First Solar Turns to Catch Shifting Rays

by Aaron Levitt | April 23, 2012 2:22 pm

I’m a firm believer that one day, “alternative energy” will one day just be energy.

However, a variety of factors have continued to push that day further into the future. Everything from an abundance of oil and natural gas flooding storage facilities in the U.S. to recent policy moves across major markets in the European Union have conspired against the renewable-energy sector. It seems that every breakthrough is followed by a huge step backward. The latest could be seen as a major blow to the overall sector.

After a year of slumping earning reports and seeing its share price plummet (down another 6%-plus in afternoon trading today), solar-industry stalwart First Solar (NASDAQ:FSLR[1]) recently announced a vast restructuring plan. By idling production and reducing headcount, the thin-film pioneer hopes to align its manufacturing operations with the general negative long-term view on Europe and the immediate demand/pricing environment. Management views these reductions as necessary in order to survive in this challenging marketplace.

That marketplace is certainly getting more challenging by the day. The First Solar news is just the latest in a series of setbacks for the industry. Bankruptcies and plant closures are quickly becoming commonplace.

For investors in the sector, seeing one of its leaders struggle is an ominous sign. And there’s no way to know if First Solar’s moves will enable it to escape the carnage facing the industry.

The bulk of First Solar’s efforts will involve shutting down or idling capacity at its thin-film factories[2]. The giant will shutter all of its factories across Germany as well as indefinitely idle four of 24 production lines in Malaysia. This follows reductions already taking place across the rest of Europe and the U.S.

Overall, this will eliminate about 30% of First Solar’s workforce — about 2,000 employees — and reduce production capacity to the 1.5-to-1.8 gigawatt range. The company estimates that it will save about $60 million this year and grow those savings to $100 million-$120 million in 2013.

Chairman and Interim Chief Executive Mike Ahearn said of the restructuring: “After a thorough analysis, it’s clear the European market has deteriorated to the extent that our operations there are no longer economically sustainable, and maintaining those operations is not in the best long-term interest of our stakeholders.”

How did we get here?

First Solar was the talk of the town when it was founded back in 1999, and the company thrived in the mid-2000s. Several factors, including an abundance of cheap gas, feed-in tariff cuts, Chinese competition and falling silicon prices, played a part in First Solar’s downturn.

At its core, thin-film solar technology refers to processes that do not use polysilicon materials to turn sunlight into energy. First Solar produces its panels using cadmium-telluride as the main ingredient. The company’s size gave it production-cost advantages over a variety of rivals, and in 2009 that difference was around 50%. Adding to this advantage was the fact that polysilicon prices were trading at historic highs of around $700 a kilogram[3].

As with most commodities, sky-high prices attracted new producers, and production increased. Polysilicon prices plunged to about $30 at the start of the year[4]. These days, silicon-based solar panels aren’t much more expensive than First Solar’s thin-film panels.

Adding insult to injury, Chinese solar producers have been accused of selling their panels at prices far below cost, which they’re able to do because of subsidies provided by Beijing[5]. Overproduction coupled with the below-cost pricing has caused photovoltaic-module prices to plunge more than 75% in over the past three years.

But perhaps the biggest issue facing First Solar and the rest of the industry is the economic situation in Europe.

Europe has traditionally been a bright spot for renewable energy, with Germany and Spain leading the way in subsidizing alternatives. Various feed-in tariffs and subsides have allowed utilities to add solar to their energy mixes at costs comparable to traditional fossil fuels.

But in the wake of Europe’s continued debt crisis as well as the plunge in panel prices, these subsides are being cut. The latest came at the end of March, when Germany announced it will reduce solar subsides by 29%[6] — double analyst estimates. The rub for First Solar is that Germany accounts for about 50% of the company’s installation capacity.

Where does that leave investors?

With former industry leaders such as Q-Cells filing for bankruptcy and even Chinese producers such as Suntech Power (NYSE:STP[7]) announcing factory closures, the near term isn’t shaping up to be a good for the solar industry. Current supply-demand dynamics are terrible. According to Bloomberg New Energy Finance[8], solar factories will be able to make as much as 38 gigawatts worth of panels this year, or about 54% more than estimated demand.

Still, for those looking at the industry as a long-term bet — perhaps decades long — there are glimmers of hope. Overall global energy demand continues to grow unabated. That has resulted in a record number of new solar installations over the last few years. Analysts expect any slack demand stemming from Europe to be made up by increases in Asia and the U.S. China has made renewable energy a priority during in its various five-year plans, and the region will continue to be driver of new capacity for years to come.

In addition, prices for solar stocks have never been cheaper, with many trading about 70% lower since the beginning of 2011.

First Solar will most likely survive. The company plans to focus on developing solar power plants and offering services to utilities rather than selling just solar panels It already entered this market back in 2007 and could parlay its leadership position into deals with larger utilities.

While I wouldn’t buy just yet — the solar shakeout is just getting started — the overall sector is starting to look like an interesting play for the long term.

  1. FSLR:
  2. shutting down or idling capacity at its thin-film factories:
  3. polysilicon prices were trading at historic highs of around $700 a kilogram:
  4. Polysilicon prices plunged to about $30 at the start of the year:
  5. subsidies provided by Beijing:
  6. Germany announced it will reduce solar subsides by 29%:
  7. STP:
  8. According to Bloomberg New Energy Finance:

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