Solar Goes on a Building Boom Despite Memories of Past Bust

  • Trina, Jinko, Hanwha and rivals add capacity as demand surges
  • Yingli is cautionary tale of overbuilding as shares plunge 70%

The solar industry is on a building binge.

Top manufacturers are adding almost 7 gigawatts of factory capacity, comparable to the energy produced by seven nuclear reactors, as they anticipate global demand will continue to rise. As bullish as the outlook is, the plans are also raising concerns: The last time the industry poured billions into new factories and equipment, the result was a massive oversupply that triggered two years of losses and dozens of bankruptcies.

So, will the current expansion be met with surging demand, or is another big hangover on the horizon?

“We’re really confident because right now, our customers are demanding more than our current capacity," Arturo Herrero, chief marketing officer at JinkoSolar Holding Co., told investors on a conference call last month. For 2016, “we don’t have enough production to cover all our customers." 

Jinko predicts global demand will grow as much as 20 percent next year, to 65 gigawatts. Bloomberg New Energy Finance expects more, with demand reaching as much as 77.8 gigawatts in 2017 as costs continue to decline and governments push for even more clean energy.

U.S. lawmakers gave another boost to manufacturers this week, extending a key tax credit for solar projects. The climate-change accord reached by almost 200 nations in Paris last weekend is also fueling hopes for even longer-term growth.

In the near-term, manufacturers are betting that boosting production will increase their profit margins, according to Jenny Chase, head solar analyst for New Energy Finance. 

With many companies running factories at full speed, manufacturers have handled rising demand by farming out production to dozens of smaller suppliers, she said. Outsourced panels have higher costs, and the practice has led to stalled margins at some suppliers. That, coupled with a desire to crowd out some smaller companies, has the big producers looking to expand in-house.

“Not all capacity is created equal,” Chase said in a telephone interview. “What they are basically betting on is if they expand massively, they can lower operating costs and squeeze the lower tail out of the market.”

Solar panels have been getting cheaper for years, and while technological innovation remains the main driver, increased output may add to the momentum, Chase said.

The risk is that the industry overbuilds, ending up with too much capacity and driving down prices. Solar companies went through this cycle in 2011 through 2013. The biggest manufacturer at the time, Suntech Power Holdings Co., failed in 2013 after loading up on debt to fund growth. Its successor as top supplier, Yingli Green Energy Holding Co., is now in a similar position after a building boom that blew ahead of demand and left the company struggling with more than $2 billion in debt. Its shares have plummeted 71 percent in the past year, much more than the Bloomberg Global Large Solar Energy index of 20 companies.

Manufacturers say they’re being cautious. Trina Solar Ltd., currently the biggest supplier based on 2014 shipments, is pursuing an expansion that balances new capacity with outside partners, Chief Financial Officer Teresa Tan told analysts on a Nov. 23 conference call. “We will be flexible enough to reduce in time when it’s also needed,” she said.

First Solar

First Solar Inc., the biggest U.S. panel maker, is maintaining output of about 3 gigawatts through 2017 and could rapidly ramp up to 4 gigawatts when demand picks up, CEO Jim Hughes said on a conference call Dec. 9.

“The history in this industry of being aggressive on capacity has not been a happy one for most of the people that have undertaken it,” he said. “The majority of the companies that have taken the lead as the largest producer in the industry in the last several years have all run into significant and potentially fatal financial distress. Overbuilding the market just has not paid.”

While global demand is climbing, the industry may outpace it.

“It’s definitely possible you could see serious oversupply again,” said BNEF’s Chase. “This is what solar does: they expand and they crush their own margins and they hope.” 

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