Miscellaneous/Energy Equities/Evergreen Solar 060311
March 2006: Photovoltaics
Evergreen Solar Inc. (ESLR)
‘Been there, done that’ might be a cliche for ESLR’s stock price. After all, wasn’t the stock price in the $20s in 2000? Isn’t it driving to that region again? In the meantime, hasn’t it paid its penance in dropping to below fifty cents share in 2003? Is the company just that vulnerable or have there been a lot of external forces at work?
Accepting conventional wisdom on various post 2000 effects, there are two special factors which may have affected ESLR beyond the dot com bust, Enron scandal and 9/11. The first effect is a euphoria which surrounds a technology market because it is on the leading edge of an anticipated market implementation. We have seen it before in medical devices, telecom and especially in any company located within ten parsecs of the Internet. Despite the decades of development in photovoltaics (PV,) the technology is complicated and expensive. It requires high purity ingredients such as silicon grown into ingots, and construction of photodiode junctions requiring high tech methodology. The fundamental requirement is to capture as much of the 1 Watt/m2 which falls on the earth as economically as possible. Research continually searches for lower cost ways to do this, but at current price levels, PV requires government subsidies to compete.
Of course, the playing field is not level because fossil and nuclear power sources are not taxed or otherwise penalized for their global pollution, warming and storage costs. The associated medical problems plus the costs associated with global warming are not in the least caused by PV generated electricity. Perhaps if there was parity, oil, coal and nuke ‘juice’ would cost twice that of PV generated electricity.
The conundrum for ESLR is how to develop the latest technology to be price/performance competitive, and how to receive fair payment for its efforts and produce energy in a framework where today oil, natural gas, hydro, nuclear, wind and geothermal are all less expensive. Perhaps ESLR is not so much a ‘today’ situation, but rather a near future situation as availability and demand for fossil fuels continue to boost electric rates, giving PV the opportunity to compete not from lower PV costs but from higher fossil costs.
ESLR exists in a major euphoric group labeled energy alternatives. Even Congress people on the election trail eschew with tear laden eyes how we must move to unfettered oil independence and clean air. (Just before pushing their favorite energy/environmental-depleting, special-interest, pork-barrel bill.)
An instrumental factor has been the Bush State of the Union commitment of a 22% increase in funding for cleaner energies. Of the $868 million additional dollars, $148 million is earmarked for solar in the 2007 budget.
Solar also got a huge boost when the State of California Public Utilities Commission approved an 11 year, $3.2 billion incentive program to place PV on homes, businesses, farms, schools and municipal buildings. It is the nation’s largest solar power investment which puts the focus on generating electricity, not just studying the problems.
At the federal level, the IRS is supposed to allow up to $4,000 in deductions for solar-powered home improvements. The point is rapidly arriving where convergence of PV costs with fossil-generated electricity may occur. As that trend continues, the need for government subsidies will drop and someday PV could be cost competitive while delivering nonpolluting power which does not tip our balance of payments.
With so much PV interest from Japan and Germany, ESLR is expanding production in Germany and receiving government subsidies to build it. ESLR continues to restructure to take advantage of global interest in PV by giving the CFO a new job as Vice President of worldwide expansion.
In this environment of market recovery, government subsidies and increasing oil prices, ESLR has been able to rebuild the stock value so that 50 cents in 2003 has rewarded stockholders with a 30 X increase in value. Where is the justification?
Revenues are one of ESLR’s building blocks. From $6.7 billion in 2002, the number grew to $23.5 billion in 2004 and estimates for 2005 are $43.2 billion. Looking into 2006, analysts expect ESLR to book over $98 billion, perhaps fueled by better product and the incentives. The growth of world oil demand, especially from China and India, is not a deterrent to the completive posture of PV, which while not dropping in price is allowing fossil-fueled electricity to rise to comparable levels to PV.
According to a report from TheStreet.com, ESLR has secured its silicon needs through 2006 so material supply should not be a limiting case.
ESLR has been in business since 1994 and has posted an annual loss in the last three years. Debt of $912 million is offset with cash of $127 million and the operating cash flow is a negative $11 million. With the anticipation of further fossil energy price increases and volume production efficiencies, ESLR can continue to attract shareholders with mere market momentum to increase share price. This basis is not without risk because as the market stiffened in February, momentum stocks such as Google and the energy alternatives dropped significantly. ESLR dropped from over $15 at the beginning February to $13.76 on February 14th. The drop has been similar to that experienced by other momentum stocks including the alternative energies.
