This week, RenewEconomy obtained an interview with James Hughes, the CEO of the world’s biggest manufacturer of flat panel PV modules, Pheonix-based First Solar, Inc.
You can see our report on the interview here, but this is the full transcript. It’s a long interview, but Hughes provides a fascinating insight into how his company is approaching the market:
– the issue of centralised power systems rather than distributed generation
– why the company is not so focused on “grid parity”
– why it favours the utility market over the rooftop market
– the future hot-spots for the solar industry
– and the share market outlook for it and the industry as a whole.
Here is a (lightly) edited transcript of the interview:
RenewEconomy: Jim, thanks for agreeing to the interview. 2012 has been a tough year for the solar industry. Is it turning the corner?
Jim Hughes: Well, a lot of the evidence is anecdotal at the moment, but the market feels better at the end of the year than it did at the beginning of the year. For us, from a volume standpoint, it’s been a pretty reasonable year. Clearly the margins are under pressure from an historical viewpoint, but that’s not news to anybody. But through the third quarter, we’ve maintained a book-to-build of 1:1 which is a pretty good accomplishment in this environment, but it definitely feels better.
We are seeing capacity rationalization in parts of the industry, and the other dynamic that has manifested itself, and I’m not sure that the press and the investment community fully understands this, has been a clear bifurcation into the rooftop segment and the utility segment. The dynamics of the sales process is different in those segments. Everyone treat it as a monolithic market, but there is a clear bifurcation. There’s a lot of spare inventory in the rooftop segment, and you’ll see a lot of discussion of low spot prices, but you don’t have that phenomena in the utility grid segment, the timing and size of the projects are such that the logistics don’t usually work.
The big question mark for us is what is the total size of market. Two things drive that, one is the government sector and is policy driven, and the other is overall GDP. The OECD and other agencies have taken down GDP forecasts, and one of the dynamics I have highlighted is that as we move to a less subsidised model for renewables, then we are going to be in the same basket as traditional energy in that the correlation for demand for our product is GDP. So the biggest thing I look at is what global GDP will look like over the next 3-5 years.
RE: And how does that look like to you.
Hughes: The next two years looks troubling, but I don’t believe in the China meltdown scenario, I believe the emerging markets will continue to see their standards of living increase, and we will see robust economic growth in those markets.
UTILITY SCALE MARKET VS ROOFTOP MARKET
RE: You mentioned that bifurcation of the market in your recent presentation to investors. Clearly then, you are happy to be in the utility market.
Hughes: There’s two reasons for that. First, we believe we have a competitive advantage in engineering and power production stand point. We deliver a product that is well engineered and can deliver a highly predictable result for the customer. The rooftop market, the installations are too small and there are too many variables to do a system level power prediction with that degree of precision. In addition, you don’t have meters and diagnostics to measure the output, so the quality measure for the rooftop panel is what does it flash test at, and the end user doesn’t really know if they got what they paid for – you have different levels of soiling, of shading, of insulation, uncertainty over ambient temperature, variability in installation circumstances.
I would rather sail into a market where there’s a much stricter quality standard, as opposed to one that is more commoditised. And there are some major structural issues in most of the regulatory systems around the world with respect to rooftop installations. They are being facilitated with either net metering of feed in tariff programs. Neither of those, long term, is sustainable. You have to fundamentally restructure the regulatory system if you really want to accommodate rooftop at any sort of significant penetration level. At some point, at low levels of penetration we have today, it doesn’t manifest itself as a major issue, over the long term at higher levels it becomes a problem. I would rather sell into a market where I see what I believe are more sustainable regulatory structures, and more sustainable policy basis.
Centralised generation vs distributed generation”
I am not a huge believer – and I know you have written about it – in the idea that the centralized model of energy distribution is outdated and a more distributed model is what makes sense going forward. Some degree of distributed generation does make sense. I believe community solar has a bright future. I believe off-grid has a bright future. Taking it to the residential level, the difficulty is that storage is very expensive, and the difficulty is that unless you disconnect from the grid and use storage, then there is a huge subsidy inherent in a metering type of model. You also ignore the patterns of industrial use and the synergies between residential usage patterns and industrial usage patterns, and you lose that synergy when you got to highly distributed model, and I simply don’t believe that the synergies of generation at a household level overcome the value of the generation on a centralized basis. So I continue to believe that renewables can make a bigger impact long term, and can make a faster impact, when applied at the grid level.
Costs and capacity factors
RE: To do that though, you have to match costs with competing technologies on the grid, how is that looking then. You are looking at $100-$140/MWh as your cost target, so what sort of time frame are you looking at.
Hughes: That’s correct. And it depends on the cost of capital, and the solar resource, and there are markets in the US where we are selling below that today, on an LCOE (levellised cost of energy) basis. One of my big focuses of my efforts is that a lot of people want to measure pound for pound renewables into the baseload element of the generation mix, and displace directly fuels and usage which is baseload today. That’s a difficult economic comparison and will be for quite a while. There is a tremendous amount of energy which is consumed at peak and intermediate peak level which is consumed at the dispatch curve, and at these intermediate level peaks and peaks, in many, many markets we are clearly economic today.
