An Assessment of Renewable Energy Corporation

editors | 07 November, 2009 17:15

by George Marinakis, George@JournalofSustainability.com

Renewable Energy Corporation’s (REC) strategy is to achieve market penetration and profitable growth through a cost-efficient manufacturing base, or what they refer in their various Annual Reports (2004-2008) as “cost leadership through industrialization.”

They intend to achieve this market penetration and cost-efficient base in part by vertically integrating and decentralizing. REC comprises three loosely-coupled business segments organized around products and product stages. REC is present throughout the solar industry “value chain”: “[w]e are excelling across the value chain, building on our unique position as the most integrated solar energy company in the world” (2006 Annual Report, emphasis added). Their “strategic decision” was to focus on the “upstream part of the business” (i.e. raw materials; 2004 Annual Report), though REC is also present downstream. In 2005 REC reorganized into three business segments: REC Silicon and REC Wafer on the upstream side, and REC Solar on the downstream side (It also owns 33.3% of Sovello in Germany). REC states that “[w]e invest in R&D across all divisions, functions and activities,” (Annual Report 2006), which apparently means that R&D is also decentralized. The benefit of vertical integration is that access to solar grade polysilicon makes REC less vulnerable to supply chain volatility, facilitates control of quality and value across the supply chain, and lowers production costs (2008 Annual Review). Decentralization facilitates a narrower focus and higher specialization by each business segment, which is important given REC’s emphasis on technical advances (discussed below). On the downside, REC’s particular implementation of decentralization must introduce shipping costs, because REC makes Silicon in the USA but makes wafers in Norway and Singapore and modules in Norway and Sweden.

REC Silicon and REC Wafer both have external customers, and as a vertically intergrated company they also supply REC Solar. REC Silicon produces silane gas and polysilicon, and operates plants in Moses Lake, Washington and Butte, Montana. REC Wafer produces multicrystalline wafers and monocrystalline ingots, and operates in Norway and is building a plant in Singapore. Silane gas is used to deposit amorphous silicon onto glass and other surfaces. Above 420 °C, silane decomposes into silicon and hydrogen, allowing it to be used in the chemical vapor deposition of silicon (http://en.wikipedia.org/wiki/Silane). Polycrystalline silicon, or polysilicon, is used in wafer form to make solar cells which are then combined into photovoltaic modules (http://en.wikipedia.org/wiki/Crystalline_silicon#Polysilicon). Growth in the global solar industry is generally limited by the availability of solar grade polysilicon. According to Wikipedia (Id.), “[o]nly twelve factories are known to produce solar-grade polysilicon in 2008,” and REC was one of them. Market penetration is not the problem here; staying competitive is (discussed later).

REC Solar produces and markets cells, modules and systems, and operates in Norway and Sweden. REC Solar forms a relatively small part of their company, but for now it makes a disproportionate profit. In 09Q2 REC Solar had a property, plant and equipment carrying value of 1510M NOK (1 Norway Kronor = 0.175 USD), compared to 4874M NOK for REC Wafer and 11515M NOK for REC Silicon; but in 09Q2 REC Solar had 426M NOK in revenues, compared to 929M NOK for REC Silicon and 1525M NOK for REC Wafer.

REC also intends to achieve market penetration and a cost-efficient base through “lean manufacturing” as inspired (their word) by the “Toyota model,” i.e. “making all operations simple and all decision-making unambiguous” (2004 Annual Report). This cost improvement process calls for constantly evaluating overall factors (the supply chain, product portfolio, planning horizon), continually improving their administrative systems and their competence, and ensuring a proper level and quality of staffing. We’ll see this message again from the new President & CEO who was appointed April 2009.

