What’s going on with First Solar (and cadmium telluride solar cells)?

Above: Year-to-date price history of several large solar cell manufacturers.
FSLR = First Solar (American)
SPWR = SunPower (American)
STP = Suntech Power (Chinese)
YGE = Yingli Green Energy Holdings (Chinese)

Followers and investors in one of the world’s largest solar panel producers have experienced a continuous stream of bad news since February. First Solar, a global leading producer of thin-film solar cells, has lost nearly half of its market capitalization since the beginning of 2012 and seems to be plumbing new all-time lows every few days [1]. First Solar is not without company in its suffering: its biggest American rival, SunPower Corp, has performed under the S&P 500 for the year as well (though not nearly as badly), and the established solar sector as a whole took a particularly bad tumble in mid-2011 and hasn’t yet recovered [1].

Much of this is likely due to changing market conditions and foreign competition. Over the past few months, much discussion has taken place regarding the Chinese government’s role in the selling of solar cells to Western markets, providing subsidies to Chinese manufacturers selling their products abroad in an attempt to undercut Western manufacturers and force them out of business. In late March, the US Commerce Department announced that they had found evidence that the Chinese government had indeed provided impermissible export subsidies to its local manufacturers, and placed small tariffs on solar panels from several Chinese manufacturers in response [2]. There is the possibility for even more punitive tariffs should the Commerce Department decide that Beijing is engaged in dumping practices, which would involve the government heavily subsidizing producers to the degree that they would be able to sell their panels abroad below cost [2].

But First Solar seems to have special problems, beyond the market conditions that would be affecting its competitors as well. Unfortunately, most of the company’s unique problems likely stem from its technology. First Solar is the leading producer of thin-film solar panels using cadmium telluride (CdTe) as its semiconductor material, and  produces the most efficient CdTe panels available [3]. CdTe panels, while having less sunlight-to-electricity conversion efficiency than some other materials like crystalline silicon, are particularly cheap to manufacture, with First Solar’s solar panels being the first to fall below a dollar per watt [4]. This cost advantge has been a boon to First Solar during its life, but some troubling news arose out of its 2011 10-K filing and annual earnings report. In the company’s earnings conference call, its then-CEO noted that it had used more money than originally predicted in fulfilling product warranties in 2011 and had alloted additional money to its warranty reserve [5].

The 10-K filing also noted that the company believed its higher rates of product are failure can be traced to a potentially increased failure rate of its cells in hot climates. It reached this conclusion “based on technical literature, data that we have developed internally including through accelerated-life testing, our analysis of modules returned under warranty, and our analysis of performance data from systems that we monitor under O&M agreements” [6]. It should be noted that, given the short short life span of thin-film technology and First Solar’s dominance of the market, this is really the first evidence or investigation towards the potential problems of cadmium telluride solar cells in hot climates. If First Solar’s suspicions are correct, we may be finding out for the first time that CdTe has a shorter lifespan in hot, sunny weather (where solar would be most appealing anyway).

This could be some pretty terrible news for First Solar, since its business strategy now focuses entirely on building utility-scale solar installations. During First Solar’s rapid growth in the second half of the 2000s, much of its sales and revenue came from its operations in Germany, where the national government heavily incentivized solar power development through the use of a generous feed-in tariff (a type of production subsidy). In 2010, amid many other austerity measures, the German government slashed this subsidy over the protest of domestic and foreign solar cell producers [7]. First Solar took this as cause to focus on building utility-scale projects in hot climates like the American southwest [8], and recently ceased all German manufacturing operations [9]. It was only after expanding out of temperate climates that First Solar found out about their potential problems in hot climates. This potential shortfall in meeting the company’s best market opportunity has gotten many investors spooked and concern about its viability [10].

Will this spell the end for the company? At this point, it doesn’t look like it. True to its goals in orienting towards utility-scale solar, First Solar has been able to sell projects in Arizona and California to plant operators like NRG Energy and Berkshire Hathaway’s MidAmerican Energy [11,12]. It would seem that these investors, at least, are not as concerned about the technology as the stock market seems to be.

References:
[1]: http://www.google.com/finance?q=fslr
[2]: http://www.nytimes.com/2012/03/21/business/energy-environment/us-to-place-tariffs-on-chinese-solar-panels.html
[3]: http://www.businesswire.com/news/home/20110726005689/en/Solar-Sets-World-Record-CdTe-Solar-PV
[4]: http://www.popularmechanics.com/science/energy/solar-wind/4306443
[5]: http://seekingalpha.com/article/399251-first-solar-s-ceo-discusses-q4-2011-results-earnings-call-transcript
[6]: http://www.sec.gov/Archives/edgar/data/1274494/000127449412000015/fslrdec1110k.htm
[7]: http://www.nytimes.com/gwire/2010/03/31/31greenwire-slashed-subsidies-send-shivers-through-europea-32255.html
[8]: http://online.wsj.com/article/SB10001424052970203518404577097540383138700.html
[9]: http://www.nytimes.com/2012/04/18/business/energy-environment/first-solar-to-cut-2000-jobs-and-close-a-german-factory.html
[10]: http://blogs.marketwatch.com/thetell/2012/03/12/first-solar-slides-again-on-price-target-cut-warranty-woes/
[11]: http://finance.yahoo.com/news/nrg-energy-midamerican-solar-first-201300851.html
[12]: http://www.bizjournals.com/phoenix/news/2012/05/04/midamerican-first-solar-start-work-on.html

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