Energy

Alt-Energy Watch: Another Believer in Solar Consolidation (FSLR, STP, YGE, TSL, SPWRA, SHCAY)

As part of last week’s story on stock buybacks in the solar PV industry, we opined that a consolidation in the solar industry is looking to take shape.  Acquisitions and mergers have already cleared out many of the downstream project development companies. What are left are the solar PV makers themselves.

It turns out that Standard & Poor’s agrees.  The firm notes that the industry’s lowest cost structure belongs to First Solar Inc. (NASDAQ: FSLR), and that the most potential for a rival to First Solar comes from Suntech Power Holdings Co. Ltd. (NYSE: STP) Yingli Green Energy Holding Co. Ltd. (NYSE: YGE), and Trina Solar Ltd. (NYSE: TSL).

S&P expects pricing pressure to last for a few more years, and believes that tier 1 producers like First Solar and the others have what S&P calls “bankability.” The ratings agency says that bankability reflects product quality and indicates whether a solar PV project will be able to get financing. S&P believes that the tier 1 panel makers will by themselves supply more solar PV panels than demand will call for during the next few years. That does not augur well for the tier 2 and lower makers.

More pricing pressure, the development of more bankable Chinese firms, the overcapacity of the tier 1 firms, and acquisitions like that of SunPower Corp. (NASDAQ: SPWRA) could lead to the closure of some panel makers unless demand explodes again. Low costs for polysilicon helps level the playing field, but the advantage still belongs to the tier 1 companies. Another drag on tier 2 suppliers is that large buyers, like utility companies, are not early adopters of new technology or suppliers.

But S&P favors a Chinese company to emerge as the number 2 player in the solar PV market, a position it has named “Second Solar.” Japanese and European makers like Japan’s Sharp Corp. (OTC: SHCAY) or Germany’s Q-Cells are at a disadvantage because of government support for Chinese makers. Here’s how S&P puts it:

“In the aftermath of the global financial crisis, Chinese producers are using even more aggressive pricing tactics, at the expense of their margins, which we believe is an effort to preserve jobs while benefiting from the Chinese government’s stimulus spending and other forms of state support (such as subsidized financing, tax breaks, and special economic zones). As a result, there have been fewer failures of Chinese firms than we expected at the start of the crisis.”

An inference one could draw from this is that China’s government is going to pick the winner — and that inference doesn’t seem all that far-fetched. In also means that investing in a Chinese solar PV maker may require more courage now than it did in the heady days of a year or so ago. Yes, margins are being squeezed for all manufacturers, but in some cases at least the fatal blow could come by a government withdrawal of support.

For all its economic growth and development, China’s commitment to the free market system is less than perfect. The government cannot afford to have their solar PV makers fail because that would add to the country’s already enormous employment problems. So there is every likelihood that the government will encourage mergers to the point that the country supports just one or two champions in solar PV manufacturing.

Paul Ausick

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