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Investment Overview for First Solar (NASDAQ:FSLR)
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Below are key drivers of First Solar's value that present opportunities for upside or downside to the current Trefis price estimate for First Solar:
International Photovoltaic modules
- Gross Margins: The manufacturing cost of solar cells for First Solar declined from $1.47 per watt in 2005 to $0.75 per watt in 2010 due to significant improvements in technology. These figures are the lowest in the solar industry. As a percentage of the sales price, the company's manufacturing costs (adjusted for depreciation) fell from 59.2% in 2009 to 47% in 2011. We expect margins to decline to 20% by the end of the Trefis forecast period. If margins stabilize at around 30%, there is a 20% upside to our price estimate. If margins fall to 10% however, there could be a 20% downside.
- Price per Watt of PV Modules Sold: The average price per watt decreased from $2.25 in 2007 to $1.55 in 2010. Prices fell sharply to $1.04 in 2011 because of the shake up in the solar market. We expect that prices will continue to fall to around $0.60/watt by the end of the Trefis forecast period. However, if prices fall at a slower rate than estimated and reach $0.70 per watt by the end of the period, the Trefis price estimate could see a 10% upside.
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First Solar is engaged in the manufacture and sale of solar modules with an advanced thin film semiconductor technology. In addition the firm also designs, constructs and sells photovoltaic (PV) solar power systems. The company operates in two main business segments: the components segment and the systems segment. The components segment is responsible for the design, manufacture and sale of solar modules to solar project developers and system integrators. The systems segment provides PV solar power system for commercial systems, which includes project development, engineering, procurement and construction (EPC), operating and maintenance (O&M) services.
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The International PV Modules division is the primary source of value for the following reasons
Growth in markets outside Germany
In 2009, 2010 and 2011 Germany contributed around 712 MW, 593 and 457 MW worth of PV module sales compared to 317 MW. 480 and 636 MW by the Rest of The World. As countries globally adopt solar energy as an alternative means of generating electricity and First Solar diversifies away from the German market, PV module sales in other countries are expected to rise.
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Legislature to aid renewable energy projects
Governments all across the world have taken measures to encourage the use of solar technology as a way to help them remove their dependence on fossil fuels. The U.S. government's Emergency Economic Stabilization Act of 2008 provided tax credits to investments made in alternative energy projects. Similarly the American Recovery and Reinvestment Act of 2009 provides tax incentives worth 30% of the total cost of installation, but the tax incentives in the U.S. expired at the end of 2011. However since 2012, most solar incentive programs announced were from emerging markets such as China and other places like Japan. Government subsidies and tax credits have enabled renewable energy companies like First Solar to thrive.
Australia’s PV market has been largely driven by demand in the residential sector with approximately 80% of the installed capacity being used for residential use. As a significant portion of the country’s electricity is generated through cheap coal, the solar market growth has been quite steady in the past. The government has revised its Solar Flagship program aiming to generate 20% of the nation's power supply from renewable sources. Australia had an installed capacity of around 1.03 GW in August 2011.
While governments have been cutting back subsidies of late, we expect subsidies in many countries to remain in place in order to encourage further growth in the industry.
Impact of the economic crisis
The global economic crisis had a profound impact on the solar industry. The rise in energy prices prior to the economic downturn led many solar manufacturers to increase capacity. This helped certain manufacturers as they benefited from economies of scale which in turn helped reduce prices. However, due to the credit contraction that occurred during the financial crisis, the installation of solar power systems declined significantly. The economic crisis impacted demand for everything ranging from polysilicon to rooftop panels. As a result many smaller players with weak balance sheets have been struggling which has led to consolidation in the industry.
Innovation in solar technology
The PV industry has seen strong growth in the past few years and the total number of solar cells produced globally has increased over seven times in the past five years. Installation of these solar technologies has also increased sharply during this period. Solar companies are continuously working to improve current technology, reduce costs and make systems more efficient. PV module efficiency and costs are drivers for most of the PV power plants; therefore maintaining and improving these aspects of the company are important.
Growth in Emerging Markets
Europe and developed nations are not the only ones taking the lead in the solar industry. According to EPIA, solar installations in emerging markets will become a major source of sales by 2016 as solar power becomes competitive with diesel power generation.
In China, with the help of Solar Rooftops and the Golden Sun programs in 2009, the PV market in China experienced strong growth achieving 228 MW in 2009 and then installed around 3 GW of panels in 2011. China is expected to become the largest market for solar installations by 2014 and install between 3-5 GW.
Trefis Forecast Rationale for Price per Watt of PV Modules Sold
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This refers to the average sales price per watt of energy that First Solar realizes on the sale of solar modules.
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The average price per watt increased from $2.25 in 2006 to $2.43 in 2007 due to a favorable exchange rate between the U.S. Dollar and the Euro, which was partially offset by a price decline in module prices that year. Average prices fell in 2008 to $2.37 mainly due to the 6.5% contractual price decline that the firm’s long term supply contracts are engaged in at the beginning of each year. This was offset by a 6% increase related to favorable exchange rates between the U.S. Dollar and the Euro as approximately 74% of the firm’s net sales in 2008 resulted from sales of solar modules to customers in Germany. Prices declined sharply in 2009 to $1.75 due to competitive pressure and the commencement of the customer rebate program during the third quarter of 2009. The average selling price was adversely impacted by 4% due to a decrease in the foreign exchange rate between the U.S. Dollar and the Euro as well as a 1% change in the customer mix. Prices fell further to reach $1.49 per watt in 2010.
