Industry Outlook

Industry Outlook

Industry Outlook:

U.S.

First Solar derives majority of its revenue from the U.S. Prospective growth in demand for solar PV in the country could provide ample growth opportunities for the company. According to the Solar Energy Industry Association (SEIA), sustained growth in solar industry is expected in view of the proposed extension of the solar investment tax credits (ITC) for home owners and businesses. The extension of ITC is expected to lead to approximately 50GW of solar PV installations from 2017 through 2020, bringing the total capacity to 98 GW and concentrating solar power (“CSP”) to 2 GW, which together account for about 3.5% of the country's total generation, as compared to 1.4% in 2016 and 0.1% in 2010, reflecting an increase of about 3000% since 2010. The ITC extension is expected to lead to an investment of about US$40 billion over the period and the solar industry is expected to add over US$30 billion annually to the US economy by 2020.

In 2016, U.S. added total 28.5GW generation resources, including 3.4GW distributed solar and 7.9GW utility-scale solar. It was the first time in U.S. history that solar was the largest source of new generation capacity, accounting for approximately 40% of all new capacity additions.

Despite solar representing a large amount of new generation, it still represents a relatively small amount of total U.S. capacity and generation. At the end of 2016, solar represented 3.2% of net summer capacity and 1.4% of annual generation. For 2016, 30% of U.S. generation came from coal and with another 20% from nuclear, both are challenged under existing market condition.

Analysts estimate U.S. solar installations in 2017 will be between 8.5GW and 13.5GW - a drop from the 2016 peak, however, larger than every other previous year. The drop in deployment is expected to come entirely from the utility-scale sector, while other sectors including community solar and distributed PV are expected to grow in 2017.

Over the medium term (i.e. 2017 – 2020), the median analyst figures project that 50 GW of PV will be installed, more than doubling the current installed capacity of 40 GW. Further, between 2017 and 2020, with utility-scale PV installations being projected to remain the largest market sector.

U.S. PV Installation Breakdown

At the end of 2016, there were 33.0 GW-AC of solar systems in the U.S. Of the 33.0GW, 19.8GW were utility-scale PV and 13.2GW were distributed PV. Solar penetration varies by location – during 2016, the top 5 states represented 63% of total PV installation and, as of 2016YE, California system capacity represented 42% of all U.S. PV capacity, leading in both the utility-scale and distributed sectors. Half of the top 10 states led in both the utility-scale and distributed sectors, while the other states on the following list had less diverse deployment.

Utility-owned PV Pricing in the U.S.

PV Manufacturers have reduced module costs by significant margins over past years – as of 4Q16, average module costs were between $0.33/W and $0.35/W; further, average inverter pricing ($/W-AC) has decreased from $0.23 in 2010 to $0.08 in 2016 (for utility-scale installations).

The following chart further shows total installation pricing for utility PVs. Between 2009 and 2016, system price data set for nine regulated utilities fell 78% to $1.32/WDC ($1.95/WAC), with 2016 alone, the capacity weighted average system price fell by 22% y/y.

Declining panel / inverter prices and declining installation prices drove down unsubsidized levelized cost of solar energy. Per Lazard LCOE study 10.0 (dated December 2016), unsubsidized LCOE in the U.S. dropped to $49/MWh - $61/MWh for Solar PV (Crystalline Utility Scale), and to $46/MWh - $56/MWh for Solar PV (Thin Film / CdTe Utility Scale). This makes Solar Energy extremely competitive even on an unsubsidized basis. In comparison, LCOE for CCGT new-built was $48/MWh - $78/MWh in 2016, and $97/MWh - $136/MWh for Nuclear. (For details on LCOE, please see Appendix 1).

The majority of utility-scale systems are owned by IPPs / GenCos, which have PPAs with utilities. PPA pricing, while not in lock-step with system pricing, generally followed the same trends. From 2010 to 2016 the generation-weighted average PPA price for utility-scale systems placed in service in that year fell 64%, and in 2016 alone, PPA prices[1] dropped 33% y/y for systems placed in service in that year. Systems should have much lower PPA pricing in the near future, but this, together with RPS mandate, should continue to drive solar energy adoption at various utilities.

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Peer Analysis

During 2016, the 10 largest solar panel manufacturers together shipped 33.1GW of PV panels, representing approximately 50% of global shipments. Among the top 10 manufacturers, the private-held, U.S.-based Trina Solar had the largest volume of 5.0 GW in 2016, followed by Chinese manufacturer JA Solar (4.9 GW), Korean-based Hanwha (4.0 GW), and China-based JinKoSolar (3.9 GW). FSLR, with 2.7 GW shipment in 2016, ranked No. 6 in this group.

While there are players with greater market shares, they are not necessarily direct competition to FSLR, as these manufacturers all have varying degrees of regional exposure.

For example, many of the publicly traded Chinese players have large revenues from their domestic market, but are less dependent on international markets. On the contrary, the majority of revenue from FSLR and SunPower came from the U.S., with virtually no penetration in the Chinese market.

Further, we noted that even if some of the low-cost Chinese and Korean manufacturers increasingly export to the U.S., they will not pose immediate threat to FSLR, as their panels are largely installed in the commercial and residential sectors (i.e. non-utility scale).

With the declining module costs, almost all PV panel manufacturers saw drops in gross margin in Q3 and Q4 2016. The median gross margins was 8% and the median operating was -2% for the largest publicly-traded PV panel producers. FSLR stood out in this group – its gross margin has consistently stayed at 20%-plus while operating margin has been fairly stable – thanks largely to (1) the Company’s advancement in manufacturing & recycling technologies and, (2) the fact that FSLR generates ~50% revenue from the higher margin system construction and O&M service business.

FSLR also outstood in terms of R&D efforts. In 2016, these companies spent over $380 MM on R&D, down 5% YoY. FSLR continues to lead in R&D spending, though SunPower has been increasing its R&D expenditures annually. The majority of Chinese manufacturers are providing lower but relatively consistent levels of funding to research, and one of the largest Chinese producers - Yingli – has significantly cut its R&D budget as it endeavored to avoid bankruptcy (another positive to FSLR).

Lastly, in terms of credit metrics, FSLR ranks the healthiest among the peer group. This is evidenced not only by FSLR’s immaterial debt load, but also by its solid liquidity / cash position.

Appendix 1 – Lazard LCOE Study 10.0

[1] The average price for a PPA signed in 2015 was around $40/MWh, or 30% lower than PPAs for systems installed in 2016.