First solar seeking growth as desert power plant market dries up

NEW YORK CITY -- The biggest U.S. solar panel maker is preparing to set out its strategy for growth as sales lag for its large-scale power projects in the deserts of the southwest.

First Solar Inc. gets about 65 percent of its revenue from selling giant solar farms to utilities, a market that’s slowing after its best customers bought all the clean energy they need. The manufacturer is missing out on the current boom in rooftop solar, which is surging since SolarCity Corp., backed by billionaire Elon Musk, helped popularize a way to finance home installations.

The shift from bigger solar projects toward smaller ones leaves analysts concerned that First Solar will be left behind as the industry recovers from a two-year slump that bankrupted dozens of competitors. Chief Executive Officer Jim Hughes is pushing for more sales overseas and bought a company last year that will tap the rooftop market in Japan.

“We see First Solar as most poorly positioned with virtually no exposure to fast-growth rooftop demand,” Brian Lee, an analyst at Goldman Sachs Group Inc., wrote in a note. “In the U.S., we expect megawatt growth from rooftop to well outpace utility-scale projects over the next several years.”Hughes will speak to analysts and investors in New York tomorrow. First Solar shares have doubled in the past year, underperforming SolarCity shares that have more than quadrupled.

Solar Required

Utilities have been buying solar projects because they must — not because it’s the most economical. Twenty-nine states have renewable portfolio standards mandating that they get a certain percentage of energy from clean sources.

Many utilities are already exceeding state requirements for clean energy. That’s the case in California, the biggest solar market in the U.S. and the source of about 55 percent of First Solar’s project sales since the middle of 2012. The state’s three largest utilities are close to buying 20 percent of their power from renewables and have identified projects to meet their 2020 targets for 33 percent, according to a report last month from California electricity regulator.

Utilities in Arizona, the second-biggest market, and New Mexico have also satisfied current requirements. Texas, the eighth largest market, has 10,000 megawatts of wind farms operating, almost double the state’s target for renewable energy for 2015, leaving little room for additional solar sales.

Project Pipeline

First Solar is developing 3.7 gigawatts of U.S. projects, including the 550-megawatt Topaz Solar Farm. It’s expected to be complete this year and will supply 160,000 homes, one of two plants of that size that are the company’s largest. All of these projects are due to be complete in the next three years, according to its 2013 annual report.

The concern is that First Solar’s best years for selling large projects are now in the past, when its power plants received more than $3 billion in U.S. government loan guarantees. “The really big projects like Topaz won’t be repeated,” said Rob Stone, an analyst at Cowen & Co. in Boston who has the equivalent of a hold rating on First Solar. “There are no more loan guarantees that financed the first ones. Land near transmission lines has already been taken or is off limits, and it can take years to get approvals.”

First Solar’s thin-film panels use a different technology that’s heavier and less efficient than the polysilicon-based panels that dominate the industry. That makes them poorly suited for rooftops, where space is scarce. It’s part of the reason the company has focused on selling big projects to utilities.

Hughes’s View

Hughes has said he expects the entire U.S. solar industry to continue to expand. That includes both the large-scale power projects First Solar supplies as well as for the rooftop systems that typically don’t use panels from First Solar.

The Tempe, Arizona, based company expects to begin production this year on a product for rooftops through its TetraSun unit, purchased in April. It acknowledges that companies such as SolarCity will continue to dominate the market for smaller solar systems.

“I don’t see any reason our industries can’t grow together,” Hughes said in an interview. “We’ll continue to supply utilities and the commercial and industrial sector. For the U.S. we’ll leave the residential market to them.” On its face, the utility-scale solar market seems healthy. About 3.3 gigawatts of big solar farms were completed last year, up 84 percent from 2012. That accounted for 69 percent of total U.S. installations, according to a Jan. 6 report from Goldman Sachs.

Masking Slump

Those figures mask a looming slump because utility-scale solar farms take years to complete. The megawatts installed in 2013 were sold years before, and sales are headed for a decline now. Goldman Sachs expects a compound annual growth rate from 2013 to 2016 of 8 percent for big projects. “We see First Solar facing a big hole to fill as this demand driver wanes,” Lee, the Goldman analyst, wrote in the report to clients when he downgraded First Solar to sell from buy.

Part of First Solar’s strategy is to get more sales overseas. TetraSun, the rooftop business it bought last year, is targeting Japan, which is forecast to be the second largest market for solar after China this year. First Solar expects “a substantial portion” of revenue and operating income this year to come from its pipeline of North American projects, according to its 2013 annual report.

Overseas Deals

As it works through that list, “we may have a larger portion of our net sales, operating income and cash flows come from future sales of solar offerings outside of North America,” according to the report.

Hughes is pursuing deals in the Middle East, India, Australia and South America. The company identified 10.66 gigawatts of potential bookings at the end of 2013, including 5.9 gigawatts of opportunity outside the U.S.

Residential rooftops are the fastest-growing U.S. solar business. Installation swelled 60 percent in 2013 to 792 megawatts and will continue to drive the industry this year, according to the Solar Energy Industries Association.

A large part of that demand is spurred by the availability of financing programs that provide rooftop panels at little to no cost to homeowners. That model was pioneered by companies including Sunrun Inc., Vivint Inc. and SolarCity, which surpassed First Solar this year to become the most valuable U.S. solar company.

SolarCity, based in San Mateo, California, had installed a cumulative total of 567 megawatts of rooftop systems at the end of 2013, and expects to almost double that this year. This business is shifting electrical generation from a few remote sites to many smaller sites that are closer to the end user, a model called distributed generation. “The future for solar is distributed generation,” SolarCity Chief Executive Officer Lyndon Rive said in an interview. “First Solar has taken a strong stance on the side of utilities.”

Copyright 2014 Bloomberg

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