The Chapter 11 filing of SunEdison Inc. on April 21, 2016, marked the end of an extremely wild ride for shareholders of the world’s largest renewable-energy development company. Considered both a hedge fund and retail investor darling at its peak, SunEdison enjoyed a more than 2,100 percent increase in its share price between 2012 and 2015, trading as high as $33 a share, before experiencing a dizzying decline in August 2015, when its stock price plummeted 97 percent in a matter of weeks.
The ultimate demise of SunEdison was principally the result of an enormous amount of debt incurred during the peak of the cycle in 2014 and 2015, coupled with increasing costs of capital for its subsidiary “YieldCos,” Terraform Global and Terraform Power, which served as the main buyers of its projects. The final straw came when shareholders of Terraform Power sued SunEdison for breach of fiduciary duty in relation to SunEdison’s proposed acquisition of Vivint Solar, a transaction that contemplated the YieldCo’s purchase of a number of Vivint’s projects.1
Although several of the contributing factors to SunEdison’s decline were idiosyncratic, in many ways the trajectory of the fallen behemoth has been a reflection of the solar industry as a whole. The MAC Global Solar Energy Stock Index, which tracks the price of solar energy stocks, is down well over 100 percent since the spring of 2015.2 While solar remains a dynamic and growing part of the renewable energy sector, solar companies continue to deal with several challenging circumstances affecting profitability in the short and medium terms, and the industry is one that turnaround professionals would do well to keep an eye on.
Perhaps the foremost factor contributing to declining profits for solar companies over the past few years has been a structural imbalance between supply and demand. On the supply side, manufacturers of solar modules and cells currently have both significant installed production capacity relative to global demand, as well as the ability to quickly ramp up production to match any increase in demand; in 2016 alone, more than 20 gigawatts (GW) of new module manufacturing capacity was added to the global supply, enough to power an estimated 14 million homes.
The downward pressure on prices resulting from this oversupply has been amplified by the intensity of the pricing competition among firms. The solar industry has nothing, for example, like OPEC, which sets oil production targets for its members. Although the group’s efficacy may be debatable going forward in the face of expanded U.S. shale output, the organization nevertheless helped put a floor on global oil prices since its members enacted production cuts in December 2016. The solar industry, in contrast, is characterized by fierce competition across the value chain, with some firms willing and able to reduce module pricing to levels below manufacturing costs to gain the upper hand over competitors.
An additional factor complicating the supply situation and its impact on pricing is the potential for trade disputes and concurrent or reactive trade barriers. This spring, the United States International Trade Commission agreed to hear a petition from bankrupt Atlanta-based solar panel manufacturer Suniva under Section 201 of the 1974 Trade Act, alleging that cheap solar cells from Asia are flooding U.S. markets and causing significant harm to the U.S.’s solar manufacturing base. Suniva has requested a four-year tariff schedule on crystalline-silicon solar products, which, if implemented, has the potential to reset industry equipment pricing back to 2012 levels and installed system pricing to 2015 levels. The commission will reach its decision by September 22, with a recommendation for action to be delivered to the White House by November 13.
While perhaps positive for U.S. domestic manufacturers in terms of pricing, any such tariff would undoubtedly increase costs for end users and decrease downstream demand, and it is difficult to see how the net result would benefit the North American solar industry, particularly in light of the current supply glut. In any case, the commission has labelled the contentious investigation “extraordinarily complicated,” and market participants and observers will be following the release of the commission’s decision closely.3
Meanwhile, on the other side of the equation, demand has been lower in several key markets. In China, slowing demand over the second half of 2016 as a result of the reduction of feed-in tariffs (FITs) has carried over into 2017. In the United States, the residential solar growth rate in several major state markets has also slowed recently, as early adopters begin to deplete and the large, publically traded installers that account for the majority of installations slow their growth to focus on profitability. Additionally, there is some concern that U.S. utility installations, which experienced strong growth in 2016, will falter in an environment of rising interest rates, but any such consequences from tightening fiscal policy are by no means clear.
As a direct result of this imbalance between supply and demand, during the past two years, industry average sales prices per watt have declined in the United States and several other key markets, at times significantly, both at the module and system levels. Pricing is expected to remain low in the short and medium terms as industry participants seek to sell through inventories worldwide. At least one corollary effect of the low-price environment has been an uptick in M&A activity, as 2017 Q1 deal volume (the most recent quarter available at time of publication) is already up significantly year-over-year.4 Increased consolidation seems likely, perhaps even along the lines of the industry shakeout that took place in 2012.
Although the solar industry has experienced tremendous cost efficiencies over the past decade, profits remain heavily variable based on the size and availability of various levels of government incentives. Subsidies take the form of support programs, such as FITs, quotas, and net energy metering systems, or financial assistance, such as tax incentives, grants, loans, rebates, and production incentives.
The current U.S. administration’s tepid attitude toward the renewable energy sector and its proposed and contemplated environmental policies have also created a large measure of regulatory uncertainty. There is some risk, for example, that a particularly important federal investment tax credit (ITC) for the solar industry, which has been extended through 2019, may be eliminated or reduced under the Trump administration. This solar ITC, at a rate of 30 percent, has been a crucial economic driver of both commercial and residential solar installations in the United States, and if left intact, should allow for greater medium-term demand visibility.
With U.S. solar capacity expected to nearly triple over the next five years and strong growth projected globally, solar power as an alternative to traditional sources of energy continues to be a growth story with a bright future.5 However, it is far less clear whether prices will be sufficient to support similar growth in profits for solar companies, and looking ahead, there are certainly some clouds on the horizon.