I was looking through the First Solar (FSLR) earnings on May 16 to see if the company had merits investing in on its own rights. I have decided against investing there but there was quite a lot of useful information there relevant to Nextracker around the “45X” regulation and data center build out. I’m now more pessimistic overall because of the chance of these regulations ending and their implications, while I’m more optimistic about the data center build out from the FSLR earnings transcript.
For some background, First Solar makes the panels and also participates heavily in the building of solar plants. They are a vertically integrated maker of solar panels that will do the installation as well. Nextracker is often paired up with First Solar’s panels to complete the tracker + panel build out. Like Nextracker, First Solar has a more advanced product than the companies based out of China. It uses a material called CadTel (cadmium telluride) and “crystalline silicon modules”.
There’s also some background in this transcript on the Chinese solar industry which provides a relevant backdrop,
The Chinese solar industry has engaged in a race to the bottom with irrationally low market-distorting pricing that has caused even Chinese companies to call for intervention by the Chinese government to manage the pricing environment and end the financial hardship this is causing them. By contrast, we remain focused on a highly selective approach to forward contracting that provides optionality and healthy ASPs.
First Solar has also joined an alliance of seven solar manufacturing companies comprising the American Alliance for Solar Manufacturing Trade Committee. Only First Solar is the public company in the group of seven, and the other companies are much smaller. They have a monopoly on the entire Western hemisphere market, but the CEO almost makes it sound like the situation is difficult and then says this about the IRA (Inflation Reduction Act, or 45X),
The grim reality is that as a consequence of China’s strategic objective to dominate the solar industry, we’re the only one at scale to remain today. For the IRA to achieve one of its intended purposes, which is to spur U.S. manufacturing to the scale required to support the country’s energy independence and climate goals, we must ensure that more companies that are aligned with the U.S. ambitions and are committed to fair competition and innovation can scale, compete and prosper.
First solar has also filed petitions against China. Here’s how they describe the market,
The context of our decision to support the petition starts with China’s role in the global solar market. That country’s long history of egregious subsidies, dumping of modules at prices believed to be below their cost, creation of structural overcapacity, engagement and circumvention of measures designed to address these factors and other unfair trade practices have intentionally distorted markets around the globe, causing a significant decline in solar prices and denying international competitors access to a level playing field.
As Secretary Yellen herself has recently said, “China’s overcapacity distorts global prices and production patterns and hurts American firms and workers.” China ended 2023 with more than twice the solar manufacturing capacity that was deployed worldwide last year, had record-low factory capacity utilization rates in the first quarter of 2024 and, despite these market-distorting factors, is still expected to add 500 to 600 gigawatts of new capacity this year. With China expected to exit 2024 with sufficient capacity to meet global demand through 2032, it appears that the overcapacity is not a miscalculation but an intentional feature of the Chinese government strategy to dominate clean energy supply chains.
Here’s what the CEO says “the real risk” for US solar deployment is,
In our view, the real risk for U.S. solar deployment comes from the long-term detrimental effects of allowing China’s unfair trade practices to continue, which could result in a decimated domestic solar manufacturing base, ceding all pricing power and a complete control of supply chain distribution to a highly adversarial nation. This represents a strategic risk to developers of solar assets, clean energy transition and the U.S. energy independence and economic prosperity.
The U.S. energy independence isn’t just about producing electricity at home. It’s about having the supply chain and R&D for future advancements at our nation’s disposal as well. Historic once-in-a-lifetime policies like the IRA, while transformative of our country’s energy transition and our industry, are not enough to deliver independence due to China’s unfair trade practices. We believe the IRA must work in conjunction with strong and effective trade measures that level the playing field for investments it catalyzes.
That does give me cause for concern that the CEO views these policies as “once in a lifetime”. He then went on to give an analogy of a three legged stool, where the stool would fall down (or the solar industry collapse) if one of the legs gets taken out. Those three legs are,
- Government policy
- Demand
- “Level playing field that addresses anticompetitive market distorting behavior such as dumping and circumvention”
That is somewhat concerning to me he says we need both government policy AND a level playing field. It makes me wonder if the industry can survive without the regulation now, but I also get the sense the CEO may be exaggerating. The CEO added this about trade policy,
There can be no doubt that trade policy is intrinsic to the efforts to build a resilient American solar value chain, and we believe this view has bipartisan support. This dynamic goes well beyond being just a risk to our company. It threatens the viability of all aspiring U.S.-based manufacturers who may never be able to finance the start-up of growth of their operations.
On the data center build out there was some surprises how bullish the company is on the data center build outs using solar,
We’re seeing meaningful increases in demand expectations driven in part by data center load growth. According to McKinsey, U.S. data center power consumption is expected to reach 35 gigawatts annually by 2030, and much of this growth is supplied by renewable energy given that hyperscalers like Apple, Google, Meta and Microsoft are committed to 24/7 use of carbon-free energy. We believe that First Solar is strongly positioned to supply this emerging sector given our advantaged technology and more sustainable product.
I was surprised to learn that all of the hyper-scalers have committed to purely clean energy but that is apparently true. For example, Google is committed to operating “24/7” carbon free by 2030. This is not by regulation but by their own corporate initiatives. Basically everyone wants to go green and run on clean energy.
For those that have been following the stock, it’s trading whichever way the political tea leaves are turning and the market is estimating a huge threat to Nextracker from the regulations ending. That’s going to add a ton of uncertainty to the stock in the near term, however it may be priced in at this point, but still a risky assumption to make.
I still want to have some play in solar though because this market seems so massive and Nextracker’s business line is less impacted by competition than First Solar’s is. With all the major hyper-scalers committed to green energy that’s going to provide a big tailwind to the industry. I trimmed my position slightly today on this new information, but looking forward to what this company reports in two weeks from now at earnings.
