-SOME OBSERVATIONS ON LOWER SOLAR SHARE PRICES - AND OTHER FREQUENTLY ASKED QUESTIONS
Calgary, Alberta - November 18, 2008 -
Solar stocks are taking a beating in the market. Oil prices are declining, credit markets are in turmoil and the world is into a recession. The popular media is wondering "Has the sun has set on clean tech?"
Many shareholders and others have asked for our perspective on what is happening in the capital markets and what it means for Sustainable Energy.
Here is my perspective as Chief Executive Officer of Sustainable.
Is the sun really setting on clean tech?
Not likely! Market dynamics are changing but for the better.
Putting aside the worst bear market in memory solar share prices have come down this summer in large part because of massive new module production capacity is coming on line in 2009.
Prices for panels are already coming down - not because of slackening demand - but because of increased supply of lower cost thin film modules. We have seen module price declines up to 30% from 2007 highs and they will likely be down to 50% of 2007 highs by the end of 2009.
Price reductions result in margin compression and lower profits. With the very high multiples that many solar module shares have had, the leverage to the share price is substantial.
While the popular press and many analysts have seen the oversupply condition, for the most part they have drawn the wrong conclusions. Demand is not slowing! Instead most knowledgeable observers agree that demand will at least double by 2010 to 6,700 MW/yr and double again by 2012 to 13,700 MW/yr.
What is really happening?
What is really happening is that billions are being invested in new production capacity. And a substantial portion of this is going into low cost thin film PV - mainly amorphous silicon ("ASi") and copper indium selenium ("CIS") thin film PV modules.
For about $2.5 million per megawatt anyone with money and manufacturing expertise can buy turnkey manufacturing plants to produce very low cost ASi thin film modules from companies like Applied Materials (US) Oerlikon (Switzerland) and ULVAC (Japan). Estimates are that these companies alone have sold or booked orders for up to 3,000 MW of ASi capacity.
According to the prestigious Prometheus Institute, more than 20 new thin film companies will cross the commercial threshold every year for the next three years. A projected 9,000 MW in new production capacity is 3 times the total production of all types of solar production in 2007.
Here are a few other signposts:
• Two years ago, Sharp was the largest crystalline module manufacturer in the world. By the end of next year it will have the ability to produce 1,000 MW of ASi thin film modules.
• Q Cells - the largest supplier of crystalline cells in the world - is investing to create 500MW of thin film production capacity by the beginning of 2010, competing with their own customers.
• Panasonic is spending $6.2 B to acquire Sanyo for its solar power and lithium ion battery business units. Last month Sanyo announced that it would spend $750 million to build production capacity for its hybrid thin film cells and to build ASi thin film production capacity.
• Showa Shell Solar has said that it will increase CIS production in Japan to 1,000 MW by 2011.
Bob Dylan words are apt: "the times they are a-changin"
Who are the winners and losers?
This is the most compelling story of all!
Thin film PV has dramatically lower marginal costs than conventional crystalline PV modules. The adjoining chart shows the impact of these differences in a balanced market and an oversupply market.
• If demand keeps pace with supply pricing should be in line with the top yellow diagonal bar on the chart. Thin film is priced lower to reflect the fact that it requires more space to produce the same power. But there is margin for everyone
• If supply exceeds demand thin film suppliers can lower prices to the point that crystalline suppliers run out of profit.
Note that the blue portion of the bars represent the cost after taking into account forecast reductions in crystalline polysilicon supplies.
This is why some believe that thin film will represent 50% or more of the market by 2012 and 2/3 of all solar installations by 2015.
What does this mean for Sustainable Energy?
First, lower cost modules will drive unit growth in the market.
According to a recent Fortune magazine article there is virtually universal agreement that the industry will continue to show compound annual growth in excess of 30%. We estimate that the factory gate market value of solar inverters will grow from US$1.2 billion in 2007 to about US$5 billion in 2012
But the opportunity for Sustainable is much more focused.
Our technology is a key enabler for thin film in penetrating the largest segment of the solar power market. While we have known this, and had been working with two thin film modules the coming oversupply condition has completely changed the dynamics.
Instead of being able to sell all they can produce, module companies including thin film companies must now compete for market share. With very little to differentiate their products, most thin modules only compete on price per watt and many expect a bloodbath. So they are now looking much more aggressively at solutions like ours to differentiate to differentiate their product offerings in order gain market share and maintain margins.
The opportunity turns on a key feature of our technology - the ability of our technology to enable massively parallel PV systems. While we have known this for some time the greatest leverage is with thin film PV.
• With conventional inverter technologies partial shading of any module is the same as shading all the modules and has a disproportionate impact on system production. This come mainly from rooftop congestion window washer's railings, telecommunications towers etc. It can also come from failure to regularly clean of debris and dirt
• The solution is a massively parallel system where each module operates at its optimum power point, independently of the others in the string. The evidence is that massively parallel systems can increase system efficiencies from 10% - 30%.
• A massively parallel system also enables modules to be arranged in shorter strings and at different angles - something that is not currently possible and leaves many open spaces uncovered.
While our technology works with crystalline module the fit is near perfect for thin film modules. More significantly it overcomes a major hurdle to thin film penetration of the rooftop market.
• Thin film has a larger footprint than crystalline modules. So, while the module produces power at much lower cost than crystalline products, it requires more of the rooftop to do its job and there is more potential for partial shading of one of more of the modules from time to time during the day.
• By taking shading out of play the massively parallel system design enables virtually 100% area coverage. It also eliminates the need for sophisticated system design to avoid the impact of shading and improves building aesthetics.
