SOLAR CONSOLIDATION

Handful of players seen ruling the solar roost
Nicola Groom (w/Patrick Fitzgibbons and Matthew Lewis), July 1, 2009 (Reuters)

SUMMARY
One thing is usually true in recessions and is especially true in this recession: Only the strong survive.

In the solar panel manufacturing industry, that means 3 names are likely to emerge from 2009-10 as the dominant players: First Solar Inc and SunPower Corp in the U.S. and Suntech Power Holdings of China.

Hard times are certainly driving the industry’s consolidation but there is another factor at least as important. Because of the shortages of capital and financing, utilities are dominating solar energy development. The utilities have a lot of capital and can finance their own projects, even when the projects are in the billion dollar range.

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But that billion dollars belongs to the utility’s investors and ratepayers. No utility CEO is going to take on any more risk than is necessary and therefore is inclined to select a solar panel supplier with the proven ability to deliver a high quality product. High volume, low cost foreign suppliers with a limited or compromised track record are far less likely to sell panels in this market.

Utilities may also take a close look at the financials of a panel manufacturer before making a buy. The warranty on a solar panel extends 10-to-20 years (or longer). The utility wants to be as certain as possible the manufacturer is going to be around to service that warranty.

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First Solar meets the utilities’ criteria because it has been in business 10 years, has been one of the 50 fastest growing businesses – not solar businesses, businesses of any kind – in the U.S. for the last 3 years and is the world’s biggest thin film solar panel manufacturer. Facilitated by First Solar’s production efficiency, its cadmium telluride (CdTe) formulation is emerging as the dominant thin film technology. Estimates suggest it is taking about half of the U.S. utility solar market right now.

SunPower Corp meets the utilities’ criteria because it is the biggest solar provider in North America and has been in business since 1985. It specializes in the more time-tested, silicon-based types of solar panels. A recent drop in the cost of refined silicon is putting SunPower’s more efficient panels back in competition with the cheaper thin film panels from First Solar.

Suntech Power Holdings, founded in 2001, is the newest of the big players. It is the biggest manufacturer of silicon photovoltaic (PV) panels in the world and is essentially as strong as China. In 2008, to move on the U.S. market, Suntech formed Gemini Solar Development Company LLC, a joint venture with solar developer Renewable Ventures. Gemini was bought by Spanish power producer Fotowatio. The group recently moved into Texas, signing onto a 30-megawatt project for Austin Energy, probably the most progressive and respected U.S. municipal utility. Anticipating the boom in utility demand for solar panels, Gemini is also planning a U.S. manufacturing facility.

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All 3 companies have been expanding their manufacturing capacity throughout the financial downturn, despite a slowing of gross sales and a significant drop in revenues in the last months of 2008 and the first months of 2009.

California’s major utilities (PG&E Corp's Pacific Gas & Electric, Edison International's Southern California Edison and Sempra Energy's San Diego Gas & Electric), driven by a Renewable Electricity Standard (RES) requiring them to get 20% of their power from New Energy by 2010 and expected to be expanded to require them to get 33% by 2020, are building solar capacity as fast as they can. SunPower and First Solar are getting the bulk of the work.

Yingli Green Energy Holding Co Ltd is another Chinese panel maker making progress in the U.S. market, through its supply deal with AES Solar, a U.S. joint venture between AES Corp and private equity firm Riverstone Holdings LLC

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COMMENTARY
The new round of consolidation comes at the same time as a remarkable expansion of the industry. Already growing at unprecendented rates, the solar panel manufacturing this year may go off the charts.

Several factors are responsible, including (1) the 2008 investment tax credit (ITC) extension, (2) funding for solar development in the financial rescue packages and the Obama budget, (3) a drop in the cost of silicon, and (4) state Renewable Electricity Standards (RESs).

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(1) The investment tax credit (ITC) was extended for 8 years by the October 2008 financial rescue package. The ITC was also expanded dramatically in 2 ways. (a) The cap was removed so that now the tax credits go to 30% of the entire system cost instead of 30% of a small part of the system cost. (b) Utilities may now use the tax credits.

(2) A variety of benefits were allotted to New Energy in general and solar energy in particular by the 2008 financial package. Even more funding came with the February 2009 American Recovery and Reinvestment Act (ARRA). And the first Obama administration budget made good on the President’s campaign promise by assigning funds to begin the doubling of U.S. New Energy capacity over the next 3 years.

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(3) The semiconductor industry finally advanced its capacity enough to supply adequate quantities of refined silicon to sustain the electronic chip market and at the same time meet rising demand in the solar panel market. This had 2 dimensions. (a) The recession somewhat slowed demand for chips. (b) The market for solar thin films formulated from non-silicon materials is growing as fast if not faster than the market for silicon-based panels, reducing demand for silicon from the solar industry and having a competitive impact on prices.

(4) More than 30 of the 50 states now have RESs, requiring regulated utilities to obtain portions of their power from New Energy sources in the foreseeable future. These RESs are driving demand up, price down and utilities toward big investments in wind and solar energies, the New Energies most likely to be cost effective in the RESs’ time frames.

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QUOTES
- Vishal Shah, analyst, Barclays Capital: "I don't think the utility landscape is going to become as competitive as the commercial market, because the barriers to entry are much higher…It takes a long time to prove your technology to the utility so they can be comfortable. So from that standpoint it limits the competition only to a handful of players."
- Mehdi Hosseini, analyst, FBR Capital Markets: "[With the recent changes] the U.S. market could potentially (and finally) become 'the promised land' that investors have been waiting for since late 2007…"
- Steve Milunovich, analyst, Bank of America/Merrill Lynch: "There is a perception of a quality difference [between U.S. and Chinese panels but the U.S. utility solar market is becoming a race between First Solar, SunPower and Suntech]...It will be a fairly oligopolistic market…As Suntech moves up I don't think there is going to be any difference there…They are going to be competitive."