REC is also investing in new technology and capacity. REC believes that the solar industry is maturing, and therefore its focus is shifting “from innovation to industrialization” (Annual Report 2004). Regarding the use of silicon solar cells, REC implicitly believes that we are in the early stages of the technology diffusion s-curve, because rather than focusing on disruptive technologies (“innovation”) they are focusing on incremental improvements (“industrialization”): they are simply trying to more effectively manufacture existing solar technology. However, their position on manufacturing processes is the opposite: they are ready to embrace disruptive-type manufacturing improvements. REC is particularly betting on Fluidized Bed Reactor (FBR) technology. FBR deposits silane gas onto particle surfaces that are hundreds of times larger than the rods used by the current technology, the so-called Siemens reactors. REC acquired core compentencies (such as the FBR) through partnerships. FBR was developed by Solar Grade Silicon LLC (SGS), which was a Joint Venture between REC and Advanced Silicon Materials LLC (ASiMI; a subsidiary of the Japanese industrial group Komatsu Ltd.). In 2005 REC acquired SGS and AsiMI, the latter company providing REC with silane and polysilicon technology. Moreover, in line with its industrialization strategy, REC is enlargening its facilities. For example, REC Silicon increased its production of polysilicon by 8% from 2007 to 2008; REC Wafer increased its production of multi-crystalline wafers by 15% from 2007 to 2008; and REC Solar intends a 300% increase in production of solar cells from 2008 to 2011, and a 500% increase in production of solar modules over the same time frame. REC Wafer (formerly ScanWafer) governs its technology choices with view to industrialization and scalability. They use systems that can be operated in parallel and continuously, thereby increasing operational efficiency (e.g., by 70% in one case). They introduced the recycling of production consumables and of slurry, which reduced costs 40%. They are also structured (physically and organizationally) to systematically share competence,e.g., to promote commitment and accountability each shift is responsible for the entire production string. REC Solar (formerly ScanCell and ScanModule) reduces cost by close and long-term cooperation with equipment suppliers and through highly-focused technology development and sales contracts; and by the Toyota model (cost effective and competitive manufacturing process, with continuously improving results).

As of 09Q2 REC’s overall position had not changed, but that might not last. The solar industry has been under heavy competition from the rest of the electricity industry since well before 1997 when REC was founded, and REC entered the market with a long-term plan to keep reducing costs. REC’s stock dropped from a five-year high of $399 in September 2008 to $6-$12 since December 2008, but as of 09Q2 its revenues were still growing. Then on October 2, 2009, REC announced that because the market for solar wafers would remain weak in 2010, it was forced to re-negotiate 2010 contracts (Bloomberg). Its shares dropped 8.6% to $8. On 8 October 2009, Jefferies cut the recommendation on REC to "hold" from "buy", as they no longer consider REC to have a considerable upside (M2 PRESSWIRE via COMTEX). We can expect a very interesting 09Q4 report and perhaps strategic changes in 2010.

REC acknowledged that subsidies supported most of the demand in 2008, and that solar power has been supported by incentives in major markets (Germany, Spain, Italy, Japan, California) (Annual Report 2008). REC does not pretend that unsupported demand is driving the market, though they claim that “[o]ver the next few years, the PV market will transition from being primarily driven by incentive systems to being increasingly driven by commercial factors” (2007 Annual Report). This may be happening sooner than REC expected. REC acknowledged a sharp reduction in demand in 2009 due in part to the significantly lower incentive caps in Spain (2009 Quarterly Reports). In Germany, the CDU-FDP, which favors cutting solar subsidies (Racanelli, Vito (September 28, 2009) Merkel, yes, but still murky [online] Available: http://online.barrons.com/article/SB125391744219642281.html (October 5, 2009)), just won 48.2% of the election. Is REC up to the demands of this new subsidy environment?

REC Silicon and REC wafer weathered the global economic downturn by having the capacity to take advantage of the the increased demand from decreased prices. Though global growth of PV systems in 2008 “was limited by supply side factors such as the tight availabilty of solar grade polysilicon,” as of June 1, 2009, spot prices for polysilicon had halved since January (Groom, Nichola and Negishi, Mayumi (June 1, 2009) Falling Silicon Prices Pressure Thin-Film Solar [online] Available: http://www.reuters.com/article/internal_ReutersNewsRoom_BehindTheScenes_MOLT/idUSTRE5505NT20090601 (October 5, 2009)). Prices in solar panels are dropping and are expected to drop even further (Isensee, Laura (August 21, 2009) Solar Panel Prices to Slide into Next Year [online] Available: http://www.reuters.com/article/GCA-GreenBusiness/idUSTRE57K46Y20090821?sp=true (October 5, 2009)). By 2009 Q2 REC enjoyed a revenue growth of 9% since 2008 Q2, due to the larger output from the larger facilities and higher external sales from the upstream side (i.e. REC Silicon and REC Wafer; Second Quarter Report 2009). The other silver lining (besides increased demand) of the drop in polysilicon prices is that their competitor First Solar’s thin-film solar panels, made with little or no polysilicon, are no longer competitively priced as against polysilicon-based panels (Groom and Negishi); in fact First Solar might switch over to polysilicon (Groom and Negishi). On the other hand, China already makes polysilicon at much less than 1 Euro per watt (REC’s 2010 cost roadmap goal), though one wonders about the quality; and Thermal Technology LLC is making furnaces capable of producing solar-grade silicon at a cost lower than competitive processes. Given the competition, REC needs to deliver on their 2010 cost roadmap.

