Will Politics Save First Solar?

| About: First Solar, (FSLR)

One of the perks of writing for Seeking Alpha are the messages I sometimes get concerning my articles. This can lead to some interesting conversations about the industry, and sometimes I get tipped off about information that otherwise would miss my radar screen. Regarding my most recent article about California's new energy bill, I've been informed that I missed one key piece of information: if AB237 had not passed, net metering would have expired at the end of next year. So I would like to modify my previous statement: AB237 was a very significant win for rooftop solar installers such as SolarCity (SCTY).

A second message informed me about some interesting developments regarding First Solar (NASDAQ:FSLR). FSLR recently filed comments to the net metering docket with the Arizona Corporation Commission recommending that the commission eliminate net metering. This document is publicly available through the ACC website, although it is difficult to find. There has been very little publicity regarding this docket so far. I have reposted it online (to be downloaded directly) here.

A few interesting quotes from the document:

"The cost of PV in 2006 was on the order of $8-9.00/installed watt."

"Recently released data from the Solar Energy Industries Association and GTM Research show an average cost/installed watt for residential PV of $4.81 and the average cost/installed watt for utility scale systems as $2.10. No one could have predicted these cost reductions two, much less seven, years ago. First Solar has consistently said that as the cost of solar comes down, so must solar subsidies."

"…it is appropriate to review and revise the programs and subsidies put in place in 2006…"

"The current review and proposed revision of net energy metering have been criticized by some as anti-solar. We believe the reverse to be true. Unless the regulatory structure is adjusted to reflect current market realities, the unforeseen economic impact of net energy metering may result in an indiscriminate backlash against solar of all sizes and types."

In actuality a public backlash against solar power is unlikely as it enjoys strong bipartisan support. (Solar is favored by 98% of Democrats, 92% of independents and 84% of Republicans.) Why would a solar company ever recommend the reduction of solar subsidies and/or the elimination of net metering?

In a phone conversation, Bryan Miller (President of The Alliance for Solar Choice, an organization that is supported by four large rooftop solar companies) pointed out that APS is one of FSLR's largest customers. Given this, it's no surprise that FSLR is parroting APS' talking points.

The docket is actually not the first time that First Solar has suggested the removal of net metering. Other instances include:

  1. A comment to the Nevada Public Utilities Commission
  2. An editorial in the Arizona Republic's online site azcentral.com

Clearly First Solar is attacking rooftop solar because it is threatened by the technology. From pg. 31 of its 2012 Annual Report:

"We face numerous difficulties in executing our Long Term Strategic Plan, particularly in new foreign jurisdictions, including the following:

  1. difficulty in competing against competitors who may gain in profitability and financial strength over time by successfully participating in the global rooftop PV solar market, which is a segment we have deemphasized as part of our Long-Term Strategic Plan;"

First Solar's CdTe panels are fairly heavy and inefficient (about 13% efficient), and FSLR has never developed a suitable rooftop module. If rooftop subsidies are removed, FSLR hopes to create more demand for utility-scale solar installations. A quote from earthtodan, a Seeking Alpha reader and self-described solar industry professional:

"Meanwhile standard module companies are making even bigger modules (72-cell), which is rapidly becoming the new standard and reduces the racking hardware requirement and installation time even further. It makes FSLR modules look tiny in comparison. It shouldn't be too hard for them to take CdTe and put it in a standard large framed module, but for whatever reason they haven't done it yet, and until they do, I believe their product format will be a drag on their ability to compete in price."

I had hoped a few weeks ago that FSLR would enter into the rooftop solar market. The company sits on just over a billion dollars of cash (according to the Q2 Earnings Transcript) and has recently acquired TetraSun. TetraSun's 21% efficient technology is well-suited to rooftop installations. Unfortunately, 21% efficiency puts TetraSun right in the mix of low-cost Chinese producers, so I think the company will find some difficulty selling TetraSun modules with any decent margin. Furthermore, the new TetraSun factory is slated to begin shipping 25-50 MW in the second half of 2014. Compared to FSLR's CdTe production (389 MW in Q2), 50 MW per year is a drop in the bucket. The new modules will be targeted mainly at the Japanese market. The Japanese market is hot right now, but will it remain so for another year?

Clearly the company has given up on the US rooftop solar market. The US market, in general, is slipping away from First Solar. In a creative turn of phrase, CEO James Hughes said, "Our opportunity set outside of the U.S. is now 4.1 Gigawatts and represents 51% of the total." Interpreted another way, Mr. Hughes is stating that utility-scale opportunities in the U.S. are slowing down. The company's Q2 revenue declined by 46% y/y and project bookings fell from 2.6 GW to 2.2 GW. 2013 revenue guidance was adjusted downward from $3.9B to $3.7B. It has been said that the decline in revenue was due to the delay of two large projects, but there is something more widespread occurring here.

Since it is not prepared to compete in the rooftop solar market, First Solar has turned to political wrangling in an attempt to expand the utility-scale project pipeline. That is a risky strategy. If it continues to cling to utility-scale installations and it loses the political battle in several states, First Solar will be in a very tough position.

There is a strong debate over whether rooftop solar or utility-scale solar is best for the consumer. I won't go into much detail in this article, except to say that both systems have merits. The benefits of a utility-scale system include:

  1. Better voltage regulation
  2. Reduced cost/Watt due to economies of scale
  3. Benefits even those whose roofs are not suitable for solar

Several factors that are favorable toward rooftop solar include:

  1. Minimal transmission losses
  2. No land is required
  3. No permitting process or environmental screening
  4. Customer acquisition cost is dropping rapidly (currently $2,000 to $3,000/customer, expected to drop to $50 to $100/customer eventually)

My recommendation to FSLR is to put that billion-dollar bank to work. Any other solar company would love to be in your financial position. Stop fighting the proliferation of rooftop solar and embrace it. Acquire some next-generation research startups. Develop a form factor for your CdTe cells that is suitable for rooftops. Yes, your modules are heavy and inefficient - but they are cheap. They will find a niche in the rooftop market, and a billion dollars will go a long way toward financing new projects. At the same time, new rooftop projects could jumpstart your factory utilization (currently at 75%) to 100%, which would bring down costs across the line. The solar industry continues to grow at ~33%/year, so, as Bryan Miller said, "One company's success does not need to come at the expense of everybody else." This is not a zero-sum game.

In conclusion, First Solar is floundering. It clings to a lagging technology and has made only the smallest effort to enter the rooftop solar market. The company needs to pivot if it is to thrive, instead of attacking competitors with editorials and making backdoor deals with public utilities. With a billion dollars in cash, First Solar has sufficient resources to reemerge as the industry leader. As an investor, I will remain on the sidelines until FSLR demonstrates a new strategy for growth and innovation.

Disclosure: I am long SCTY, SPWR, RSOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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