20 May 2009


First Solar

Interview: Joseph Berwind, Alternative Energy Investing

Joe, you wrote an excellent book called book "Investing In Solar Stocks" and are an expert in the field of solar pv. What can we learn from it?

"Thanks Edwin. "Investing In Solar Stocks" has been over a year in the writing. The official publication date is July, 2009. "Investing In Solar Stocks" highlights the principles to successful investing in solar PV stocks which is fun and exciting and possesses the potential for better returns for investors than the internet, technology and biotech combined. We have already presold thousands of copies of the book in different markets throughout the world. With this kind of success, the publisher is already considering translating the book into numerous languages."

"Investing In Solar Stocks" is about access. "The book addresses the problem that because solar stock investing is in its early days there isn't any place to turn to for unbiased advice on just how to invest wisely. "Investing In Solar Stocks" will advance the reader far beyond the competition by revealing business practices in the industry for what they are and identifying the stock strategies that the top echelon of global institutional investors in the space execute to make gains. I wrote the book with a mind to make the industry and how to invest accessible to everyone"

Given the current economic and stock market situation, would it be wise to invest in solar stocks right now?

"Investing always makes sense. Stock markets everywhere are making great strides in leveling the playing field for investors. The ability to make investments in rising and falling markets have become universally available to institutional investors and the private investor isn't far behind. In this sense the book looks at profiting in all markets."

"Now, to get at what to do today? The group is well off the bottom with many solar stocks up +100% from their lows. For many who do not understand what is happening in the industry the recent run up is reason alone to sell or short solar stocks. These people are the lambs the intuitional investors repeatedly slaughter. While the recent rise in solar stocks has, in fact, been breath-taking the pros are not so fast to make up their minds about what to do with individual companies. For the poorly informed investor you can be sure they will lose a lot of money."

How would you characterize the year 2009 for the solar industry?

"2009 will go down as a year when the clubby, elite of solar matured for the betterment of the industry, however, albeit to the ultimate detriment of select PV company shareholders and employees. This year, more than any other before it, will be remembered for the depth of value destruction and franchise risk revealed by the unsustainable business strategies originally intended to create artificial barriers to entry and designed to promote funding opportunities for unbridled growth. 2009 will be remembered for the revelation that backstop-market ideology is a failed notion that skyrocketing capacity growth is sustainable. We know now that this ideology to be a false one"

"Solar PV is not a mature market. It will remain policy driven for the next years to come. Supply chains must manage responsible growth, plan around policy support mechanisms that are inherently unpredictable, and above all not lose flexibility. 2009 is the industry's annus horribilis. Only those companies throughout the supply chain, from polysilicon in the upstream to module makers in the downstream that can adapt to the new business strategies of today while managing their business in a sea of outside forces will survive. Many companies today will fail to adjust."

Compared with 2008, do you expect growth in the market volume of newly installed PV power in 2009 and 2010?

"We expect growth next year but almost none this year. As we recover from tight project finance markets we are likely to see volumes build slowly benefitting certain segments of the supply chain but slow to improve the situation for others. An example might be inverter companies that build to order and have no appreciable channel inventories can rally ahead of other segments like silicon, ingot, wafer, cell and modules that remain mired in excess supply. For 2010, we think that the rationalization going on throughout the industry today, and the successful recovery of the project finance marketplace next year, may create a more healthy industry for a few more segments in the supply chain while still others will require more time. Installation growth in 2010 is looking potentially very healthy"

What do you expect polysilicon prices will do this year and what can be the effect on the module prices for this and next year?

"These are key questions, and the answer is of course very important. The institutional investor, on the other hand, may ask a slightly different question in the search of investment opportunity. She might ask "what will panel production be next year?" She might observe that the game has changed."

"During the period of tightening supplies like poly for example, the institutional investor considered the potential total panel supply as a function of available raws and conversion factors while simply assuming whatever was made was installed. Today, what is important has changed. Estimating in environments where profits are flowing from suppliers to users begs the question, what is the capacity of the surviving module companies? A panel company with a strong balance sheet and quality products and the necessary certifications that is BANKABLE will likely survive while others that do not find themselves on the list likely fail. Regardless of what one's notion of what makes a good company or a bad company, the rationalization of the module companies now underway has become the basis for estimating one leg of the pricing equation as a function of supply and demand. Currently, we see a much healthier supply-demand dynamic in 2010, but do not be fooled into yesterday's thinking about winners and losers. Institutional investors know the game has changed and so too the investment opportunity. Stocks that worked last year, and even those that worked from the market bottom until now, are not shoe-ins for the rest of this year and definitely not in 2010 when changes occurring now will be more easily seen on the solar landscape."

