Several companies show their adaptability

By Greg Pfahl

The Solyndra bankruptcy of 2011 tainted the solar industry in the eye of the public. More recently, Abound Solar, a manufacturer of CdTe solar panels, filed for bankruptcy; General Electric/Primestar Solar announced that it would delay a planned 400 MW CdTe manufacturing plant; and Energy Conversion Devices/Uni-Solar announced at the end of July that the United States Bankruptcy Court had confirmed its
plan for liquidation.

The NEX index of clean-energy stocks is at its lowest price in nine years as the solar industry battles oversupply and solar panel price issues. Failed or failing solar companies litter the clean energy landscape to the point where CEOs trying to raise money get told by venture capitalists, “I don’t want to get sunburned.”

Grim humor and the swamping of the panel market by the Chinese aside, the solar industry is working its way through a rough patch, but there are occasional good signs out there, enough to say that solar doesn’t have to be a four-letter word. I’ll give an example of how technology and financial agility can represent hope of rising out of the clutter.

Technological Ray of Sunshine

Our firm sponsors Colorado Companies to Watch where I sat next to one of the winners, SkyFuel CEO Richard LeBlanc. When I asked him if low solar panel prices were hurting his business, he almost seemed offended, replying that panels had nothing to do with his business. SkyFuel, I’ve learned, is a concentrated solar power designer and manufacturer for utility scale solar generation. The company’s technology comes straight out of NREL in Golden, CO. SkyFuel even hired former NREL scientist Gary Jorgensen, who designed much of the technology the company uses. He leads its research and development efforts.

While I’m in no position to judge whether SkyFuel’s or the concentrated solar power (CSP) industry’s technology on the whole is any better than the others and I realize the topic is debated, the small company seems to be doing something right, and is applying some survival techniques to get to the break-even stage.

SkyFuel makes a glass-free parabolic trough solar thermal collector, called the SkyTrough®. The company claims it is the “highest performance, lowest-cost utility-scale solar power system in the world.” A SkyFuel subsidiary holds an exclusive world-wide license for a high-reflectance silverized polymer film, called ReflecTech® Mirror Film. SkyFuel has won a host of awards, most recently the CSP Technology Supplier Award from the CSP Today publication.

Unlike other solar companies, SkyFuel’s product does not incorporate photovoltaic technology. Instead, it concentrates the heat from the sun to heat liquid that is turned to steam. From there, power is generated through traditional technology. This solar thermal technology essentially replaces older methodologies such as the burning of coal to produce steam to generate electricity.

SkyFuel’s system was installed 18 months ago at the SEGS II project in California and LeBlanc says it is “hitting the NREL model right on the numbers at 85 cents a watt.” He says the levelized cost of electricity is 13 cents per kilowatt hour. LeBlanc said the company has sold systems in Canada, Reno, Nev., ($10 million) and Hawaii ($5 million) and is pursuing others in Saudi Arabia, China, India and Brazil. It also won a $2.4 million contract from the Department of Energy. LeBlanc projects to be on a break-even financial basis next year.

Creative Financial Engineering

Of course there are issues for SkyFuel and other solar companies. For venture capital-backed SkyFuel, it wasn’t financing as much as performance bonds that was a problem. A performance bond is standard in the construction industry; it’s purchased to guarantee construction and support of a product over its life. Large CSP players such as Siemens and GE have the balance sheets to forego the bonds, but small start-ups need them to back these big utility projects. For a $10 million project, a bond company typically asks for $5 million cash collateral, LeBlanc said.

“It’s one thing to get start-up money from a VC, another to get working capital from a bank and even another to get 50 percent down for a bond,” LeBlanc said, adding that the way to solve the issue was to find bonding companies that are knowledgeable and comfortable with a company’s technology. SkyFuel signed a deal with German re-insurance company Munich Re to insure SkyFuel’s warranty, on an 80/20 payout basis. Munich Re got comfortable with the risks after spending a year researching SkyFuel’s technology and operations.

So creative financial engineering, backed by technology, or at least the insurer’s comfort with SkyFuel’s technology, was part of the solution to the financial problem. Can technology solve the industry’s other problems? LeBlanc said it has to in order for the industry to survive.

“If you have a better widget, the real issue is can you get the cost down comparable to grid parity,” LeBlanc said. “If technology makes you somewhat independent, where it’s not tied to the cost of silicon or glass or precious metals, fluctuations in commodities markets are not that important.

A lot of technologies say that if oil is more than $75 a barrel, we’re good. If it dropped, we’re in trouble. If you drive down the cost of your technology to where your threshold is $50 a barrel, most of us would bet that oil would be over $50 for a while.”

LeBlanc said that the survival of solar is a pure cost issue, “because nobody really cares about environmentalism and climate change. If they did, everyone would be driving a Volt or a Prius. I may sound like a skeptic, but many people are environmentalists as long as they don’t have to pay any kind of premium for it.”

Technology versus Profitability

What does the future of photovoltaic technology hold and where is the profitability? Solar panels are widely viewed as a commodity product that competes primarily based on cost. Since 2009, the average selling price (ASP) per watt of solar has decreased by approximately 65 percent. While this sort of trend can be beneficial for the consumers such as project developers, panel manufacturers need to differentiate their products in order to avoid competing on price alone. Another alternative is to find other revenue sources in order to differentiate and protect against the volatility in ASP’s

Ascent Solar Technologies manufactures CIGS solar panels on a flexible substrate, which results in a more lightweight solar panel in comparison to traditional glass panels. Showing its market agility, in March 2011, Ascent decided to focus on emerging and specialty markets as opposed to building integrated photovoltaic (BIPV). While the company is still in the BIPV market, they are looking at markets that place a high premium on weight.

First Solar, a manufacturer of CdTe panels, recently released second quarter 2012 results. Despite restructuring charges which affected their bottom line, First Solar increased revenue from $1.1 billion for the six months ended June 30, 2011 to $1.45 billion for the six months ended June 30, 2012.

Possibly due to the downward module pricing trend, First Solar shifted its solar development business from module sales to development sales. For clarification of their growth, we need to go all the way back to Note 21 of their 10-Q titled Segment Reporting. According to the note, First Solar operates in two segments: (1) the components segment, which is the design, manufacture and sale of solar modules, and (2) the systems segment which provides a complete PV solar system, including project development, engineering, procurement and construction products, operations and maintenance and project finance. The revenue breakdown by segment for the six months ended June 30, 2012 for components was $456 million and for systems was $1 billion, and for the six months ended June 30, 2011, components was $1 billion and systems $76 million. While operating at a significantly thinner gross margin, the company has been able to control its revenue growth and profitability through diversification.

Solar companies have to be in tune with the demands of the marketplace and position themselves accordingly in order to survive. Not only do technology and adapting business offerings have to be part of the answer for renewable energy companies, they also must be willing to re-engineer financial solutions as well.

Greg Pfahl, CPA, is an audit partner in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Orange County. He also serves as the national leader for the alternative energy practice area. Pfahl can be reached at gpfahl@heincpa.com or 303.298.9600.