Already, 2017 has been a big year for solar bankruptcies. Residential solar company Sungevity and commercial solar supplier Beamreach have both filed for bankruptcy, following a year when Verengo Solar and SunEdison went under. And Yingli Green Energy, formerly a world leader on solar panel volume, just lost $267.1 million in the fourth quarter of 2016 on $294.0 million in revenue, so its days in its current form are likely numbered.
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But 2017 won't end without a few more companies going under or devolving into much-weaker financial positions. Here are the trends to look for as the year shakes out.
Solar panels on a residential rooftop. Image source: SunPower.
Low prices and technology
Every part of the solar supply chain has been squeezed over the last few years. Solar module prices fell by about one-third in 2016 alone, and the development business has seen margins evaporate. The result is shrinking earnings, which you can see below (JinkoSolar (NYSE: JKS) reported a one-time gain, without which the company would have been about breakeven for net income in Q4 2016).
The challenge for Canadian Solar (NASDAQ: CSIQ), JinkoSolar, JA Solar (NASDAQ: JASO), and Hanwha Q Cells (NASDAQ: HQCL) is that they all have multiple gigawatts of manufacturing capacity. As module prices fall, the effects disproportionately flow to the bottom line, resulting in the net losses you see above. Worse yet, if more efficient cells and modules make capacity obsolete, losses will only grow.
What we've seen in the past year is a renewed focus on efficiency for solar projects large and small. Multi-silicon capacity that once dominated the industry is trending toward mono-silicon, and even more efficient processes, known as mono-PERC, will be next. Manufacturers are chasing the industry trends and it's a tough game just to keep up.
Designing components out of the market
The other big risk for companies is their products becoming commoditized and eventually becoming obsolete. Enphase Energy (NASDAQ: ENPH) was once a fast-growing microinverter suppliers, a valuable position as module-level electronics became an industry standard. ButSolarEdge Technologies (NASDAQ: SEDG) entered the market with power optimizers and soon moved into inverters as well.
The challenge for both companies is that their offerings are becoming irrelevant as new designs incorporate inverters. SunPower (NASDAQ: SPWR) bought a microinverter company and has integrated microinverters into its high-efficiency X-Series product at the factory level. Canadian Solar has also made an AC solar module (meaning it has a microinverter). As cost pressure gets stronger, companies that make components that can be designed out or integrated at the factory by a manufacturer will be in danger. With that in mind, I don't like where Enphase or SolarEdge is positioned in the market.
Weakening residential solar installers
A report out last week showed that national solar installers are pricing their systems higher than local installers. That's not good news for installers and finance companies that grew rapidly over the last five years, especially those with no way to differentiate themselves.
Spruce Finance, a company formed when Clean Power Finance and Kilowatt Financial merged, has gotten over $2 billion of funds to finance residential solar projects, but it's now on the ropes. Power Finance & Risk reports that Goldman Sachs has been hired to find a buyer for the company, but after layoffs earlier this year, selling the company's assets off and shuttering operations seem likely.
The two public companies to watch this year are Vivint Solar (NYSE: VSLR) and Sunrun (NASDAQ: RUN), which are the second- and third-largest residential solar installers in the country but on tenuous financial footing. They need a constant flow of project sales and financing to keep their business afloat, and any slowdown can leave the companies in trouble. The failure of Verengo, Sungevity, and potentially Spruce Solar shows that financing may not be as easy to come by as it once was. And it's now clear that as large installers aren't pricing systems competitively, they could be in financial trouble for the long term.
The winners going forward
Companies that are essential to solar installations and can command a premium for their products will be in the best position in solar going forward. For example, SunPower's X-Series solar panels are seeing strong demand and margins, despite the pricing pressure that hit the industry in 2016. As they are a premium, critical component, high-efficiency solar panels should be well-positioned in 2017. Commodity modules, on the other hand, have seen margins shrink, which you can see in the chart above.
A strong balance sheet will also be a differentiator in the months ahead. Customers will want to work with companies that have a solid enough balance sheet to live up to supply agreements and warranties. And with a very small cost difference between one commodity panel and another, customers will trend to the stronger company (see Yingli's loss of customers in the last two years). Below is a look at where debt on the balance sheet stands for the companies I highlighted above.
Enphase Energy will probably find itself in trouble this year if it can't turn its business around. I wouldn't be surprised to see SolarEdge face similar challenges as the residential market struggles and module makers design the company out of the system.
Hanwha Q Cells is probably the weakest of the solar module manufacturers I highlighted above. It has $1.3 billion in debt and is losing money. But it may survive with the backing of parent Hanwha.
In the residential space, it will be interesting to see if Vivint Solar and Sunrun can post profits, or whether they face similar financial pressure that has collapsed rivals.
It's difficult to say exactly which solar companies are going to end up bankruptcy court in 2017, but if history is any guide, there will be another shake-up that will end with weak players being pushed out of the market.
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