REC Solar’s ride through the economic downturn was a different story. Like other solar panel manufacturers (Philips, Matthew (9/21/2009) Solar Burnout [online] http://libproxy.unm.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=44194092&site=ehost-live&scope=site (October 5, 2009); Newsweek , 9/21/2009, Vol. 154 Issue 12, p17-17, 1/3p), REC Solar now has warehouses full of overpriced panels (Second Quarter Report 2009). In the second quarter of 2009 they were unable to reduce module inventory levels, and module prices had dropped 35% (Second Quarter Report 2009). Their 09Q2 revenues had dropped 33% from the 08Q2 but were up 10% from 09Q1. Since April 2009 they had been operating well below capacity, had laid off 180 people (out of 700) and had no plans to increase capacity. Nevertheless, in 09Q2 they were continuing constructing a new module plant in Singapore. REC is perhaps encouraged by REC Solar’s disproportionate contribution to corporate profits (discussed above).

And it gets worse. According to their 2008 Annual Report, REC believes supply will exceed demand in 2012. How will REC meet the challenge of decreased subsidies and excess supply? By being able to offer solar-generated electricity at grid-parity prices. They are working towards this target through an ongoing cost reduction program. Their “2010 cost roadmap,” announced in 2004 and on-track as of 2008, seeks to halve production costs per watt of a module (using a 2005 benchmark) down to 1 Euro per watt (2008 Annual Review), by improving its entire “integrated PV value chain.” This involves both an increase in efficiency through new technology (incremental improvements), and an increase in capacity to produce and sell more (increasing revenues and perhaps market share). REC Silicon is using FBR technology to increase the energy efficiency of polysilicon production; and producing polysilicon capable of making solar cells having a higher output. REC Wafer is producing thinner wafers (in 2008 they were first in the world to cut a 50 micron wafer from an ingot) by using a new patented sawing process. REC also cites their “strong” IP portfolio, comprising 60 patents granted and 150 patents pending, covering the key technologies (silane gas production, FBR technology, wafer sawing, and more) that are helping it reduce costs (2004-2008 Annual Reports). Yet given China’s current ability to manufacture at less than 1 Euro per watt, REC’s cost roadmap may not be adequate, competitively speaking. Can REC outcompete China with manufacturing facilities in Scandinavia and the US?

REC does not believe the adverse environment will continue. Despite decreased subsidies, REC is betting on a mid- to long-term increase in demand due to governmental regulation and/or policy (2008 Annual Report). They cite UN projections of a quadrupling of annual carbon emissions as something that will make a decreased carbon footprint attractive. According to the Wall Street Journal, “analysts” agree with REC’s assessment: “Analysts say demand for solar products is increasingly driven by governmental concerns about global warming. As governments look for ways to reduce dependence on heavily polluting sources such as fossil fuels, they have launched a wave of subsidies on solar products, which analysts say will sustain demand in coming years.” (Spencer, Jane (October 25, 2006). Sun Hasn't Set On Solar Shares In U.S. and Asia. Wall Street Journal) Such an assessment should be tempered with the fact that solar-generated electricity accounts for less than 0.1% of the world's electricity supply, even after taking into account a 30% annual growth in the industry over the past five years. Is this a ceiling on demand, or room for growth? Does it matter, given China’s cost position? And is the really the extent of REC’s market research--a UN projection? Apparently so.

In April 2009, REC replaced the President and CEO. The newcomer promised to “work hard to reinforce our business model for lean production, through best practice benchmarking” (2008 Annual Report). That is a message of continuity, not change. Regarding the recession he noted that REC had a “large contract base” and that it had expanded into new geographical markets, both of which provided a “strong platform for growth” provided they continue with cost reductions through continuous improvements of production processes and technological advancements. Again, this is the same plan as through the previous four years. It will be interesting to see his response to the events of October 2009 as discussed above.