You will see people comment that the problem with solar is that you only have a 25 per cent capacity factor. And as a former utility guy, my response to that is when you have a demand curve that looks like a sine wave, something in the system has to have a capacity factor of 25 per cent. You don’t have square blocks of usage. So the question is not whether you have a 25 per cent capacity factor, it’s who can deliver the most cost-effective energy at a 25 per cent capacity factor. And when you look at it on that basis, even at relatively low natural gas prices we are competitive in peak portion of the curve. If solar is significantly penetrated at intermediate peak and peak, we will be a far greater contributor to total energy than we are today, our industry will be dramatically larger than we are today, so I tend to focus my effort on let’s get the low hanging fruit before we start beating our head against the wall on baseload. We can displace a lot of carbon, we can sell a lot of product, we can build a significant and sizeable industry focusing on those parts of the dispatch that are a natural fit for our technology.
Competing with liquid fuels
We believe on that basis there are lots and lots of places where we are economic today. The other focus we have is that there are liquid fuel consumed in production of electricity, – the Middle East, India, Africa, small islands around the world are all great examples. We are highly competitive on an energy only basis against any liquid fuel in any market where these is reasonable solar levels. So again, rather than dislodge the baseload, let’s go to those places where we are a dramatically cleaner technology and are economic today with no subsidies.
Why we should not get hung up on grid parity
Everyone wants to talk about “grid parity” – I’ve banned that phrase from the lexicon of First Solar. Electricity has value only at a point in time and a geographic place . There is no magic number that describes the true economic cost of electricity. You may have a tariff structure that describes it that way, but that is not the reality, and frankly, sophisticated power markets don’t operate like that. So you have to look at time of day, season and location to determine the true cost of power, and there are lots of times of day, seasons and locations where solar is economic today without subsidy. So are focus is to find those places, find those times of day, and find those market structures where we can apply ourselves.
RE: What do you see as ultimate size of the market. You have the IEA and in its scenarios suggesting 10-20 per cent of the total global energy demand. Do you see it becoming that important and that widespread?
Hughes: Yes, yes. For years I have monitored projections and changes in generation mix, participated in almost every form of renewable energy out there. And in almost all forms of renewable energy – hydro, biomass, wind – you ultimately run into resource limitations before you get to significant penetration level. You also have time of day issues. Solar has the highest, longest term potential of any renewable technology. Historically, it was much more expensive, but a number of consultants that project the future have focused on the tipping point, where solar is competitive in an unsubsidized basis and it begins to rapidly increase its penetration. I think we’re there, we’re seeing it on a global basis. I fully expect that in 20 years we will be at least a 10-20 per cent participant in the global energy generation.
RE: That is huge.
Hughes: All the technologies are different, they each have their sweet spot. But in the solar space, when you look at CSPs (concentrated solar power), when you look at concentrated solar PV, the various forms of PV – silicon vs thin film – each has its sweet spot and its nuance. So each will migrate to those areas where it is most competitive and figure out the business models that will allow it to penetrate. Even a 10% total penetration, it is a dramatically larger industry than it is today.
Taking on Chinese manufacturers in their home market
RE: China has a significant target, and you have just announced your first project there. Why China, you are going to the home ground of your major competitors?
Hughes: I don’t think we have the luxury of ignoring a market of that size. You do that at your own peril. And there is a clear precedent that gives me confidence we can achieve success. If you look at the history of the wind industry in China, over the past 10 years, it doesn’t look terribly different from what we are seeing in the PV industry – a period of rapid growth, new manufacturing participants, an overbuild of capacity, a fall in demand, and rationalization and rescue on part of government led by a large domestic program. So, we are seeing a similar pattern in solar segment. And if you look at what has happened, foreign manufacturers captured about 10-15% of the domestic market in China, so that tells me the Chinese are cognizant of their needs to be reasonable participants in the world trade game, and that they are going to provide enough of a level playing field that sophisticated large and capable participants can capture some of that market. If we assume that 10-15% is available, that is a big market and we are spending time on that.
RE: What about other markets, you are opening an office in Saudi Arabia and have a contract in Dubai.
Hughes: That is correct. Clearly, the Middle East is one of the most exciting markets, obviously the solar potential is clear. What most people don’t understand is that the Saudis, for example, burn one-third of their hydrocarbons in the production of electricity. When you look at the growth of their population, their economy, their social spending, if they do nothing, by 2020 they will be burning 50% of their hydrocarbons in the burning of electricity, and basically they (will be) broke. They will not have adequate revenue to support social spending that they currently have. Once you understand the economic fundamentals, it is not a big surprise that the Saudis are announcing 40GW solar programs. They have got to free up their hydrocarbons in open market and generate electricity from a better technology. In the rest of the region the dynamics are similar and you will see the same opportunities.
