement for the federal government to keep track of all this."

"Energy subsidies are often simply hidden from public scrutiny. It's only recently been revealed that 40 companies granted leases between 1996 and 2000 for drilling in the Gulf of Mexico do not have to pay royalties for the publicly-owned resource. This is worth nearly a billion dollars a year in lost revenue to the federal government, according to a 2008 study by Friends of the Earth (FOE), a U.S. environmental NGO, and may ultimately total 50 billion dollars."

"These production subsidies do nothing to lower the price of petrol at the pump for U.S. consumers. It simply boosts companies' bottom line, Pica said."

"This massive government intervention distorts energy markets, making it very difficult for alternative energy sources to compete without similarly massive subsidies. "And it promotes America's addiction to oil," Larsen added."

and from Encyclopedia of Earth
www.eoearth.org/articl...

"The Strategic Petroleum Reserve, a
federal government entity designed to supplement
regular oil supplies in the event of disruptions due to
military conflict or natural disaster, costs taxpayers an
additional $5.7 billion per year."

And the externalized costs of fossil fuels are also huge.

"When you consider that researchers have
conclusively linked auto pollution to increased health
problems and mortality, the CTA report?s estimate of
$29.3 to $542.4 billion for the annual uncompensated
health costs associated with auto emissions may not
adequately reflect the value of lost or diminished human life. "

"Other costs associated with localized air pollution
attributable to gasoline-powered automobiles include
decreased agricultural yields ($2.1 to $4.2 billion),
reduced visibility ($6.1 to $44.5 billion), and damage
to buildings and materials ($1.2 to $9.6 billion). Global
warming ($3 to $27.5 billion), water pollution ($8.4 to
$36.8 billion), noise pollution ($6 to $12 billion)"

"According to estimates by
the Union of Concerned Scientists (UCS), federal
corporate income tax credits and deductions result in
an effective income tax rate of 11 percent for the oil
industry as compared to a non-oil industry average of
18 percent"

"The average effective tax rate on integrated
oil operations has fallen from 21.5 percent in
the early 1980s to only 8.7 percent in the 1990s (both
figures are significantly below the statutory rate of 35%."

"The U.S. government provided net subsidies of between $5.2 and $11.9 billion to the oil sector during 1995, excluding the cost of defending Persian Gulf oil supplies. We estimate defense of oil supplies to be worth an additional $10.5 to $23.3 billion, demonstrating the magnitude of this specific subsidy element. Thus, our estimate for net federal subsidies to oil, including defense, is $15.7 to $35.2 billion for 1995. Because of the sensitivity of our totals to the defense subsidy, we present our results both with and without this item."

Two wars in two decades with huge costs in lives and money

And of course oil accounts for at least $300 billon of our trade deficit.

Nuclear energy has been subsidized for 50 years and a total of $500 billion.

So much for subsidies being an argument against renewable energy. There couldn't be a worse argument.

May 10 01:39 PM

[jmmx:]

@ frflyer:

Well done!!!

I would also point out in this article -
"This cost advantage favors large-scale installations where you have more roof space to accommodate more of the less-efficient panels."

It seems to me that no matter how large your roof is (mega-store or whatever) the space is a limited resource and you would want to maximize production using the most efficient technology that was reasonably cost competitive. The thin film only makes sense to me for use in solar farms where available space (i.e. bare land) is a non issue.



On May 10 01:39 PM frflyer wrote:

> The subsidy figures from EIA don't tell the whole story on subsidies
> for conventional energy...
>

May 10 06:06 PM

[billp37:]

You may have missed?

1kWh = 3412.14163 BTU.

May 10 07:19 PM

[delbmarcs:]

Once silicon costs are normal fslr will still be 50 c/W cheaper than Si at the system level. It is also on a faster cost reduction curve, because it is less mature - there are more low hanging fruit, it is faster to double production. We are all in luck that fslr is so good at what it does, because it is adding competition in a field that was too long without it.
If anyone thinks we are going to solve our socieal problems by using natural gas, they are fooling themselves. That's why solar and solar stocks are so valuable.

May 10 07:33 PM

[Windsun33:]

What makes you think that silicon costs are NOT normal now?

The problem I see with the FSLR panels is that just the mounting structure and wiring alone cost about 40% more than most Si panel systems would cost, offsetting a lot of the base price advantage.

May 11 12:33 AM

[SHASHIDHARA.BV:]

Can anybody comment on the Cadmium content in the Solar panels & how do you support their utilisation in Green Energy production ?

May 11 01:41 AM

[frflyer:]

It seems to me that the market will have enough demand for thin film and silicon wafer based cells.
First Solar will probably do well, but will also have competition soon from companies like CIGS thin film makers like Nanosolar and Heliovolt.

"It is also on a faster cost reduction curve, because it is less mature - there are more low hanging fruit"

Not in cost of materials.

Polysilicon manufacturing is itself an evolving industry, so wafer production costs could benefit from better manufacturing technology, futher reducing Si solar cell costs.

A little off topic, but there is an excellent article on costs and economics of wind energy and why feed in tariffs make sense. How wind integrates into the grid.
In Europe, though wind energy has high up front costs to build, but very little cost later, it lowers consumer's electric bills because of it's predictable power prices.
I couldn't explain it well enough to do justice to the article, so I recommend reading it.
www.eurotrib.com/story...

Anyway, if you do read it, does anyone think solar is a similar situation? By solar, I mean any solar, PV, CPV CSP, distributed or utility scale.

May 11 02:27 AM

[Dave Marsh:]

I don't understand how FSLR gets away with putting two extremely toxic materials together (cadmium and tellurium), wthout being nailed for violating Hazmat laws. Cadmium in particular is very nasty stuff. At end of life, there will an awful lot of toxic-laden panels to dispose of.

May 11 03:39 PM

[Chris Lau:]

This is a great write-up. Good analysis and skepticism in the key areas (i.e. subsidies).

Jun 12 11:21 PM