Low Prices Melt Profit For Solar
Donna Howell – Thu Jul 30, 6:42 pm ET
Falling solar prices are pinching most solar firms now, but could end up spurring more use of solar power in the near future.
Prices for crystalline-silicon solar panels, or modules -- the most common type of solar panel -- have plunged on the heels of a drop in prices of the main material used to make them, polysilicon. Both declines stem from a solar module supply glut tied to the financial crisis, which quashed project financing, and a harsh winter in Europe, which hampered installations.
"Module prices have been dropping since the beginning of this year," said Henning Wicht, principal photovoltaics analyst at research firm iSuppli. "There's a huge oversupply coming for modules, and next year for polysilicon."
The trend in general isn't good for solar firms. The trick is how they can profit while surviving a broad, deepening price war, which at the end will likely spark renewed solar demand.
Costs Not Falling As Fast
The trend "squeezes margins on (solar) companies because prices are coming down substantially faster than the cost structure," said Pacific Crest analyst Mark Bachman.
But the decline in prices doesn't affect all solar firms the same way.
No doubt it hurts providers of polysilicon wafers, such as MEMC (NYSE:WFR - News), Wacker Chemie and LDK Solar (NYSE:LDK - News). They're getting much lower prices for their goods than before. Their customers are solar manufacturers.
Amid the module glut, "no one was willing to buy polysilicon at basically any price until it went under $100 per kilogram," Bachman said. It bottomed around $60, he says, and is $60 to $70 now.
Solar companies that buy polysilicon to make solar cells or solar modules include Suntech Power (NYSE:STP - News), Yingli Green Energy (NYSE:YGE - News) and SunPower (NasdaqGS:SPWRA - News). The glut hurts these kinds of firms now, but they stand to benefit as lower polysilicon prices spark demand, Bachman says.
The problem is that the inventory such companies hold was built when polysilicon cost up to hundreds of dollars per kilogram, and that inventory is now subject to write-downs, since solar firms can't sell their modules for as much as they'd hoped.
"The main reason is that all the module makers took out their margins to lower prices and make them more attractive to the end user," Wicht said, predicting module prices will keep falling, to about $2.30 per watt by year's end.
Prices that crystalline-silicon module makers charged buyers averaged about $4 a watt last year, Wicht says. They're $2.50 to $2.70 now.
"Our panel manufacturing costs were less than $3 a watt in 2006. In the fourth quarter of this year, we will be at less than $2 a watt," SunPower CEO Tom Werner said on the company's earnings conference call July 23. "This is ahead of schedule relative to our 50% cost-reduction road map."
SunPower shares jumped 29% the first day after it beat second-quarter views and upped its outlook.
Not every solar company is directly affected by the dip in polysilicon and crystalline-silicon module prices. No. 1 U.S. solar firm First Solar (NasdaqGS:FSLR - News), for instance, uses cadmium and telluride instead of silicon to make its special "thin film" module. It's been able to do so at low relative cost, becoming a price leader. And late Thursday it reported a 148% rise in second-quarter per-share profit and a 97% jump in revenue, both well above analyst expectations. (See related story, this page.)
But it's still indirectly affected by the plunge in prices.
"Until a month and a half ago, First Solar was sitting in the catbird seat," Bachman said. Then a new drop in crystalline-silicon module prices "significantly closed the gap on First Solar's price advantage."
Playing Defense On Costs?
He says the worry is that First Solar might now have to play price defense, not offense, against crystalline-silicon module makers -- and drop prices more than anticipated. Indeed, First Solar CEO Michael Ahearn told analysts Thursday that aggressive crystalline-silicon prices were a factor last quarter, specifically in the German market. Still, First Solar's gross profit margin of 56.7% was up from 56.3% in the first quarter.
First Solar gradually trimmed its prices to $2.06 revenue dollars per watt last quarter, according to Bachman's analysis.
"And they could lower another 12% by the end of the year," he said.
Bachman and Wicht say First Solar could thrive despite industry price cuts.
"First Solar has a very good and competitive cost structure and a very good product," Wicht said. "I believe they will even increase their market share, because they can compete on the module level easily even with shrinking silicon prices."
Other companies making forays into the U.S. market include Japan's Sharp (Other OTC:SHCAY.PK - News), Germany's SolarWorld and China's Suntech, Bachman says.
Beyond the firms involved in making solar cells are wholesalers and installers. This sector has been able to benefit from low module prices without passing on the full discount to the end user, Wicht says. But competition could change that.
Costs are crucial to solar firms' ability to make a profit. Along with First Solar's strength, Wicht says, SunPower has the advantages of a differentiated, high-efficiency product and an established network for installations. China's Suntech and Germany's Q-Cells are setting up their own installation businesses now too, he says.
What will happen with prices depends partly on the financing environment. That's looking better, says Bachman. Where lenders had required solar companies or their customers to put up 35% of the cost of a solar project, that requirement has fallen to as little as 20% in some cases, he says.
"When the debt players require less equity to get in, it starts to open up demand," he said. But "with falling module prices we haven't yet seen elasticity of demand. ... The fear in June was that investors were holding off purchasing for these new projects, with prices coming down that fast."
Bachman says demand is starting to pick up and prices are starting to bottom, but adds that it would be optimistic to say prices will improve soon. Wicht sees the module glut lasting at least six more months.
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