Whenever an industry comes into existence outside of the influence of free market forces, by government fiat, one can be sure of its short-lived existence or existence that is entirely dependent on government subsidies, doles, grant, loans, & other creative siphoning-off of taxpayer revenues. The renewable energy is a typical contemporary instance of such an industry and First Solar (NASDAQ:FSLR) is an early entrant.
The search for renewable energy sources and the attempt to mass produce and commercialize such sources is based on erroneous and politically motivated climate science. Global warming, climate change, the alarming rise of CO2 emissions, caused principally by anthropogenic activities, is an all too common media-reporting event and repeated calls to combat this imminent disaster are ubiquitous. Multinational corporations that are not directly involved in the generation of energy or those that have a negligible carbon footprint are usually the most vocal, like Microsoft (NASDAQ:MSFT), in their commitment to battling climate change and global warming. Senator James Inhofe (R-OK) rightly calls global warming a hoax in his new book, "The Greatest Hoax: How Global Warming Conspiracy Threatens Your Future."
It is in this context that the long-term prospects and sustainability of First Solar ought to be analyzed. First, increasingly, the science of global warming is being debunked across various media channels and as the issue continues to be publicized, this, eventually, should lead to changes in public policy. The most immediate effect of such a change would be the complete discarding of all regulations based on this flawed science and the ending of subsidies towards the alternative energy industry.
Therefore, from an investment viewpoint, any investment in companies within this industry ought to be made with extreme caution for the long-term sustainability of this industry is highly suspect. Elucidating the point made earlier about industries that are not subject to the influence of free market forces, because the science here is flawed and government sponsored, most companies in this industry do not strive for cheap alternative energy solutions that compete directly with coal, gas, and oil. The major rationale for asking consumers to make the switch to alternative energy is the doomsday prediction of green propaganda.
Consequently, the market viability of such technologies is highly suspect. For instance, First Solar, on its website, lists the number of equivalent cars it has removed, the number of equivalent trees that would have been planted, and the tonnes of CO2 displaced as a result of electricity production resulting from its sales. Similarly, Evergreen Solar (ESLR), on its website, cites that its solar panels take less carbon emissions to manufacture with its stated mission being the production of more energy with a minimal impact on the environment. The propaganda for the cause of global warming has been so successful and pervasive that CO2 which all mammals, including man, exhale is now, routinely, termed a pollutant.
First Solar, as expected, was being subsidized in Europe. Germany, recently, ended all subsidies towards the alternative energy industry. Consequently, First Solar was forced to close two plants in that country, lay-off 30% of its workforce, and cut off four of its 20 manufacturing lines in Malaysia. The reduction in subsidies towards the solar industry is symptomatic of public policy across Europe. Further, recently, Nasdaq management has announced that First Solar would be removed from the Nasdaq 100 as it failed to meet its market capitalization requirements. The effect of the ending of German subsidies on First Solar's stock was catastrophic. The stock price plummeted from over $300 to around $20. In addition, there are disturbing indicators of how First Solar manages and utilizes the money it receives as subsidies. In 2010, the Obama administration gave First Solar a subsidy of $16.3 million. Meanwhile, in the two years following the grant of this subsidy, CEO Gillette was paid $32 million for his two year service with the company after being, recently, ousted. An article that sums up First Solar's recent performance can be read here.
Within the solar and alternative energy industry, First Solar's financial performance is not unique. In February of this year, another solar panel manufacturer, Energy Conversion Devices (ENERQ.PK) filed for bankruptcy protection and intends selling off its solar businesses. Yet another Solar technology company, Solyndra, filed for Chapter 11 bankruptcy late last year even after being offered $535 million low cost loan guarantees by the Department of Energy. Another reason frequently cited for these and other such bankruptcies is the competition that is received from Asian countries such as China. Claims are made that the cost of manufacturing solar panels has continued to diminish in Asia, to the point that manufacturers in the West are no longer able to compete with their Asian counterparts even after receiving subsidies.
Further, firms in Asia within this industry are well-financed in terms of subsidies. This, however, does not change the fundamental point about the long-term viability of solar power or another alternative source of energy as a true free market competitor to oil, gas, and coal. Genuine industries do not collapse at the first hint of competition from Asia. Indeed, the trend in most real industries is to outsource to Asia or to move manufacturing there in order to compete successfully. Nor are failures confined only to the solar energy industry. Within the alternative energy industry General Motors' (NYSE:GM) government subsidized Chevy Volt is reported to be doing poorly. Recently, General Motors has had to halt production for 5 weeks and lay off about 1300 workers. GM had expected to sell 10,000 Chevy Volts in 2011, but was only able to make sales of 7,700. It is also estimated that each Volt sold to date has cost the taxpayers $250,000.
An apt article in the National Geographic sums up the cost of solar energy and the problems associated with determining the real costs involved. Solar energy is pricey made more so by uncertain weather conditions so much so that the actual cost involved on an annual basis would depend heavily on local weather and region conditions. Given the present state of technology, solar energy in Germany, a country that has, till recently, had a generous government incentive program for around a decade constitutes only about 1.1 percent of its total energy output. A US Energy Information article estimates leveled costs of energy resources in terms of $/MWH starting in 2016. The following figures are taken from the article:
Conventional Coal: $94.8/MWH
Natural Gas: $66.4/MWH
Wind (Offshore): $243.2/MWH
Solar PV: $210.7/ MWH
Solar Thermal: $311.8/ MWH
Another reason why solar energy is expensive is related to the costs associated with manufacturing, principally, because solar cells continue to be expensive to manufacture. To summarize the costs involved, a coal power plant that provides electricity 90% of the time costs 4 to 6 times less than a solar power plant of similar capacity but which provides electricity for only 30% of the time. If this plant were to be scaled up to produce as much electricity as the coal plant running 90% of the time, it would cost about 18 times more.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.