Due to the over supply of solar panels and the declining support of the U.S. and European governments, the company has made a strategic decision to build solar operating plants to complete with existing electricity suppliers. Europe had represented 80% of sales in 2010. Recently, both the German and Italian governments have slashed government subsidies for solar power. The company expects the U.S. market to represent over half of future sales.
In May, the company announced the completion of a 50-MW solar farm in Nevada. The farm has a 25-year agreement with NV Energy Inc. (NVE) and is able to provide electricity to 9,000 homes. In April the company announced a 20 MW pant to be constructed in Hagerstown, Md. providing power to an estimated 2,700 homes through FirstEnergy Solutions. In addition, the company has recently announced a demonstration project in Saudi Arabia along the Red Sea Coast. The Saudi’s have announced a $109 billion solar power initiative targeting 33% of electric production from solar by 203.
The over-saturation of solar panels in the market is in part from Chinese manufactures and declining demand in Europe. The declining demand for panels prompted the company to announce in April a global workforce reduction of 30% or 2000 workers. The Chinese manufactures have increased solar panel output in six years to accommodate half of world demand. In response to accusations of China dumping solar panels on the American market the U.S. Department of Commerce will be imposing import duties. The duties will vary between 2.5% and 4.6%.
Current political depictions have also tarnished the solar manufacturing market hurting stock prices. News articles and political ads featuring the bankruptcy of Solyndra and its government loans have generally demonized the sector. Declining natural gas prices has also contributed to investor flight. In addition, depression of per barrel oil prices puts downward pressure on the stock.
Further, the company is experiencing labor and regulatory difficulties in its production plants. And a class action law suit involving product flaws in manufacturing totaling $253 million has been instigated. The company has already spent $254 million replacing panels which have not performed to expectations.
Also, the Securities and Exchange Commission (SEC) is investigating the company over premature leaks concerning its failure to secure a government subsidy for a plant under construction in California. The plant has subsequently been sold, but the information about missing the loan deadline announced a First Solar executive a day before the company officially made it public.
Declining government subsidies and fossil fuel prices are shrinking demand for solar panels. Tariffs will aid in leveling the playing field between U.S. and Chinese manufactures but demand in the short run should remain depressed. However, fossil fuel prices will inevitably rise and the interest of major electric utilities in adapting a green component to their production should bode well for the company’s new direction. World economic recovery and emerging markets in Africa and the Middle East represent a potential strengthening of global demand. First Energy is well positioned to take maximum advantage of a recovering world economy and is generally recognized to produce a cutting-edge product.
In my view, acquiring the stock is a long-term gamble with a potential of huge payoff for investors. Acquisition should be limited to the highest risk level of investment with the intent of a long-term hold.