FirstSolar Foresees Pricing Pressure From Lots of New Capacity

It was out the door and into the hallway for First Solar’s (FSLR) presentation at JP Morgan’s technology conference.

“We can turn a sheet of glass into a functioning solar panel in less than two-and-a-half hours,” declared First Solar’s chief financial officer Jens Meyerhoff.

But what stood out to me was Meyerhoff’s observation that the market for solar technology is about to be hit with tons of capacity, in the form of amorphous silicon and polysilicon production.

That could spell much deeper cost competion, I imagine, though the company has sewn up a lot of existing business in long-term contracts, which it negotiated at prices below the market average. Leaving money on the table was the trade-off First Solar made to secure deals that would give the company long-term visibility, said Meyerhoff. The company has planned for there to be 6.5% declines in pricing in its industry on an annual basis.

There are barriers to entry in the fact that First Solar employ substantial trade secrets that are not revealed in patent filings, said Meyerhoff. And, too, the company owns its own custom equipment, rather than using off-the-shelf stuff.

Meyerhoff talked a bunch about the company’s cost structure. First Solar is able to deliver about 65 cents to 75 cents per kilowatt hour. Bear in mind that solar power is up against conventional energy sources with a price of about 12 cents per kilowatt hour in some cases.

The driving force in making solar more cost-effective is making conversion rates of solar energy higher. First Solar has seen its conversion rare rise from 9.5% to 10.6% in the last year, and the company is projecting an increase to 12% in the near future, though Meyerhoff noted there is a degree of uncertainty around conversion rate trajectory. Moving production to Malaysia is cutting 20 cents per kilowatt hour from First Solar’s cost, compared to its current production facility, added Meyerhoff.

The implication of all this was that the company’s ability to continue to lower costs of production hopefully means that First Solar can maintain the highest gross profit in its industry. That would help defray pricing pressure coming from the flood of new capacity.

Meyerhoff was also asked about what could expand the company’s market. He noted that First Solar has a current backlog of over $6 billion. Some areas of the Southwestern US could open up in the near future, he said, though First Solar’s projects in the US, however, remain “learning projects” at the moment.

Comments

[Jason T]

Thanks for update, but nothing about "price." Over 22x net tangible asset value and over 100x earnings with net profit margins at 30% signals very high expectations in future earnings. Great company but not a great price at all. I like to compare to CSCO in 2000 when it traded at 82 a share or 22x book value. 2 years and 7 months later, it was 8.12 a share or a little over 2x book value. FSLR could drop 80% from here and then it might be selling at a reasonable price. Disclosure: I have a short position in FSLR

[Zenfar]

Why not compare it to CSCO in 1994? Before the big Internet build out.

[gaucho]

Wow you add 2 = 2 and come up with negative 5. What a load of crap!! The demnd for solar energy is growing at an accelerating pace the introducion of plug in hybrid's and th introduct of all electric cars will drive the demand through the roof.

[gaucho]

If you want to see a great graph then look at LDK. Held down by the shorts to way below its competitors values it it rising quickly on a huge 200 million dollar stock buyback. This think may spike to 90 in a ver short time. At that value it would still be cheap.

[Massimo]

Hy Ray. Take more attention to the numbers, because yours aren't right! Now, you write "First Solar is able to deliver about 65 cents to 75 cents per kilowatt hour.", it must be "First Solar will be able to deliver about 65 cents to 75 cents per watt PEAK." That translates to roundabout 8-10 cent per kilowatt hour if you install the sistem in the South-West.
Second: you say "Moving production to Malaysia is cutting 20 cents per kilowatt hour from First Solar’s cost". Correct: "Moving production to Malaysia is cutting 20 cents per watt peak from First Solar’s cost". Please note that they produces actually for 1,14cent/wp. So Malaysia production cost would be 0,95 cent/wp next year. In 2012 with 12% efficiency and improved cost they will be at 0,65 - 0,75.
That would mean that in 2012 FSLR would be FULLY competitive with conventional peak power plants in the Southwest.

[fxtrader07]

thanks for the article and thanks also to massimo for clarifying some numbers.
I thinks FSLR's 6.5% price decline estimates are a joke and way too low.
with the massive buil-up in silicone.based capacity and given the fact that silicone-based solar panels have a higher conversion rate than fslr's thin film, the stage is set for a much steeper decline in prices - cut-throat-competition... I'd say - of rather 12-18% annualy.
So for all the longterm contracts secured at sub-market prices, fslr will face a huge margin problem going forward - somethingb that the analysts obviously haven't factored in at all. And the people chasing the stock at 300$ certainly haven't even thought about it for more than a second. Odds are very high that we have approached a cisco-like peak in fslr's stock price - I fully agree with JasonT.
This stock is a strong sell and will likely be back to low double digits 2-3 years from now

[steve pluvia]

"First Solar is able to deliver about 65 cents to 75 cents per kilowatt hour."

1. Sheesh, you don't understand the key metrics of solar power -- and you think you're qualified to write and article on the subject? As a previous poster noted -- your numbers are WRONG re cost/kwh. Wrong by about 10x. That qualifies as ridiculous-stupid wrong.

2. Excess capacity? Ummm lets go over business 101: You don't sell for less than it costs you to make. There is NO OTHER MFGR with lower costs than FSLR. Once that sinks in, get this -- NOBODY IS CURRENTLY PRODUCING PV AT COSTS LOWER THAN FSLR SALES PRICE.

Lets recap -- so you might get this. You have cost-to-produce, and sales price. The difference is profit. If nobody can produce for a price lower than what FSLR sells at, that means everyone must sell at a higher price than FSLR, or they are selling for less than their costs which means their losing money on every PV panel sold.

I suggest you write a new article titled "I Really Don't Know Anything About Solar or Business Basics"

[nickgogerty]

author compares cost of module production to power production reflecting total lack of understanding about energy or the PV solar market. Try reading Edward Gunther before commenting on this topic again. : guntherportfolio.blogs.../

[steve pluvia]

More evidence you know nothing about the key metrics of solar:

"The driving force in making solar more cost-effective is making conversion rates of solar energy higher."

WRONG

The key metric in solar is INSTALLED COST -- what it costs for PV panels, inverter, mounting hardware, wiring and labor. c-Si panels are 2x the efficiency as FSLR CdTe panels, but FSLR installed cost is about 50-70% lower.

Not sure why I attempt to explain this to you since you clearly don't know the difference between production costs, installed costs, CdTe or c-Si.

[larrypkelley]

I have an absolutely new emerging technology for making multi0crystalline Si solar cells.
Protected by trade secrets. I use approximately 1/30th the silicon and about 1/20th the electricity as other makers of crystalline or multi-crystalline cells. To see some of my crystal growth equipment, please visit the "factory pictures" page on my website.
shelbygemfactory.com
Larry Kelley ph 231 861-2165