TechPulse 360

First Solar posted solid fourth-quarter results on Thursday afternoon. Profits rose 6.7 percent and revenue surged 48 percent to $641 million.

Despite the obvious margin issue, business was strong considering the difficult financial environment and the fact that supply still exceeds demand in the solar business.

There are several reasons for the better than expected quarter from the world’s large maker of solar cells. First, buying interest in solar has come back stronger than it has for other products. This is especially true in countries such as France, Italy and China, where the Asian government has embarked on a major solar and wind energy build out.

Solar thermal is still domimant, but is losing ground. Shown here are U.S. utility contacts for solar panels and solar thermal. (Source: First Solar)

Second, German consumers continue to buy solar panel in advance of an expected cut the feed-in tariff that has made solar a good investment in this less than sun drenched country. Both have lifted demand from the mid year depth of the recession.

Another, less discussed, reason may be behind the market resilience as well. Solar cells (thin film ones like First Solar’s and polycrystalline one from other suppliers) are now being favored for large solar farms over thermal solar. Only three years ago, solar thermal – where big mirrors catch the sun, heat a liquid and drive steam-powered turbines – were the dominant proposal.

Even now, solar thermal makes up 21 percent of the projects planned by U.S. utilities. The remaining 29 percent are with solar cells.

But if California is an indication, the pendulum has swung. In 2007, solar thermal made up 63 percent of plant proposals in the state. In 2009, it made up 35 percent.

Water demand is one explanation for the shift. Solar thermal plants often require large amounts of water in a dry state. The improving efficiency of solar cells is another.

What ever the reason, solar cell makers such First Solar will benefit.

U.S. demand for solar systems is widely expected to jump in the next 12 to 18 months. But this growth is no sure thing.

As much as 85% of a solar farm's revenue can go to repay debt, a significant burden

Analysts argue that the falling price of solar panels will make them more attractive alternatives to fossil fuel energy, such as that from natural gas, and spark buying. But the expiration of a federal solar grant in the stimulus bill could counter balance these lower prices at least in the short term.

The result could be a nation less able to compete in the 21^st Century green economy.

That’s because the greatest constraint to new solar installations is the lack of investment capital. As much as 85 percent of the revenue from large scale solar plants goes to repaying loans and debt – a high burden.

This burden leaves little room for error and makes investors shy. The federal grant – offered in lieu of a tax credit – helps. It attracts a greater pool of investors willing to bet their money on a solar farm, says First Solar CEO Robert Gillette.

Trouble is the grant is due to expire at the end of this year. That will make it hard for solar projects to sign on. Many take a year or more to secure financing. In testimony Thursday before a Senate subcommittee on green jobs, Gillette argued the grant should extended to December 2012 to give the domestic solar industry a boost.

First Solar expanded its manufacturing from 20 MW to more than 1,100 MW since 2005 and expects to add another 700 MW of capacity, he said. But 90 percent of the output is sold overseas. That’s because government policy abroad has been more supportive.

The consequence for the U.S. is potentially severe. While First Solar expanded its Ohio plant last year, most its plants are built outside of the United States. “The proximity to markets and low cost manufacturing will drive investments and manufacturing overseas unless policies here help drive market growth; it is that simple,” he says

The U.S. market has the potential to be among the largest in the world. But without energy legislation and incentives, the country risks losing the global race for green technology and jobs. It “could be relegated to an importer of products developed and manufactured in other countries,” warns Gillette.

The world’s largest solar module producer offered a cautious outlook for market growth next year and signaled that significant pricing pressure will continue through the year.

The outlook led the company to restrain its factory expansion even as Chinese manufacturers steam ahead with their production line expansion. The difference could leave the company at a disadvantage if market growth is greater than expected and the company can’t ship enough products.

First Solar said it anticipates the solar market to be 7.5 GW in 2010 and to grow only 35 percent a year until 2012. The forecast is below the aggressive projections of some analysts.

The Arizona company also estimates that production in the industry is still 2 GW greater than demand, a situation that will lead to more pricing pressure in the coming year.

“2010 will be stronger, we think, than 2009,” said CEO Robert Gillette. But “supply will exceed demand…(and pricing) pressures will still be there.”

Gillette said he expects the world’s largest solar market, Germany, to be strong in the first half of the year. But expected reductions in the country’s feed-in tariff could slow demand later in the year.

The Spanish market, meanwhile, is beginning to recover, and California and Ontario represent opportunities for manufacturers. However, the real growth opportunities will be markets in China and India, where feed-in tariff are anticipated, and in France.

With oversupply continuing, some competitors will drive manufacturing costs to 75 cents a watt by the fourth quarter of the year. First Solar produces at $1 a watt or less today.

On the capacity front, the company’s guidance is that it expects to add 8 manufacturing lines in Malaysia in 2010 and 2011 and two lines in France in 2012 in an attempt to retain its manufacturing lead. Additional lines will follow in China, it suggested.

But it acknowledged that it could lose share against the Chinese if the market is stronger than it expects.

Demand rebounded from earlier this year, but pricing is a wild card and great uncertainty will continue into 2010, the largest solar module producer said Wednesday.

A First Solar farm in Nevada. The company has won new projects in California and China recently

First Solar described pricing environment as “unclear” as the beleaguered industry looks toward the coming year.

When manufacturers suffered from over production and excess supply earlier in 2009, First Solar responded with a rebate program. The effect in the third quarter was to cut prices even as it lifted demand.

“Strong demand will enable us to sell all that we produce this year,” said Executive Chairman Michael Ahearn. But pricing is likely to remain under pressure.

The company’s gross margin fell in the third quarter and is projected to fall again in the fourth (to 41 percent to 44 percent from 50.9 percent in the third).

Ahearn said demand has been particular strong in Germany, ahead of a potential cut in the feed-in tariff for solar as the newly elected government takes over. Italy and France also generated solid demand.

But, the company’s third-quarter financial report, released Wednesday, showed the impact of the rebates. Revenue fell well below what analysts had predicted (to $480.9 million compared with expectations for $529 million). First Solar said it may have lost $74 million in sales because of the price cuts.

It also had to defer $58 million in revenue when a Canadian power plant deal concluded just after the quarter ended. The company’s stock fell even though quarterly profits were strong.