More Solar Embarrassment Ahead For The Obama Administration?

by: Bennington Investment Ideas

Solyndra, the bankrupt solar module manufacturer, has dominated recent headlines for the solar photovoltaic (PV) industry. Its bankruptcy has placed the American taxpayer on the line for the $535 million loan guarantee made by the Department of Energy. The loans were to be used to commercialize Solyndra's innovative cylindrical CIGS (Copper-Indium-Gallium-(di)Selenide) technology. Since its bankruptcy, Republican members of the House and the FBI are investigating.

However, Solyndra was not alone in declaring bankruptcy in the past couple months. Evergreen Solar, Inc. (OTC:ESLRQ) filed for bankruptcy in August. Shares of the company are currently trading at 4 cents, giving it a market capitalization of about $1.5 million. Evergreen had previously been a recipient of $58 million in subsidies from the state of Massachusetts. Evergreen was supposed to manufacture crystalline modules. Module price declines have been cited as a possible driver of bankruptcy for both companies. This steep decline in module prices is the other major story for the solar industry.

Price declines and challenging outlooks are pushing many solar companies to the brink. Share prices have plummeted across the whole module manufacturing industry. Market leaders, like First Solar, Inc. (NASDAQ:FSLR) and Suntech Power Holdings Company Ltd. (NYSE:STP), are also down substantially. FSLR just closed at $59.74, down 55% from just 3 months ago. STP is down about 70% over the same time frame. SunPower Corporation (SPWRA) is down 60%. Furthermore, declines are not just limited to module manufacturers. SatCon Technology Corporation, an inverter manufacturer, has declined 45% over the last three months. This is a challenging environment for start-up companies to become established and ultimately prosper.

Solyndra was not the only DOE backed module manufacturer

The DOE guaranteed several loans under its program to stimulate the industry. Perhaps, unfortunately for President Obama, Solyndra was not the only module manufacturer to benefit from this program. Abound Solar, Inc., a privately held manufacturer of Cadmium-Telluride (Cd-Te) thin film modules, received $400 million in loan guarantees back in 2010. Abound's goal was to reach 840 MegaWatts of annual capacity.

However, by focusing on Cd-Te technology, Abound has to compete against FSLR. While FSLR might have suffered a drop in its stock price, FSLR is an industry leader with over 2 GigaWatts of manufacturing capacity and $464 million in cash and short term investments. However, even its operating cash flow went negative in the most recent quarter. FSLR is also hurting from the challenging price environment. Its gross margins have dropped from 54% in 2008 to 46% in 2010 to 37% in the second quarter of 2011. Despite these challenges, FSLR has a reasonable position. As a project developer (FSLR recently acquire NextLight Renewable Power), FSLR has sold several of its projects. NRG Energy (NYSE:NRG) has recently completed the acquisition of FSLR's Agua Caliente 290 MW solar PV project, which is currently under construction. FSLR also sold its 230 MW Antelope Valley Project to Exelon Corporation (NYSE:EXC). In the Cd-Te world, there is a competition between FSLR and Abound. Furthermore, Abound competes not only with FSLR, but also with all the crystalline technologies and other thin film technologies.

Is there a market for flexible solar modules?

Like Abound, SoloPower, a manufacturer of flexible solar modules, also received loan guarantees from the DOE to the tune of $197 million. SoloPower also uses the CIGS thin film technology. CIGS and the closely related CIS (Copper-Indium-(di)Selenide) technologies have comparable efficiencies to perhaps slightly higher than Cd-Te efficiencies. One challenge is that CIGS technology involves more materials than Cd-Te, resulting in a more difficult manufacturing process. While SoloPower competes in this space, Solar Frontier is also very competitive with its CIS technology. Solar Frontier just commenced operations at a new 900 Megawatt facility in Japan. As a 100% subsidiary of Showa Shell Sekiyu K.K, Solar Frontier also has strong financial backing. This creates one more challenge for SoloPower. Only time will tell if SoloPower's innovative module will stand out in a crowded market place.

Don't forget crystalline technologies!

But wait, there is one more company to consider. The last DOE loan guarantee associated with module manufacturing was for $150 million to 1366 Technologies and was just recently closed. According to its website, 1366 Technologies

is implementing a series of proprietary manufacturing innovations aimed at producing high efficiency multi-crystalline solar cells at a fraction of today’s cost.

The key question will be whether this technological improvement can be fully commercialized and then compete against the scale advantages and head starts of the established Chinese crystalline competitors, Yingli Green Energy (NYSE:YGE), Trina Solar Limited (NYSE:TSL), STP, JA Solar Holdings (NASDAQ:JASO) and others. It should be noted that 1366 operates upstream from a module manufacturer in that its technology, as described on the website, is for manufacturing solar cells. Solar cells are then combined to create solar modules. However, many Chinese companies are vertically integrated and manufacturer their own cells for their own modules.

Solar PV has a role to play

I suspect there are quite a few nervous people at the DOE. Despite picking several different technologies ranging from Cd-Te to CIGS to crystalline silicon, the DOE could still end up empty-handed. Having watched its first investment in module manufacturing fail, the DOE has to sit and wait to see how the others perform.

However, there is a bright side to the solar picture. The fierce competition in the manufacturing space is driving down prices of modules, which ultimately makes solar power cheaper. Furthermore, FSLR's 37% gross margin suggests that FSLR could handle still lower prices. TSL posted a second quarter gross margin of 17%, much lower, but still some space to allow for some downward pressure. The beneficiaries of these prices drops will most likely be developers who have already contracted to provide U.S. utilities with solar power.

While solar power requires subsidies to be successful in many geographies, it is not necessary in all cases. Despite high capital costs and low capacity factors, solar power does not require any future fuel, eliminating both those costs and risks, and has very minimal ongoing operating costs. Furthermore, a solar PV plant that starts operations today could be producing power for 25, 30 or perhaps even 35 years into the future. So comparing today's price of electricity to that produced by solar power is relatively unfair. One should look at price comparisons into the future. Solar PV is also readily installed with limited environmental impact at any capacity size ranging from a few modules to millions of modules. For these reasons, solar PV should work well in areas without easy access to traditional fuels, countries with depreciating currencies/high inflation (that drive imported fuel costs up), countries with poor transmission infrastructure or irregular power supplies, isolated areas, and countries with immediate power needs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.