News this week that the main operating subsidiary of Chinese company Suntech, the world’s largest producer of solar panels, was forced into bankruptcy did not come as a surprise to those in the industry.
It did, however, come with a sigh of relief from analysts who believe the solar giant’s collapse could speed along a market contraction necessary to bring the supply of solar panels back in line with demand.
CPS Energy officials agree, and remain bullish on its deal with OCI Solar Power and its partners.
“While we don’t know yet how much this will reduce capacity,” said Cris Eugster, executive vice president and chief strategy and technology officer, “this is what needs to happen in the market.” And while he acknowledged that OCI partner Nexolon America had a difficult year financially, “we remain confident in our partners.”
Analyst Fatima Toor of Lux Research agrees, noting that Nexolon’s deal with CPS Energy strengthens the companies’ hands. She also thinks companies like OCI and Nexolon will benefit from the shake-up in China.
Suntech was “part of a massive Chinese government effort to dominate renewable energy industries,” writes Keith Bradsher in a March 20 New York Times story on the bankruptcy. But a ten-fold expansion of Chinese solar panel manufacturing capacity from 2008 to last year meant a three-quarters drop in solar panel prices, “undermining the economics of the business.”
Industry analysts say more failures will be necessary to bring supply back in line with demand, and note that Chinese companies, in particular, could be be under the greatest pressure.
“Although the Chinese government supported the rapid growth in solar manufacturing capacity, it now says the current situation is unsustainable and recommends allowing the least competitive companies to fail,” wrote Kevin Bullis in a story published in the MIT Technology Review just two days before the Suntech announcement.
It’s unclear whether the Chinese government will let Suntech fail; more likely, the state government will take it over to save jobs — but that takeover could still lead to a less efficient company with reduced capacity.
The Chinese also have a trust problem. U.S. imposed import tariffs on Chinese panel makers last year after a trade investigation; the European Union is conducting its own investigation, which could also lead to tariffs.
“The Chinese could retaliate,” against the U.S. and the E.U., and a trade war would mean panel makers from other countries, such as Taiwan and South Korea, “will benefit from that,” Toor said.
And while manufacturing costs abroad are often cheaper than those in the U.S., Toor said she thinks domestic manufacturing can be competitive, “if they’re smart about it,” by using automation and producing high-efficiency panels, which are in the most demand here.
The failure of companies like Suntech “is a growing pain for the industry,” Toor continued. “Solar is not going anywhere, and it’s growing in the U.S. and other markets.”
Eugster said CPS Energy was able to get such a good deal in large part because of the softness of the market.
Companies vying for the deal “were hungry,” he said. “We got in at a good time; this deal gives us competitive pricing on the energy and an economic development deal that benefits San Antonio.”
OCI Solar and Nexolon continue to meet all the milestones within the contract; Nexolon has broken ground on its manufacturing plant and held its first job fair, while OCI Solar has begun to build 41 MW Alamo I, the first of five solar farms that will ultimately total 400 MW.
Most importantly, though, said Eugster, is that CPS Energy customers are shielded from risk if one of the companies is ultimately unable to fulfill the contract.
“We only pay for the power they produce,” he said. “This is not Solyndra. We haven’t fronted any money hoping they will succeed or fail. We haven’t given them a dime.”