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Solyndra Chapter 11 – What Does It Mean For US Solar?

Last week the US solar sector faced the disappointing news that solar start-up and CIGS player Solyndra filed for Chapter 11. This follows the recent moves into bankruptcy protection by Evergreen Solar and the smaller SpectraWatt in the past two weeks. Clearly, the recent period of oversupply and sharp decline in module prices has taken its toll.

Brian Harrison, Solyndra president and CEO was quoted as saying: “Regulatory and policy uncertainties in recent months created significant near-term excess supply and price erosion. Raising incremental capital in this environment was not possible. This was an unexpected outcome and is most unfortunate.”

Clearly, this was a disappointment not least for the company’s employees, its financial backers and the Department of Energy (DOE):

  • 1,100 employees have been laid off.
  • Various VC partners have exposure of a total of $1bn to the company.
  • The DOE has previously provided $535m in loan guarantees to Solyndra.

With Chapter 11 protection in place, the company is now looking at options which include the sale of the business and the potential to license the company’s copper indium gallium selenide (CIGS) technology. The end result for the company’s VC backers and the DOE will clearly be dependent on the level of interest the company can generate in these options.

Somewhat obviously, not an encouraging situation. Moreover, this spate of Chapter 11 announcements in US Solar has for good reason raised concerns about cheap Chinese competition and perhaps the lack of a level playing field. Indeed, immediately after the announcement, Representative Henry Waxman of the House Committee on Energy and Commerce said the bankruptcies, “are unfortunate warnings that the United States is in danger of losing its leadership position in the clean energy economy of the future … We should be doing everything possible to ensure the United States does not cede the renewable energy market to China and other countries.”

What is clear is that competition from China in solar modules is intense. Moreover, the recent oversupply in the solar sector driven largely by a subsidy related sharp decline in European solar demand, has brought this to the fore. Previously, the low cost Chinese module players were working at or close to capacity and with excess demand in the solar market as a whole, the higher cost players elsewhere were still able to work with decent order books. That excess demand suddenly dropped off this year and the low-cost efficient Chinese players have been building new capacity. In the end cost and efficiency factors come to the fore.

It’s also true that Chinese module manufacturers benefit from a range of support mechanisms from the Chinese authorities, including cheap land and cheap loans. Indeed, this week polysilicon maker GCL Poly received two new loan facilities from the China Development Bank totaling $713m.

The lack of a level playing field in China is clearly a global issue of some importance. However, focusing on the US solar sector the situation is more complex. Three points are worth considering.

Firstly, in terms of Solyndra itself, in the end the company’s technology was aimed at providing a solution to a problem that itself dissipated ie the company’s CIGS technology was intended to remove the need for expensive refined silicon in the production process. They acheived their aim. However, the polysilicon used in mainstream cell and module manufacture at the same time dramatically driopped in price. Secondly, Solyndra had intended to offset the higher cost of their module technology to consumers with lower cost flat roof installation technology. However, others have provided such an approach in conjuncdtion with the lower cost polysilicon-based modules.

As Barry Cinnamon, CEO of Westinghouse Solar, points out: “Chinese solar panels are 10 percent to 20 percent less expensive than US-made panels, but by some estimates Solyndra’s panels were 100 percent more expensive”.

Secondly, China is now the leader in the manufacture of polysilicon-based modules. This has hurt other module suppliers. However, recent research from GreenTech Media and SEIA suggests that the US solar sector as a whole has a net $1.9bn trade surplus ie the Chinese players import capital equipment and particularly polysilicon from the US. In 2010 US exports of capital equipment for the solar industry totalled $1.4bn and exports of PV polysilicon feedstock totalled $2.5bn. For more detail, see GTM’s research piece here.

Finally, particularly given the pressure on budget deficits globally, the longer-term health of the solar industry must depend on the industry’s ability to get total system costs down – with a reasonable aim being to get to grid parity over the next 5 to 10 years. This will probably be done with a combination of innovation in the US, and a continued squeeze on manufacturing costs in China. Without this process, the solar sector is unlikely to reach the level of build-out that the clean energy sector clearly needs to see.

From an investment perspective, this probably means that in the process ahead towards a very competitive lower cost, higher volume market it’s probably best to stick with the main low-cost Chinese players such as Suntech Power (STP), Trina Solar (TSL), Yingli Green Energy (YGE) and JA Solar (JASO), alongside US players with a strong market position such as First Solar (FSLR) and SunPower (SPWRA). The period ahead could be very difficult for second tier players everywhere.

Having said that, I currently have no positions in either solar or clean energy as a whole and will maintain that position until the macro environment becomes clearer – for more detail see here.

Disclosure: I have no positions in the stocks discussed.