The interesting part of a company which is still on the cusp of a technology growth trend is whether it has to succumb to profitability regimens because of the growth. The anticipated earnings for 2005 are - $0.31 and for 2006 are still expected to be - $ 0.20 with anticipated revenues more than doubling. Further hope is analysts expectation of 5 year growth for ESLR of 35% annually. In mid-February, the CFO was transferred to handle worldwide expansion. The new CFO was hired from an unlisted company, so his past performance is not available. The profitability position may also be a board decision given to the CFO to implement. At this time, the market acceptance of ESLR without profits makes it unnecessary to attract buyers with a positive balance.
ESLR has state-of-the-art competitive product which begins with the method used for forming basic silicon substrate. Instead of pulling a large diameter crystal from molten silicon, two strings immersed in the molten silicon are pulled, forming a connecting film sheet of crystalline material which is very flat and thin. In contrast, conventional silicon crystals must then be sawed, expending cutting time. By cutting costs and saving material, ESLR’s “String ribbonTM” methodology results in finished materials which can be used immediately. It is estimated that about twice as much finished panel can be produced with the thin sheets as with the ingot - cutting method. This comes at no efficiency penalty, as ESLR reports efficiencies comparable to other crystalline PV up to 15%. Looking up the food chain, panels should be lighter, making them easier to install and requiring less structural framework.
At the installation level, ESLR has also addressed methods to reduce costs. The thinner PV modules are assembled with aerodynamic cowling to allow panels to be held in place by its own weight. Further attention to sealed junction boxes requiring no maintenance and factory prepared wiring and connectors makes the balance of plant costs shrink.
In 2004, there were 19 PV manufacturers in the U.S. ESLR is one of the big players in PV where BP plc is the world’s largest solar electric company. Sharp and Shell Solar are also big. While these are oil companies with minor PV divisions, others such as Suntech Power Holdings, (P/E=110) and the largest PV manufacturer in China, and U.S. based SunPower (Profitable last quarter of ‘05) attract equal interest from PV enthusiasts.
The growth of ESLR, based on the string ribbon technology, has contributed to the U.S. PV shipment growth which had a record high of 181, 116 peak kW in 2004, a 66% increase over that of 2003.
Before 2004, there was little importing of PV, but it became almost 1/2 the amount of U.S. exports in 2004. As we see China and South Korea begin to build capacity, we might expect the import figures to grow as fast or faster than the U.S. production.
From a product approach, the competition for ESLR is from the thin film and cast silicon construction. In 2004, thin film shipments doubled to 22 peak MW.
Since common-old-electricity is the final product, ESLR has to compete with the traditional fossil and nuclear generators, and the other alternatives such as wind, geothermal and biomass renewables. Nuclear is gaining support primarily because of the nonpolluting aspects despite the 10,000 year storage problem. Nuclear proliferation which used to be a hush-hush fear is apparently turning into a ho-hum problem with North Korea, Iran and even Venezuela who are tinkering with bomb-abilities. (Ed. note: So who is next; Wal Mart?)
Is there a place for batteries in this world of PV?
With PV growing in efficiency, cost performance and popularity, does anyone need batteries anymore? The purist would look at grid connection as being the ultimate combination, but where the grid does not exist, night does fall, and with it the PV ‘juice.’ Taking lessons from satellites which fall into darkness in each earth orbit, the balance between batteries and PV is synergistic. If that model continues, as PV continues to grow, we might find that battery needs would also grow.
But just what batteries will do well? Classically, stationary power has used deep cycle Lead-acid batteries because of the relatively low initial cost. As more compact or portable systems begin to appear, we also see Nickel-metal hydride batteries become a part of the package. One wonders if the day will not come when our Lithium-ion powered cell phone, PDA and laptop would have one surface coated with PV so that as it rested, the solar current would top off the battery, negating the need for a wall connection.
As a technology develops, the place for the research-oriented organization is a good incubator. ESLR has been able to play in the field as a pure PV play even though major oils also dabble in the field. The business is beginning to change with global presence and competition becoming part of the story. One question will be whether ESLR will be able to remain independent or must become a part of a bigger organization which will be able to compete in this changing field. Only time will tell. BD