Clouds over the Solar Power Industry

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Modules and Wafers

The tough environment also extends to companies further down the supply chain, such as makers of solar modules and wafers—the halfway point between raw polysilicon and finished PV panels. According to analyst Henning Wicht of iSuppli, these players are facing increased competition as profit-starved polysilicon suppliers try to move into the higher value-added module and wafer business.

One trying to ride out the storm is SolarFun (SOLF) in Qidong, Jianjsu Province. When times were good, the company had expected to produce 175 megawatts to 190 megawatts of PV cells and modules this year. It also planned to add four cell production lines in 2009 after inking a new three-year supply contract with Germany's Q-Cells. But on Dec. 2, SolarFun reduced its 2008 production target to around or below 175 MW. The expansion plans? Shelved for now. "The first quarter will be relatively slow in the industry," says Henricus Hoskens, SolarFun's CEO.

The problems aren't limited to new entrants. Q-Cells cut its forecast for yearend sales on Dec. 9 because of weakening market demand linked to the current financial crisis. According to the company, roughly 40 to 50 of its 80, predominantly Chinese, customers have postponed orders. That will reduce net income this year from €215 million ($284 million) to €185 million ($244 million). "Due to the deterioration in project financing conditions and the uncertain market situation, we expect demand to remain weak into early 2009," says a company spokesperson.

The jump in financing costs also is hitting the last step of the solar supply chain: End consumers who now can't afford to expand capacity. To date, Western Europe has been the major market for PV panels as governments, particularly in Germany and Spain, offered lucrative incentives (so-called feed-in tariffs) that guarantee above-market returns on solar projects for up to 20 years.

This year, these state-backed schemes in Germany and Spain were cut by as much as 25%, although France has recently raised its subsidy. That has weakened profits for many independent suppliers that rushed in to profit from the feed-in tariffs, which pay producers higher-than-market prices for electricity produced via solar. "Small companies that have developed renewables could be in trouble," says Colette Lewiner, global energy, utilities, and chemicals leader at consultancy Capgemini (CAPP.PA). "They have overinvested, taken on a lot of debt, and will find it difficult to raise new money."

Market U-Turn

Yet one company's crisis is another's opportunity. According to Ingmar Wilhelm, executive vice-president for development in Italy at Enel Green Power, the renewables division of Italian utility Enel (ENEI.MI), the market was saturated with would-be developers of solar projects just three months ago. That pushed up the cost of everything from choice sites to solar equipment as companies grabbed as many projects as they could.

Now, the market has done a U-turn. Smaller players have rescinded options on future developments, in part because project financing is harder to find. "It has certainly helped us to increase our negotiation position," Wilhelm says. This year, Enel Green Power will install 260 MW of solar capacity, compared to 80 MW in 2007. The utility also plans to double its projects annually to eventually hit 4 GW of solar power by 2013.

The fact that deep-pocketed Enel will probably weather the financial crisis better than smaller competitors just shows that in the solar business, it increasingly pays to be big. Q-Cells, SunTech, and other heavy hitters may be cutting back, but they still have the financial muscle to survive, while many independent firms could go under. Price pressure from stronger players "will accelerate industry consolidation," says Christine Wang, a Taipei-based analyst with HSBC (HBC) who covers solar companies.

Analysts reckon the industry is set for a round of bloodletting in the next 18 months. That will be tough on some firms, but Sak Nayagam, climate change expert in Accenture's (ACN) energy practice, believes it's a necessary step to build the economies of scale for solar to become a mainstream power source. "It's the necessary shift from experimentation to actual project execution," he says.

Business Exchange related topics:
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Scott is a reporter in BusinessWeek's London bureau . Tschang is a correspondent in BusinessWeek's Beijing bureau.