Wednesday, March 4, 2009

Cheaper Solar Spurring Demand, Hitting Producers

EE Times/Nichola Groom/March 4, 2009

A dramatic fall in the price of solar panels has made the clean power source a better deal than ever before, but solar manufacturers' profits have dwindled thanks to that rapid decline and many may not survive to see solar bargains evolve into booming customer demand.

Skyrocketing demand for solar power was a bright spot in the global economy for much of last year until a pullback in solar subsidies in Spain and frozen credit markets dried up access to project financing choked off demand, sending panel supplies soaring and prices into a free fall.

In turn, solar companies including China's JA Solar Holdings Co. Ltd., LDK Solar Co. Ltd. and Canadian Solar Inc. have cut their production forecasts for the year.

Lower prices led Germany's Q-Cells to cut its 2009 sales outlook twice, while Solon SE withdrew its forecast. It has also meant lower profit margins for many, including China's Suntech Power Holdings Co. Ltd., China Sunergy Co. Ltd., Trina Solar Ltd., and U.S installer Akeena Solar Inc.

Share prices have followed suit, with many solar stocks having logged losses of more than 50 percent so far in 2009, after dismal performances in 2008.

After hitting $4.20 a watt in the middle of 2008, solar panel prices have slid almost 30 percent to about $3 a watt, with research firm New Energy Finance predicting a further 20 percent drop this year.

That is good news for solar customers, analysts say, as the cost of the renewable energy source approaches that of power generated from dirtier sources such as natural gas and coal.

"It's a great thing," said Barclays Capital analyst Vishal Shah. "The pain that we are seeing in the industry right now is going to manifest into stronger growth in 2010 because prices are so low."

A recovery in worldwide credit markets and a flow of funds to renewable energy companies from the U.S. government's economic stimulus bill is expected to boost solar demand beginning as soon as the third quarter of this year.

Before that happens, however, solar panel manufacturers that have already slashed production forecasts for this year will have to make further cutbacks.

Oversupply of panels

The 20 biggest solar manufacturers are currently expected to produce about 7,000 megawatts of product this year, according to Gabelli & Co. analyst John Segrich, who compared that with projected worldwide demand of just 5,200 MW.

"The top 10 vendors by size, if they are all successful in their build plans, would fill worldwide demand this year," Segrich said. "Volumes still need to be adjusted, or pricing is still going to fall further."

Some of those supply cuts may come as companies that cannot reduce their production costs simply shut down.

"We are tracking hundreds of factories around the world, a lot of them in China, and we could be in oversupply until 2012 or so if they all stayed in business," said Jenny Chase, who heads solar research at New Energy Finance. "But of course they are not going to."

Several small, privately-held companies in China have already shut down their factories, Chase said, as customers have feared that they would not have the history or resources to back up warranties that stretch for 25 years on solar panels. Many Chinese panels, she added, are still perceived as being lower quality.

The companies in the best shape to weather this year's oversupply are market leaders with large cash cushions such as U.S. producer First Solar Inc., analysts agreed. First Solar also benefits because its panels are made from cheaper cadmium telluride rather than silicon.

Even First Solar, however, said last week that it would selectively reduce prices on its panels this year to keep its competitive edge when it enters new markets.

Meanwhile, SunPower Corp., a U.S. maker of silicon-based panels, is well-placed because its highly-efficient products command a price premium.

Companies with higher operating costs, including many European companies, and those with elevated debt levels, which includes many Chinese producers, will have the hardest time navigating this year's shakeout.

"The European companies (have) become extremely inefficient and their competitiveness is the weakest, and the Chinese companies that could be competitive are going to have balance sheet issues," Shah said.

Suntech and LDK have the highest leverage ratios in the industry, according to Barclays Capital's Shah, followed by Trina and Solarfun Power Holdings Co. Ltd., all from China, and the United States' Evergreen Solar Inc.

So is there a bright side for solar investors? Yes, according to Shah, who said the carnage in solar stocks has made many of them attractive as current depressed levels assume even 2010 will be a "no-growth year."

"I'm not quite convinced we are going to see that," he said. "The stocks could double and triple from here."

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