Approximately 65% of net sales during 2009 were in Germany compared to 74% in 2008. As the production costs decreases, the average selling price will continue to decline making solar a more attractive alternative energy solution. We expect prices to decline steadily during the Trefis forecast period.
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Trefis considered the following factors for its forecast:
- Increased Demand
- An increase in government demand spurred by government incentives will likely result in a shortage of polysilicon which is the main ingredient in PV modules. Demand for PV modules has increased from 170 MW in 2000 to around 7,059 MW in 2009.
- Even though First Solar does not use polysilicon for the production of its modules and instead uses a proprietary thin film technology that consists of cadmium tellurid, a rise in the price from competitors due to an increase in the price of polysilicon will enable First Solar to be more competitive and charge higher for PV modules.
- Polysilicon prices increased from $200/Kg in 2007 to $450/Kg in 2008 due to shortages in polysilicon and increased demand. During the economic recession polysilicon prices fell drastically as demand declined.
- Average estimates indicate that polysilicon prices are likely to hover as a result of oversupply and average around the $60/ Kg mark towards the end of 2011.
- Exchange rate volatility
- A large portion of First Solar’s module sales have been generated in Europe, particularily in Germany. The past strength of the Euro compared to the US Dollar benefited several solar manufacturers. Most economists believe that the dollar will gradually weaken over time against major currencies. This should help benefit the average sales price (ASP) for major producers.
- Increasing oil and natural gas prices
- Governments worldwide are encouraging the use of alternative energy fuels such as solar energy to offset the increased demand for fossil fuels such as crude oil and natural gas. Global demand for oil has increased sharply over the last several years due to growth in developing countries like India, China, Brazil etc. In 2000 China consumed around 4,772 barrels of crude oil per day. This figure increased to 8,625 barrels per day in 2009, an increase of 80% over a nine year period. As developing economies grow demand for oil is bound to increase sharply which will lead to an increase in oil prices.
- Solar systems are moving towards grid parity
- Grid parity is defined as the point at which solar systems can generate electricity at the going market price. Grid parity will mark an important turn in the demand for solar energy as government subsidies and support will no longer be necessary to set of solar facilities.
- Different markets can be expected to achieve Grid parity over the next few years depending on the retail price of electricity in the market and geographical factors such as solar irradiation. Peak rate grid parity has already been achieved in markets such as Hawaii and Italy and markets such as Germany are expected to reach grid parity over the next 2-3 years depending on the decline in prices of solar modules and the increase in the cost of traditional electricity sources.
- In the U.S., Solar has already achieved peak hour grid parity in California which is the largest market for PV modules in the U.S.
- Bulk price parity and wholesale price parity are expected to be achieved later over the long term.
- Government thrust in renewables
- Governments in India, China and other developing countries are emulating the incentive system followed by European nations to boost solar power generating capacity. Increased demand from emerging markets should help improve the pricing dynamics for solar modules.
- In the wake of the nuclear crisis in Fukushima Japan, countries are expected to take steps to reduce their reliance on nuclear energy and boost wind and solar power generation.
- Carbon emission standards will also force countries to adopt non-polluting means to generate electricity.
- Systems business growth
- Several solar PV module manufacturers have been entering and expanding their systems integration business and procurement and construction (EPC) business as a way to drive end demand for their modules. Many of the Chinese suppliers have relatively lower EPC businesses compared to their counterparts such as First Solar and SunPower in the US. By diverting more modules towards the installation of systems, the demand for modules could remain high thereby helping support ASP’s
Mitigating
- Excess inventory of finished goods
- PV module prices dropped significantly in 2009 due to an increase in inventory of finished goods amongst major solar players. In an attempt to increase sales and pay off debt, many PV module manufacturers had to cut prices in order to generate sales. In 2009 solar cell production reached 9.34 GW when global demand was 7.3 GW. According to GreenTech Media research (GTM) the producible module supply will increase from 16 GW at the end of 2010 to nearly 30 GW at the end of 2013. During this period supply will outpace demand by 26% annually.
- Broad economic slowdown
- The solar industry is largely incentive driven and dependant on the level of subsidies and tax credits provided by governments across the world. The global economic recession of 2008/2009 impacted the public finances for many countries which led to governments scaling back spending. This had the impact of lowering subsidies in various places. A decline in Feed in Tarrifs (FIT) and other incentives could impact demand which would have the impact of lowering the average sales price for modules.
- Apart from government subsidies, tight credit conditions made it very difficult for several of the solar players to compete and win customers. A slowdown in the availability of financing could reduce demand going forward.
- Feed in Tariff (FIT) cuts
- Several countries have adopted a Feed in Tariff (FIT) policy which requires utilities to pay government set rates for all solar energy produced in the country. By ensuring that utilities buy the electric power at the cost of production, there has been greater diversity in alternative energy resources and has led the cleantech development. Recent news that several countries may be cutting these tariffs is leading to speculation that solar demand will not grow as fast as initially believed. This could further strain the average module sales price.
- Italy and the Czech Republic have retrospectively cut their FiT rates as generous subsidies created a glut in the market with investors rushing in to take advantage of the incentives. Spain has put a cap on the PV capacity that can come online each year at 500 MW in order to avoid excessive subsidies.
- Declining demand from major European markets has resulted in a situation where the industry is stuck with excess capacity and high inventory while the demand has tapered resulting in a sharp decline in pricing of PV modules in Q2 2011.
- Drop in polysilicon prices
- At current polysilicon production rates it is estimated that total 2011 production will total 180 k tons of which solar industry is expected to consume around 150k tons. This is enough to produce around 25 GW of solar panels much higher than the anticipated demand estimate of 20.4 GW in 2011 by Solarbuzz.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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