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Can First Solar Benefit from a Revitalized Loan Guarantee Program?

April 20, 2012 | About:

The Energy Department is again offering a Federal loan guarantee program to wind, solar and geothermal energy projects. This new program comes about six months after a larger $16 billion program using funds that Congress appropriated to the department last year. Last week, the Energy Department stated that it had sent letters to companies that may be eligible for the money. One of those companies is First Solar (NASDAQ:FSLR). Can the struggling solar panel manufacturer use this second chance to make a comeback?

The loan guarantee program, passed as part of the 2009 stimulus plan, was a disappointment to over 30 companies that applied for the loan guarantees. The department told the companies that it had not been able to complete the application review process before the program’s expiration date of Sept. 30, 2011. Therefore the companies were unable to receive the guarantees.

There is, however, a loan guarantee program that was established out of the Energy Policy Act of 2005 and is still in force. Not many companies have applied since the credit subsidy (an upfront fee required of applicants) can be quite expensive. But the Energy Department has announced that under the budget deal of April 2011, it had $170 million that it could use to pay the subsidies or a portion of the subsidies for companies that apply.

The size of the loans that the department could guarantee is not yet clear. It all depends on how many companies apply, how much funding they need, and the government’s assessment of the companies’ risk. If the government were to base the new loan on prior loans, it would be safe to assume that the volume could run up to several hundred million dollars.

First Solar was one of the applicants with an incomplete loan application when the program expired in 2009. The company had applied for a $1.93 billion loan. First Solar is still facing financial problems and could really use this loan. On April 5, First Solar hit a new 52-week low. The past year has been relentless on the company’s shareholders who watched the stock lose 85% of its value. An abundant solar panel supply and the need to lower prices for its panels are to blame for most of the company’s financial problems. It is too difficult for the American company to compete with Chinese competitors like Suntech Power (STP) and LDK Solar (LDK). Unlike here in the U.S., China has subsidies, low lending rates and cheap labor.

Despite the tough competition, First Solar is still expected to make some sort of a profit this year, even though the company – along with many solar panel manufacturers – is trading for much less than book value. As long as the sector continues to fight with energy conversion devices, I expect more struggles for First Solar.

Since 2008, First Solar's accounting risk has been dropping as quickly as its stock price. The risk has that was once labeled as "average" is now "very aggressive." Further complicating things for First Solar is a lawsuit filed last month, accusing the company of making false statements that have challenged the trustworthiness of its financial statements. Maybe First Solar needs to learn from Yingli Green Energy (YGE) and Trina Solar (NYSE:TSL). They are both using efficiency to stay above water.

I question the sustainability of the solar industry as we know it, at least in the U.S. It is too easily affected by subsidies. These subsidies helped the industry grow and also helped its demise. But in an ideal situation, called “grid parity,” eventually subsidies would not be needed.

Grid parity is the ability for an energy technology to generate electricity at a cost equal to the price of power purchased from the grid. This is important for clean energy like solar energy. When energy technology like solar panels and wind turbines make cheap power, those technologies will make their way into the mainstream and the government will no longer need to subsidize them. Clean technology needs to become competitive from a cost standpoint.

This is a difficult goal for clean energy start-ups when they are trying to save their customers money by promising lower monthly electricity bills. Although customers seem to genuinely care about clean energy, they do not want to pay the cost of producing the power – only the cost of consuming it. There may still be a chance to take advantage of the low solar stock prices without being a fool. One of the stocks I would look toward instead of First Solar is Jinko Solar (JKS). The stock tends to head back up after it hits $5 per share and that is where it is now. If patterns continue, it should head back up again. The same is true for Trina Solar, at around $6 per share right now.

Although the loan guarantee program could certainly help First Solar, something needs to be done about competition with grid prices to make a lasting impression. Borrowed money can only take the company so far before it ends up filing for bankruptcy like Solyndra. The company also fell victim to competing Chinese solar manufacturers, but brought $500 million from taxpayers with it. The government seems to understand the importance of solar energy which is why it is extending this program again. But something needs to be done about lower-cost Chinese competition before I would invest in solar.

Getting rid of competing solar companies can help as well. The fewer companies that survive this bottoming out of the solar industry means fewer companies to compete with and lower supply. Lower supply means that the companies can charge a more reasonable cost for the solar products and perhaps make a profit. For now, I will stay away from First Solar. It may be wise to stay in the game but from a distance, while watching Germany’s progress with the solar industry as they battle to prove that solar power can be cheaper than electric power.

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