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China Solar Boom Erodes Technology Edge Backed by U.S. Loans

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China Solar Boom Edges U.S. Technology
The sun shines off of First Solar Inc. solar panels that form a one megawatt (MW) solar photovoltaic array at Intel Corp.'s campus in Folsom, California. Photographer: Ken James/Bloomberg

China’s success in wresting control of the solar industry is erasing an advantage for U.S. suppliers led by First Solar Inc., which use a rival technology supported with $5.5 billion in government loan guarantees.

First Solar, the largest U.S. solar maker, for 12 years has tinkered with a process that sandwiches a film of toxic cadmium telluride between panes of glass to harness the sun’s power. The Chinese in contrast recently started manufacturing the polysilicon-based cells found in 90 percent of panels sold worldwide and are best known for powering the common calculator.

First Solar prospered as surging costs for polysilicon prevented the Chinese from dominating a global panel market worth $33 billion last year. The tables turned as Chinese manufacturers led by GCL-Poly Energy Holdings Ltd. and LDK Solar Co. ramped up production, pushing the cost of the raw material down 90 percent. That’s gutting margins across the industry and forcing First Solar to reduce prices.

“It seems likely to significantly pressure First Solar’s margins,” said Timothy Arcuri, an analyst at Citigroup Inc. in San Francisco. “Silicon manufacturers are struggling to remain solvent, and that’s causing inventory liquidation.”

First Solar, which ousted Chief Executive Officer Rob Gillette last week and cut its 2011 earnings forecast, plans to brief investors on its strategy at 4:30 p.m. in New York today. Ted Meyer, a company spokesman, declined to comment.

Plunging Prices

The Tempe, Arizona, company had a compelling pitch when the price of polysilicon climbed to more than $400 a kilogram in 2008. Now, the cost is less than $40, reflecting a surge in output from Chinese manufacturers.

That’s had a direct impact on revenue and profits at solar manufacturers, sending shares in the Bloomberg Global Solar Leaders index down 55 percent in the past year. First Solar drove the decline with a 64 percent drop.

Three U.S. solar companies already have succumbed to bankruptcy this year, including Solyndra LLC, which received a $535 million loan guarantee from the U.S. government to build its manufacturing plant. Congressional Republicans are leading a probe of President Barack Obama’s backing for the industry.

GE’s Solar Plans

The political firestorm is a distraction for the solar industry, according to General Electric Co. Chief Executive Officer Jeffrey Immelt. “I don’t care about Solyndra,” he said today at a Columbia University event in New York.

GE is building a $300 million thin-film solar factory in Colorado, and expects panel sales to top $1 billion by 2020. Immelt is also watching China, where investments in renewable energy are on a scale that’s “vastly superior to the U.S.”

In the long run, he expects GE’s thin-film cadmium telluride panels to beat China’s silicon panel-makers on costs. “GE is going to win,” Immelt said. “We’re going to invest what it takes.”

Abound Solar Inc., Solyndra and SoloPower Inc. shared in $1.13 billion in U.S. guarantees for their thin-film factories. Thin-film manufacturers including First Solar received about a third of the $16.1 billion the U.S. set aside for renewable energy technologies.

‘Fundamental Flaw’

“The fundamental flaw in attempting to spend our way into a green economy is that it creates enterprises whose continued existence demand continued government support,” W. David Montgomery, senior vice president at Nera Economic Consulting in New York, said in testimony to a congressional hearing in Washington yesterday. The loans, he said, “can only lead to a waste of taxpayer’s money.”

The funds awarded to Solyndra went for a factory whose output now is priced out of the market by Chinese products. The guarantees for First Solar catalyzed the construction of generation plants whose returns are already fixed, making those investments more secure.

Still, First Solar’s profit margin may decline to 16 percent in 2012 from 19.8 percent this year and as much as 31 percent in 2007, according to data compiled by Bloomberg based on historical data and analyst estimates. Mike Ahearn, the company’s acting CEO, said on Oct. 26 that the board needed new leadership to “navigate through the industry turmoil.”

Increased Output

LDK, GCL-Poly and their rivals have increased output of polysilicon and the cells made from the material even as demand growth ebbed. LDK on Nov. 1 said it planned to triple its polysilicon capacity even though prices for the material now are half what they were a year ago.

An oversupply of panels stiffened competition for market share. Average module prices slipped to as low as $1.10 a watt last week, from more than $2 a year earlier, according to Bloomberg New Energy Finance. It’s even worse in Europe, the world’s biggest market, where Germany, France and Spain trimmed subsidies after a boom in panel installations.

The average retail prices for the thin-film modules First Solar makes dropped 48 percent to 0.84 euros ($1.15) a watt from January 2010 to October 2011, according to pvXchange GmbH, a Berlin-based trading platform for photovoltaic products. Silicon-based modules fell 41 percent to 0.92 euros a watt during the same period.

Declining Margins

The global surplus of polysilicon and panels is driving down profits at other solar companies. At Suntech Power Holdings Co., a Chinese company that’s the world’s largest module maker, margins may drop to minus 4.2 percent this year from positive 8.2 percent in 2011, according Bloomberg data. Renewable Energy Corp. ASA today said it would end a contract it had to supply solar wafers at above-market prices.

“There is inventory being flushed for ridiculous prices,” said Ahmar Zaman, an analyst at Piper Jaffray & Co. in New York. “It’s not sustainable, but it will compress earnings for a few quarters.”

First Solar typically sells modules at a discount to Chinese polysilicon products of 15 cents to 20 cents a watt, Zaman said, making up for its lower efficiency. He expects the company to maintain this differential, even as prices for polysilicon panels continue to slide.

The company’s thin-film modules had an average efficiency of 11.7 percent in the second quarter. First Solar aims to reach 15.2 percent over the next few years. That’s still less than the 17 percent to 20 percent efficiencies of the best Chinese polysilicon modules.

In the longer term, thin-film manufacturing systems will continue to reduce production costs and allow First Solar maintain its advantage, said Mark Waller, founder of Bridgeworks Capital.

“The physics will keep cadmium telluride efficiencies below pure crystalline silicon,” said Waller, who was also an initial investor in PrimeStar Solar and led its sale to GE earlier this year.

“Thin film can be done cheaper,” he said in an interview. “In 10 years, silicon may still be slightly ahead on efficiency but the cost-base of thin-film will win. Everyone’s trying to automate, but it’s easier to do with thin-film.”

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