Daniel Lacalle

Why Solar Bankruptcies Soar Despite Growth and Subsidies

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 SunEdison, Sungevity, Suniva, Beamreach, Verengo Solar … and now another giant, Solarworld.  Solar bankruptcies keep growing. The case of Suniva, for example, is amazing. It announced its bankruptcy just after receiving millions in subsidies.

Bankruptcies in the solar sector already surpass all those of inefficient coal and fracking companies combined. The interesting thing is that this domino of bankruptcies, which accumulates more than 120 corpses of large companies  around the world, is self-inflicted.

It is not due of lack of growth. Solar installations soared by 50% in 2016, with annual growth at 76 GW . Do you know the famous curse that says “if you run you hurt, if you walk, it hurts you more and if you stop, you die”? That, dear friends, is what happens to much of the solar sector.

It’s ironic: A sector that brags of how much it has lowered costs and how competitive it is, and at the same time blames its bankruptcy domino on low prices. A huge drop generated by excess capacity – over 40% despite exponential growth – and, with it, the need for operators to generate any cash and sell at lower and lower prices. The curse of the sector has been its own growth:

Death by working capital. Huge expansion plans and new capacity to meet a demand that has grown exponentially, but not enough to cover the pace of productive capacity growth. Cheap money and juicy subsidies justified a business model that was far from being an energy model, but closer to a builder-developer one: Over-indebted, dependent on subsidies and unable to absorb overcapacity and compete with its own price cuts.

With costs falling, many companies are economically unviable and if the price decline were reversed, they would be unviable as well. If the prices of the panels went up to stop bankruptcies, the mantra that solar is competitive with other energies would disappear in one minute. Any of the companies mentioned in the first paragraph of this article would have needed price increases in their products of more than 50% only to stop burning cash, let alone make money. Born from a bubble, dead by a bubble.

The reality is simple. If a technology is viable, it does not need subsidies. If it is unviable, no subsidy will change it.

The efficient companies will survive and absorb the weak, but let us not blame the collapse on a lack of environmental commitment or support, when it is an evident case of massive leverage and fraud, hiding debt off-balance-sheet and giving overly optimistic estimates to “inflate” share prices.

The problem is that an important part of the solar sector still thinks that the problem is that they are not “supported” enough or that governments have to subsidize more their business for a “greater good” at any cost to the consumer. A proof that it is not a problem of support or growth, is that the list of bankruptcies has risen after debt restructurings, capital increases, interest rate cuts, massive liquidity injections, and spectacular growth.

If a solar -or any- company goes bankrupt in an environment of huge subsidies, spectacular growth, low-interest rates and high liquidity, it is not a case of a mistake, it was a bomb about to explode.

That is why we may see more bankruptcies in the face of greater growth. Because the wrong model of overcapacity, high debt, dependence on subsidies and inefficiency is being perpetuated. And that is not attacking a technology. Do not mistake technology and environmental commitment with indebted and inefficient businesses.While the wind sector works with an industrial energy model, in the solar subsector the constructor-promoter model still exists, and this will not be solved by a climate summit or 50GW more in annual installations.

Some solar companies have learned to manage a realistic model, partly thanks to venture capital funds and outside companies who have bought what was left of the disaster created by engineers who ignored working capital and debt.

Finally, sanity is starting to prevail with real industrial energy models, less or no debt and managing inventories as entrepreneurs. But the problem is the same, if costs continue to fall due to competition, inefficient firms will continue to fall, and if costs rise, the technology will not be competitive. The devil’s curse.

Disruptive technologies cannot be based on inflationary models, because their own development attacks price inflation – in electricity prices, in asset valuations – and therefore companies cannot be leveraged as if they were regulated utilities.

A disruptive technology can only succeed if it understands its function, which is to reduce costs and energy intensity (in this case). If the solar sector is based on an over-indebted constructor-developer model, it loses its role of innovation and competitiveness to become rent-seekers, precisely what they criticize of the incumbents.

There is life in solar energy. If companies die, no one will be to blame but themselves.

Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)


Picture courtesy of Google

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