Isn't the big market for solar especially thin film in utility scale projects?
Yes but thin film PV must and will penetrate rooftop markets to sell product. The recently announced agreement between First Solar and Solar City is an important signpost.
According to Photon International's report "Detailing Demand" more than 70% of solar installations will be rooftop systems. Only in the US will utility scale ground-based systems approximate close to 50% of total systems for the next few years. Thin film companies cannot meet sales targets without significantly penetrating this market.
Centralized solar power systems often require substantial investment in distribution infrastructure which must be paid for. According to Prometheus at $4.0 /watt installed, building based solar is at grid parity. Ground based systems must achieve US$3.0 watt to achieve grid parity.
In fact the reason that Spain is now requiring that 2/3 of all systems be on rooftops is that the grid could not handle the growth in ground based systems mainly in remote areas.
When will this all happen?
2009 will be when thin film comes into the market in really high volumes. By the end of the year production will be ten times what is was in 2007. By 2012 it could double again representing 50% of all PV module production.
We estimate the addressable value for thin film inverters for rooftop applications alone at $400 million in 2009 growing to $1.5 billion per year by 2012. A 25% market share by 2012 is an achievable target.
What is Sustainable doing to capture the opportunity?
The past ten weeks have been a watershed for Sustainable. Although we validated our assumptions about changing industry dynamics over the summer we first took our proposition to the industry at the Valencia show and followed with the show at San Diego
We have received strong validation of the massively parallel concepts from virtually all of the thin film module manufacturers we have met with, including two of the largest in the world.
We are scheduling trials and demonstrations with leading module manufacturers and system integrators in Spain, Germany, Taiwan and North America. We are negotiating and expect to shortly announce partnerships to roll out integrated thin film packages (modules inverters pre-cut racking and wiring assemblies) to these markets.
Based on current cost estimated we believe that we can deliver integrated systems which can be installed at US$4.50/watt. Current costs range from US$7.00 - US$9.00/watt. According to Prometheus building based systems become economic without subsidies at US$4.0/watt.
How defensible is our technology? How else would you enable massively parallel systems?
The reason that more systems are not parallel is because the efficiency of conventional inverter technologies decline significantly with large parallel system designs. We have a different platform which enables parallel systems without compromising system efficiencies
According to our patent attorneys we have a very strong IP portfolio. The core concepts of our original patents are simple and very broadly cast making it difficult to get around. We have also filed for additional patents on concepts which improve on the core patents reducing costs and improving efficiencies.
One way to enable massively parallel systems is to put a small low power inverter on each module. The concept is not new and at least one company has come out with such a product. The first problem is cost. The so-called micro-inverters cost about 3 - 4 times our cost. There is also an issue whether adding complex electronics to each module makes the system more or less complex in terms of installation and maintenance and more or less reliable.
National Semiconductor Company recently announced that it is developing a semiconductor solution that will achieve the same value proposition as we do. The cost is 2 - 3 times the cost of our approach and the same issue of multiple points of failure is in play.
What about the economy? Won't this negatively affect industry growth?
This is certainly an issue which is beyond our capability to answer. But following are a few observations
• Incentives in Europe are built into the rate base so do not entail a budget decision every year to extend. Given the US legislative system it is unlikely that the tax credit extension will be repealed. In fact the US President elect, Obama, still gives every signal that he intends to deliver more not less support for alternative energy.
• Investment in solar power infrastructure is a very powerful means of boosting the economy especially if the modules are manufactured at home. The effect is the same as building roads. In contrast nuclear power plants take years to plan and the investment will have no impact on the current situation. The president elect is saying that 5 million jobs can be created from investment in "green" or environment-related industries.
• This week, California Governor Schwarzenegger terminated talk that the recession will crimp California's fight against global warming when he ordered every utility in the state to obtain a third of its electricity from renewable sources by 2020. This is an enormous boost for solar. In fact the recent decision by PG&E to build a 500MW solar plant ahead of wind to meet its set aside requirements shows that solar is now at parity with wind in that market
• The main issue, of course, is how the credit crisis will impact growth. Obviously no one really knows but solar projects in Europe are investor driven, based on 25 year contracts, where the utility must take all that the project produces and return on total capital ranges from 8% to 15%. If one cannot finance these projects, it is not likely that one can finance very much. Time will tell.
Will falling oil prices impact growth in the industry?
Not likely. In my opinion, the recent price reductions are largely irrelevant even to short term growth in alternative energy:
• Oil prices today are about what they were 16 months ago and few thought then they would go as high as they did this year. Yet the industry was growing then at 40% a year. So there is no reason to believe that it should slow now simply because we have gone back to more sensible and defensible levels.
• Lower oil prices are also a significant stimulus to all economies other than the Middle East Russia and perhaps Canada. If the recent oil shock has done nothing else anything it has galvanized a realization in the minds of the European and American public that they need to reduce dependency on foreign oil.
• Energy independence is a key issue for both Europe and the incoming US administration. The US currently imports about 14 million barrels per day. Europe imports about the same amount. Even at $70 per barrel this means a loss to each economy of $1 billion per day. Yes you read correctly: per day.
• This week the president-elect confirmed his plans to invest $15 billion every year into solar power, wind power and other renewable fuels to reduce U.S. dependence on foreign oil and improve national security while helping the planet.
• The reality is that oil prices will not stay low for very long. Demand is growing and major new discoveries are not coming. Alternative energy technologies will only fill a very small portion of the growing world demand for energy which is in a crisis condition in any case.
Michael A Carten, President & CEO