Already entombed by recent negativity, the solar industry just received further disturbing news with the bankruptcy of Wuxi Suntech, a principal China subsidiary of Suntech Power Holdings Co., Ltd. (ADR)(NYSE: STP), and the growing despair of LDK Solar Co., Ltd (ADR)(NYSE: LDK) as they struggle for survival. This may be a losing battle, with LDK crushed by debt and limited liquidity, and headed toward financial default.
Ever since this losing streak started two years ago, more than 200 Chinese PV and PV-related companies have shut their doors. Many of those companies had a significant amount of capacity, in numerous cases ranging between 300 and 500MW. When looking back to the third quarter of 2011, the entire solar PV business started going through a period of heavy losses, and self-inflicted eradication, brought about by overspending on rapid growth, which was unsubstantiated by prudence and thoughtful design.
Before many of the companies could understand the dangers of the perfect storm gathering around them, the European credit crunch brought them back to a screeching halt. The creative enthusiasm fueled by rising energy prices and the high cost of energy production lost its priority immediately.
Governments in Europe started to slash subsidies on solar energy generation as their own financial health weakened. This has triggered a chain reaction in the investment market and sped up the downward spiral that dragged the industry all the way to the bottom. Most of the businesses have been caught unprepared and since dropped off the financial cliff.
Solar energy in China became incapacitated by its own actions. Excess capacity was built at maximum speed, without watching for risks lurking in the shadows. While the country witnessed a production capacity reaching an astonishing 50GW during 2011, during the same period, there was over 10GW of inventory waiting to be digested by markets and sitting in warehouses. Under those circumstances, it was foreseeable that supply and demand soon would begin the process of price decline, which will feed stiff competition.
While most of the key players were battered by the rough conditions, some have ridden out stormy waves with greater success. According to Bryan Li, CFO of Yingli Green Energy Hold. Co. Ltd. (ADR)(NYSE:YGE), his company was among those few who have been better prepared and steered clear of the treacherous waters. In a recent interview, Li revealed tactics applied by Yingli during the period, and the steps taken for better financial strength to withstand the solar winter.
Li believes finding a low-cost, diverse range of funding sources was a crucial factor when investing in the business. Even when things looked strong, securing low-cost financing was a top priority. The company received high credit ratings since 2010 and started to obtain low-cost, non-mortgage-based debt, which resulted in RMB 4B of funding with repayment terms of five years on average. Before the end of 2011, Yingli repaid all of their overseas-based convertible bonds, and decided not to issue OCB. The reason behind this decision was the plan to keep the company safe from pressures applied by overseas investors, who were not concerned about the long-term growth of a Chinese solar company.
Another key strategy adopted by Yingli was to curb excessive spending and minimize expansion costs. The company also executed strict controls over their Capex during 2012. It has successfully avoided the excessive investment that others were executing.
Li thinks after six quarters of digestion of excessive capacity and shuffling of the business, the supply and demand has moved toward a more balanced state. More importantly, the business integration and reorganization have sped up the process of low-cost solar energy to become commonly accepted. In Europe, certain parts of the US and in Japan, the cost of solar-generated power is close to, or even lower than, the average consumer’s cost.
Li thinks that solar power generation will become widely adopted only when its costs are lower than other forms of electricity generation. The current trend seems to be indicating this. In Europe, the cost of producing a single KW/h is around Euro 0.13. The average household’s electricity rates are higher. For example, in Germany the cost is Euro 0.26, in Great Britain it’s Euro 0.16, in Spain it is Euro 0.20, and in France it’s Euro 0.14. In Germany, solar-generated power can be subsidized at EU 0.16 per KW/h. The excess power can be sold back to the electricity grid if there is more energy produced than required.
As the cost drops for electricity generated by means of solar, this situation brings business to a “sweet spot” where it is more cost effective to utilize solar power instead of traditional sources. As the economic trend is shifting from a clean energy policy and subsidies-driven mechanisms toward a market-driven industry, it will not be long before the resurrection of solar business profitability and celebrity status for investments in solar energy are upon us.