First Solar: tired of playing “whack-a-mole”

The dramatic news last Wednesday that the $3 billion U.S. solar industry bellwether First Solar was exiting subsidy-dependent markets and instead shifting focus toward utilities was a sobering indicator of what the subsidy environment will look like in the next few years.

The news cost First Solar 20 percent of its market value, but it was a necessary move, if only to send investors the message that the company will not ignore declining subsidies and assume that it can use the same business strategy.

Domestically, the solar industry is fighting for an extension of section 1603 of the Department of the Treasury’s cash grants program, which sunsets on New Year’s, and a group of six solar companies, led by SolarWorld, is pushing the Commerce Department to take action against China over reports that Chinese solar makers are dumping panels below the cost of producing them on the U.S. market. Against the backdrop of others in the solar industry trying to get help from the government on multiple fronts, First Solar’s frank move to formulate a strategy that is not government-dependent stands out.

First Solar CEO Mike Ahearn went country by country on last week’s guidance call, pointing out an inverted “V” effect whereby incentive programs cause a spike in projects that then sharply plummets when the speed of market expansion alarms politicians and they pull subsidies.

Ahearn showed an impressive amount of awareness in that he was up front with the fact that this is a game First Solar does not want to play anymore. He went as far as describing a “whack-a-mole” situation, where First Solar was constantly going after the next subsidy market until it abruptly vanished. By going whole hog into utility-scale projects, First Solar will have to get solar costs down to 10–14 cents per kilowatt-hour over the next few years if it wants to compete with coal and natural gas, which will require both efficiency gains and bringing down manufacturing costs. But at that cost, grid parity begins to become a reality.

If First Solar succeeds — and that’s a big if (grid parity isn’t always enough; there are other issues for utility solar like access to the grid, land planning, transmission lines for solar) — it will have done something monumental by getting off the subsidy tap. The average cost of a kilowatt-hour in 2009 was 12 cents, and projections don’t have solar getting near there until 2020. By turning off subsidies, the market is forcing First Solar to do everything it can to hit that levelized cost of electricity much sooner. It doesn’t have until 2020 to figure that out.

There are no simple solutions for any of the renewable energy companies that have matured in a subsidy environment, but I admire what First Solar is trying to do by attempting to make its way minus subsidies. Fiscal conservatives often make glib statements about how we should let markets take care of themselves, despite the fact that fossil fuels are heavily subsidized, so much so that the International Energy Agency has begged countries to reduce the $409 billion in subsidies allocated in 2010 that were doled out for everything from hard coal mining in Germany to petroleum pricing support in Mexico. By contrast, renewables got $66 billion in 2010, and keep in mind, fossil fuels have been subsidized for over 50 years.

It will be an uphill climb for First Solar. And its new strategy will reverberate across the solar industry, because all solar companies will now have to answer the daunting question of how they will survive in decreasingly subsidized markets. But it’s a strategy with a potentially massive payoff: a day in which coal and natural gas generators will have to answer the question of why they’re not as cheap as solar.

Question of the week

What must First Solar do to survive in a decreasingly subsidized solar market?