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Credit Crisis May Drive Solar Industry Consolidation

Posted on: Wednesday, 5 November 2008, 07:58 CST

Many solar energy companies could fail or be acquired by stronger competitors due to rising interest rates and falling prices of solar modules, according to industry analysts. 

Such turmoil would likely result in widespread industry consolidation. 

Solar energy companies have enjoyed substantial investment and government subsidies in recent years, which have driven supply ahead of demand.

"In our view, too much solar capacity has been added relative to demand, and will lead to oversupply," wrote analysts with Goldman Sachs, who predict a corresponding 15 percent decrease in module prices.

Oversupply and decreasing demand amid slow global economies will drive the cost of photovoltaic solar energy close to that of conventional electricity, something known as “grid parity“.  Ultimately, this will provide a boost to the sector, but many companies will fail along the way.

A dangerous combination of falling prices and tighter credit will make it especially perilous for those solar companies with high debt and weak cash flows.

"On a global average, three out of four (solar energy) companies will not make it," Robert Schramm, an analyst with Commerzbank in Germany, told Reuters.

The impact of stricter financing conditions will affect returns seven times more than would module prices, according to Commerzbank, who predicts next year's financing for global photovoltaic projects will be 33 billion euros, 20 billion of which will need debt financing.

However, all indications indicate a near halt in debt financing for large-scale solar power parks outside Germany that will likely last until at least mid-2009, Commerzbank said.

Indeed, solar panel maker Evergreen Solar warned in October that it would not be able to fund a new $400 million production facility to service its 2010 contracts without an improvement in the credit markets.

Evergreen runs a joint venture with Norway's Renewable Energy Corp (REC), a leading polysilicon manufacturer, and Germany's Q-Cells, the top solar cell maker.

"We think that about 10 percent of the companies may fall victim to the current financial crisis -- most of them in Asia," wrote Credit Suisse analyst Karsten Iltgen.

Slowing demand based on tighter credit was also cited by Thomas Weisel Partners in their recent downgrade of China-based solar cell makers Suntech Power Holdings Co Ltd and JA Solar.

For those wishing to invest in the sector, Goldman Sachs recommends  looking for equipment makers with significant market share, technology leadership and take-over potential, such as Meyer Burger in Switzerland and Germany's Roth & Rau, which makes equipment used to produce solar cells.

Iltgen of Credit Suisse also favors Roth & Rau, due to the company's low valuation and strong cash position.  Roth & Rau shares currently trade at a discount to Meyer Burger and rivals Centrotherm and Manz Automation.

But Hans-Otto Truemper, managing director of Grossboetzl, Schmitz & Partner, which has 1.8 billion euros of assets under management, believes the timing is not quite right.

"If you look at the current energy costs -- oil prices have practically more than halved -- then the competitiveness of solar and wind power needs to be called into question," he told Reuters.

"However, I see opportunities in the sector and in the long term, there is no way around it."

Source: redOrbit Staff & Wire Reports

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