In the face of recent bankruptcy filings by major companies in the solar industry, questions are being raised as to how and why firms that once enjoyed the limelight in the clean energy sector and enthusiastic investor backing are failing. SunEdison, once valued at almost $10 billion with shares trading at over $34 as late as July 2015, filed for bankruptcy proceedings in April. Abengoa, the world’s leader in solar thermal technology, once selling at 7.39 euros per share, dropped to 40 euro cents in November last year, and declared bankruptcy in March.
Unlike the Solyndra days when the failure of U.S. government-backed solar companies brought on fears that shook the whole industry, the struggles of SunEdison and Abengoa are not seen to be reflective of the sector. Rather, they are company-specific, a combination of untimely and overaggressive growth strategies, inadequate cash flows from solar and solar thermal projects, overreliance on foreign government subsidies in the case of Abengoa, and excessive financial engineering in SunEdison’s case. Coupled with falling oil prices and global competition, ineffective firms that failed to offer value to the marketplace experienced a culling, not dissimilar to the situation in 2011 and 2012, when high numbers of solar companies failed and had to exit.
SunEdison embarked upon a hyper-growth strategy from late-2014 to mid-2015, according to S&P analyst Angelo Zino, loading up on $11 billion in debt to acquire renewable energy projects. These were to be developed and handed over to its two associated companies Terraform Power and Terraform Global. When SunEdison attempted to purchase Vivint, signaling an entrance into long-term, contract-driven residential solar, investors balked, leaving the associated firms unable to purchase projects from SunEdison. Already deep in debt, SunEdison’s delay of its financial report due to accounting questions led to a drop in its stock price, leaving SunEdison no choice but to generate cash by selling its assets to other companies.
Abengoa experienced a similar situation, as it racked up $10.3 billion in debt to finance its global ambitions, among them the acquisition of two solar thermal plants in the United States. The projects were enabled by $605 million in federal grants and tax credits, as well as $2.9 billion in loan guarantees from the U.S. government — investments that no private lender was willing to make. In addition, the Spanish government slashed subsidies making solar much less attractive in Abengoa’s home country, further reducing revenues. Lawsuits in the U.S. and Spain accusing the firm of misleading investors and acting against investor interests, all while its solar thermal projects were slow to turn a profit, seem to indicate that the firm has lost its competitive edge in the glut of government backing.
What can be learned from SunEdison and Abengoa? There is a need for a greater focus on home-grown technology and innovations instead of wild, debt-fueled, investor-vexing acquisitions. Economic shifts in the market are more difficult to predict than one’s own abilities. Where firms cannot compete on up-front costs, it can make up in technological efficiency. SunPower recently developed a solar panel with 24.1 percent efficiency — a new record for silicon modules. Such high levels of efficiency allow for a better Levelized Energy Cost (LEC), a measure that compares the total cost of a power source with the sum of the energy produced over its lifetime. Lower LECs means more value for money. Alternatively, innovations in the non-panel components of a photovoltaic system, including wiring switches, inverters and battery banks, can provide significant gains in efficiency.
In the end, many solar companies are still doing well. Some that are struggling will improve their fortunes. Others, whether doing well or poorly, will face different outcomes in the future than they face presently. All I know is that we need to follow the alternative energy space. It is our future.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Heeje Yoo, Hoffmire’s colleague at Progress Through Business, did the research for this article.