Solar is growing rapidly. So why are solar firms struggling?

Source: Benjamin Storrow, E&E News reporter • Posted: Tuesday, May 9, 2017

The U.S. solar market is going gangbusters, but American solar firms are struggling to keep their heads above water. A record-setting year, which saw U.S. solar installations soar to new heights, has been followed by a series of bankruptcies and slumping stock prices.

The downturn has hit panel-makers and installers alike. Sungevity Inc., an Oakland, Calif.-based residential solar installer, declared bankruptcy in March. Georgia-based panel-maker Suniva followed suit last month, citing a deluge of Asian-made panels in the U.S. market. Even relatively healthy firms have struggled to escape the pain. Shares of First Solar Inc. and SunPower Corp. have lost roughly half their value since early last year, while Sunrun Inc. is trading for a third less.

Analysts blame a market saturated by low-cost panels, shifting business models and rapidly changing technology for the trend. Perhaps the greatest challenge of all: It’s difficult to keep up with an industry growing by leaps and bounds.

“It’s the way of the wild out here,” said Jigar Shah, who founded former solar developer SunEdison Inc. “You’ve got to keep up every day or you will be left behind.”

SunEdison filed for bankruptcy last year, unable to sustain the debt used to fuel its rapid growth. Shah left the firm in 2008 after a disagreement with the company’s board over SunEdison’s direction.

Solar firms’ struggles follow a spike in U.S. solar installations. Some 14.8 gigawatts of solar capacity was installed in 2016, or double the amount brought online the previous year. Growth in utility-scale projects was particularly strong. American power companies added 9.5 GW of new solar, more than any other power source.

Much of the development owed itself to an investment tax credit for solar projects. Utilities rushed to have projects brought online before the end of 2016, when a 30 percent credit on the project’s cost was originally set to expire. Congress later extended the credit through 2021, when it will fall to 10 percent for commercial projects and ends residential ones.

The battle for market share

The falling cost of panels also fueled the growth. The average cost of a photovoltaic system fell by 20 percent between the end of 2015 and 2016, according to figures from the Solar Energy Industries Association, a trade group. The cost declines have begun to transform utilities’ views of solar, analysts said. Where solar was once viewed mostly as a means of meeting state renewable portfolio standards, power companies increasingly view it as a hedge against natural gas.

“What’s really happening is solar, in particular, is kind of the demand associated with it is essentially solely on the merits of the economics,” First Solar CEO Mark Widmar told financial analysts during a recent earnings call. He noted utilities are increasingly integrating solar into their long-term planning forecasts.

But that has not necessarily translated into profits for solar firms. Panel-makers and installers face a different set of challenges. Manufacturers, betting on a significant bump in demand, flooded the market with a surplus of solar modules. Now they find themselves in a bind. Modules are selling for less than the price needed to turn a profit. But if one company refuses to lower its prices, a competitor will.

Shah reckons panel-makers are where their counterparts in the computer industry found themselves in the 1990s. Where Dell, Gateway and Apple once outdid themselves to offer the cheapest possible personal computers, today solar module manufacturers like First Solar and SunPower are fighting for market share.

“These guys think if they’re the last guy standing, they’ll do well,” said Shah, who now serves as president of Generate Capital, a solar developer.

Residential installers, by contrast, have watched their business model change. Sector leaders SolarCity Corp., which was recently consumed by Tesla Inc., along with Vivint Solar Inc. and Sunrun, helped pioneer the surge in residential solar installations by offering homeowners leases or power contracts to finance panel purchases. But as the cost of residential solar systems declined, consumers have shown an increasing penchant for owning the panels outright.

Many of the sector leaders were slow to catch onto the trend, said Cory Honeyman, who tracks the industry at GTM Research. Firms like SolarCity and Vivint also invested heavily in marketing and sales, burning through large amounts of cash in a race to acquire market share.

Today, those firms are revisiting their assumptions on how to grow as they struggle to turn a profit, Honeyman said. Cash flow preservation and a focus on profit margins have become increasingly common talking points in earnings calls.

“Both distributed solar and large-scale solar continue to see a growing number of geographies where it’s cost-competitive,” Honeyman said. “But the question is with the current cost structure of rooftop and large-scale solar: Are companies baking in sufficient margin, and are they managing all their soft costs to be a profitable company in the long run?”

Answering that question will go a long way toward determining who benefits from America’s solar boom.