Seeking Alpha
Alternative energy, solar, energy efficiency, grid modernization
Profile| Send Message|
( followers)  

By Ucilia Wang

BP Solar (a subsidiary of energy giant BP) has canceled a $97 million plan to expand manufacturing in Maryland, citing an increasingly intense competition in the global market.

The solar company, which makes, installs and operates solar power systems for homes and businesses, told The Gazette this week that it still plans to complete the building that was meant to house a new silicon ingot factory. But BP Solar will use the building, located at the company's North American headquarters, as office space instead.

The solar company won't be buying $67 million worth of equipment for the factory, BP Solar spokesman Tom Mueller said, adding that the competition among solar-panel makers is getting too intense.

"We anticipate continuing on with manufacturing there; we're just not going to finish up the expansion project," Mueller told The Gazette. "We're trying to position the plant to be competitive in the future and the competition globally has become very intense in the last few years. It just doesn't make sense to go forward with this expansion."

BP Solar is midway through completing the $30 million, 140,000-square-foot factory. Employees from two of the company's offices in the same county will move into the new space.

The company broke ground on the factory project in July 2007, and expected to nearly double its silicon-ingot production capacity to 150 megawatts. BP said at the time that the new building would have enough space to grow its ingot and wafer production to more than 400 megawatts later.

BP decided to cancel its plans for the factory at the same time that the U.S. financial market has been hit by the bankruptcy filing of Lehman Brothers Holdings Co. and the sales of several large U.S. banks and mortgage lenders.

The turmoil has triggered fears that raising money to carry out solar power plants will be difficult. Companies that do line up financing could see a rise in project costs, said Mark McLanahan, senior vice president of corporate development at MMA Renewable Ventures, on Thursday after the company announced a joint venture with solar-panel maker Suntech Power Holdings (see Suntech Buys EI Solutions, Teams Up with MMA).

"You can assume that it will bring up the price of delivered kilowatt or megawatt hours because your debt costs are higher, the conditions are more onerous and the transaction costs will be higher," McLanahan said.

BP Solar's move could reflect the possibility of an oversupply that some analysts predict will lead to fewer solar companies and lower profit margins in 2009 and beyond (see Analysts Pick Next Year's Solar Winners).

"We believe the pace of capacity being added, relative to actual demand expectations, is alarming," wrote Jeff Osborne, an analyst with Thomas Weisel Partners, in a research note last month. "We look forward to the coming shakeout of the sector, when prices will fall over 20 percent and winners will be separated from the losers."

All year long, some solar industry analysts have been forecasting that the market could be oversupplied by silicon, which is turned into wafers to make solar panels, starting next year. The glut would reverse a trend that began in 2005, when solar companies competed fiercely against integrated-circuit companies for silicon and couldn't secure enough to meet the demand for panels.

Since then, many silicon makers have built new factories and signed long-term agreements with solar companies. Like farmers who plant too many acres when prices are high, these silicon makers could end up producing more than needed in the next few years. A recent research report by the Prometheus Institute and Greentech Media predicted an end of the silicon shortage by the end of this year (see New Research Predicts End to Silicon Shortage and Oversupply of Silicon to Be Worse Than Expected).

But all that, of course, depends on demand. U.S. President Bush signed a bill Friday to extend renewable-energy tax credits – and to enact a $700 billion bank bailout plan – after the House of Representatives approved the bill earlier in the day.

The plan is nowhere near as large as the incentive programs in Germany and Spain. But if the credits boost solar demand, and the bailout improves the financial markets, the situation might not be quite as bad as some analysts – and companies – fear.

Source: BP Solar Nixes Factory Expansion: Proof of Industry Oversupply?