India is similar. Any time you have a billion people with low levels of energy consumption, significant electricity produced with liquid fuel – the estimates are 25-35 GW – unserved peak demand of anywhere from 10-20%, that’s the sweet spot for our technology, so it is a very interesting market. Clearly, neither of these markets are easy places to do business, but you’ve got to get in there and boots on the ground, understand the market, develop a capability and push it forward.
In Latin America and the Pacific coast, is a region with very high insulation levels, the northern desert of Chile is about the highest insulation levels in the world. Again, either they have significant energy shortages or they are burning hydrocarbons to produce electricity, and if they want to facilitate economic growth they have got to deliver renewables, including solar. So that is another exiting market.
There are also industry verticals as opposed to geographic markets that look interesting to us. Anywhere where liquid fuels are used to generate electricity is an ideal opportunity, and the mining industry globally – 30% of its cost of goods sold in electric power and a great deal of that electric power is liquid fuel. So to an extent you can present a case to reduce cost, that presents an excellent opportunity.
America will continue to be a key market for us. It’s already got a large solar presence, so it’s not necessarily a giant growth market, but it is a sizeable market and will continue to be. I think the opportunities in Europe will be dictated by how fast they can turn themselves around in an economic growth viewpoint.
And there is Asia Pacific, led by Australia, and with Thailand and Indonesia – Indonesia is a market that is often ignored, huge population, a lot of liquid fuels being consumed in electricity, a hydrocarbon exporters, they need to free up hydrocarbons for use as export, and that is also a big opportunity. We have an important presence on the ground in Thailand.
RE: What about Australia then? Because you have built the first utility-scale solar project here at Greenough River, you have a contract to build a 159MW project with AGL, but there is not a lot happening out there. What do you think will kickstart utility-scale industry in this country.
Hughes: We continue to advocate with government for the continuation of policies that will facilitate connection of grid connected solar. We think there will be significant activity. There is also significant mining activity, much of it off-grid which uses liquid fuel, and we are turning our attention to that. It’s a big market, and a sophisticated market. In the US and Europe, as we see economic recovery we will see a return to focus on energy policy, in terms of climate change and in economic growth. As we believe solar is at the point where solar is presenting a compelling economic thesis, not just a climate change thesis, we think we will see favourable policy environments as the political establishment gains the luxury of turning their attention to something beside economic policy.
RE: So at the moment you are building the world’s biggest solar plants. Will we see many more plants of this size, and what is the sweet spot for the industry.
Hughes: I think our view is that PV projects will be smaller than that. We view that 20-100MW is probably sweet spot for utility-scale solar. The availability of sites that will support 300MW, 400MW, 500MW projects is somewhat limited, particularly in markets that are more developed. The exception to that is the Middle East. We could see some very large installations in the Middle East. There is a lot of talk of export of power from north Africa and Middle East to Europe, and that could support some very large array sizes. But that I a few years down the road. Our view is that in next few years 20-100MW is where the majority of the projects will fall.
Long term cost outlook
RE: The Sunshot program in the Department of Energy has a goal of getting the costs down below $1/watt. Is that goal that can be met, and how does that change the dynamics.
Hughes: I certainly think it will get there – certainly in our base roadmap today, we see visibility to getting close to those numbers We don’t get to that level, but over the long term, as everyone focuses on tight integration between balance of system and the module itself, and as scale factors start to come in, in more regions around the globe, I certainly think that is a reasonable objective, and one that we will see one day – whether that is 2016, 2018, I don’t know. It is not a pie-in-the-sky number for someone to talk about.
How First Solar’s share price became victims, and then a beneficiary, of hedge funds
RE: Back to First Solar, you have had a rebound in the share price after hitting bottom in August. Is the market getting a more mature understanding of your business, or just liking you more?
Hughes: There is a dynamic that we were subjected to, in that we were the largest cap solar stock out there, and also in a major index in the S&P 500, and traded on the Nasdaq. For the last several years, a large number of investors, hedge fund type investors, have wanted to make a bet against the solar industry. And in all honesty, their assessment of industry circumstances was correct. So if you want to put a short position, on one of the only names that has any sort of liquidity, it has been us. So we have been the subject of significant short selling action as a result of that. The counter to that is that as industry sentiment changes, as I believe it’s beginning to, the opposite holds true.
So while we were the most logical choice to short the sector – when investors begin to regain some enthusiasm for the sector, for the very same reasons we are the logical player to make a bet on the sector. So, I think we’ve seen the equity pricing has been less dictated by specifics of the company and more by the sentiment of the market, so we’ve benefited as people realise that not every solar company in the world is going to go bankrupt, that the death of European feed in tariffs is not the death of the industry, that the cost reductions that have occurred as a result of industry overcapacity have actually facilitated demand that paint a long-term brighter future for the industry.
Tips for 2013
RE: Can we finish with some tips for 2013. What will be the big things that will play out on the market?
Hughes: We will see the emergence of new markets as major players. We will expect to see big announcements through the Middle East, we will see the Indian market continuing to develop, and signs of growth in the Latin American market. We will be watching what happens in China, combined with those new markets, is probably what is going to dominate the business in 2013.