What is your vision for thin-film technology and the numerous new manufacturers? Some companies are claiming to sell (thin-film) modules at $ 1/Wp next year? Do you expect thin-film to become the dominant solar PV technology in a few years’ time?

"It is possible as long as one assumes the capital markets open up again as they were before things changed; however, using a stricter interpretation I would not think the investment capital nor the capacity to fabricate the needed equipment will emerge in so little time as a "few years." In the boom times of the last four years investments flowed. Approximately $11 Billion raised for a combination of purposes like raw material purchases and capacity additions occurred when access to capital was easy. In the next few years, however, investments supporting growth in capacity is likely to become almost a zero-sum game. Although you will be right to say commercialized thin-film companies with proven execution and market share winning cost structures will grow, we must consider that select c-Si companies are themselves going to benefit from being commercial now and will push their own costs ever lower. These are the companies first in line for what we think will be only enough capital to accommodate share gains and conservative market growth. While the thrust for all companies, no matter the technology, is to takeout costs, and despite the claims of companies with little or no commercial scale that they can achieve such a breakout level of low costs, the new capital and private market paradigm of today and the next few years may not provide the capital needed for unproven and pre-commercial companies to grow to such an extent to tip the scales away from c-Si so fast."

Where and when do you expect to see grid parity first? And when will the subsidy dependency time frame end?

"Ah! This is the question isn't it? To get to the answer we use our own proprietary fabrication cost simulation model to identify device technology and production cost improvements over a T+9 annual format. Our tool allows for fabs to be located in any geography and in any currency using transfer pricing between fabs to calculate costs and profits by segment for the integrated business. To do this we create the fab, equipment, and the materials. We don't take any claims of process improvements for granted and we don't leave out any costs."

"We model grid-parity after estimating systems costs in our proprietary LOCE model. Our model is programmed to allow for simulating systems installations in various critical markets with the ability to shift between project years with and without subsidies and to adjust for external inputs such as interest and discount rates adjusted for technology risk. In short, nowhere along the chain from materials to installed systems do we eyeball it. While this seems too detailed for many, it is not for capital providers and executive management teams."

"For example, Photon recently printed the basic Die Grid Parity Fabrik figures without cost breakdowns and absent certain indirect costs. While these printed figures imply grid-parity for southern Europe they leave us with many questions. In the competition for scare capital I predict that we all will become far less tolerant of these types of grid-parity forecasts going forward. Will the survivors in the industry do a better job of knowing with greater exactness the specifics of how they will achieve grid-parity relative to their own technology and equipment choices? It seems to us inevitable especially after the firestorm of value destruction we have already witnessed.”

"Perhaps we all realize that First Solar will achieve wide scale grid-parity first. Should market demand next year represent 188% of First Solar's December 2009 capacity, then we may assume investors will support the company's growth plans that, depending on their equipment supplier, may very well result in a disproportionate jump in share for First Solar placing greater pressure on those companies with higher cost structures. As I mentioned earlier in this interview, capital allocation for the next few years may fill advantaged technologies first and disadvantaged technologies almost not at all."

What are the major threats to the solar industry at the moment?

"The major threats remain the same as they were - Policy change is outside of our control. With continued and growing support, 2010 will resume growth again. In fact, with the ever so slight but improving market, the worst may in fact be behind us. While this will not prevent us from seeing more companies dropout of the PV business, including some big ones still struggling with take-or-pay contracts and too much debt, it may mean that the difficult choices governments make in election years like Germany may not mean more regulatory support risk for PV as these policy makers allocate scarce resources in these troubled times. That said, policy risks followed by interest-rate risk seem to us to remain the risks at the industry level."

When do you expect that the current 'oversupply' situation might end?

"As we mentioned a little earlier, rationalizing capacity will take a little longer. Our best estimate is that sometime next year we balance supply and demand. It does not matter how much polysilicon is available to the industry as previously mentioned and for the reasons given. What matters is the sum total capacity of bankable module companies relative to country demand. Look for success stories among those well-positioned companies that can drop their costs faster than their peers. Look for failures among those companies that refuse to change with the times and pursue new strategies as they refuse to take the hard choices we believe is necessary to shift them back into the winner’s category."

How will the solar industry look in 5 years from now?

"Big and quite changed - There are already executive level boardroom meetings going on that will change the face of the industry as we know it. The long-term take-or-pay with upfront deposit contracts and backstop-market ideologies are out. Survivors will scale, solar finance will change as utilities, REITS and banks partner and the often admired PPA becomes a thing of the past especially in the USA."

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