Thursday, March 15, 2012

First Solar Replacing More Solar Panels

Tempe-based First Solar Inc. said this week it is making more warranty replacements of its solar panels in hot climates than expected, just as it is building billions of dollars worth of power plants in the desert Southwest.

Company officials said the issue was not significant, but some analysts are concerned the heat issue could spell trouble down the road for the company.

First Solar took a $37 million fourth-quarter charge to set aside money to handle potential warranty claims related to temperature, and plans on setting aside a larger portion of its sales going forward to cover warranty expenses.

Officials said the discovery occurred as First Solar is shifting its business from overcast and even cool markets in Germany, Italy, France and Spain to places like California, Arizona, India, China and Australia.

It is common knowledge in the solar industry that solar panels, both the traditional crystal-silicon panels and the "thin-film" panels that First Solar makes, produce less electricity the hotter it gets. The problem is not that they don't produce electricity at all in extreme heat, just that their maximum output decreases as the temperature increases.

Solar panels don't need heat to make electricity, only sunlight. Of course, most places with abundant sunlight also are hot, but that is not always the case, as with locations such as Colorado.

For this reason, solar manufacturers calculate a "temperature coefficient" that indicates what percent of their power they lose for every 1 degree change in temperature. This helps determine the brand of panel that will generate the most electricity in a given climate.

Different panels made by different companies have widely different temperature coefficients. First Solar said that its panels generally perform better in hot weather than traditional silicon panels, but it's seeing more problems in hot places.

"As our geographic mix of sales has shifted to hot climates, we have increased our warranty accrual," Chief Financial Officer Mark Widmar said during a Tuesday conference call with investors. "Our experience has shown that our warranty rate for hot climates are slightly higher than the return rates for temperate climates."

He did not discuss which locations have been troublesome.

First Solar is building projects in some of the hottest places in the nation, including Yuma County, where the company is building a 290-megawatt power plant.

The Agua Caliente plant snared a $967 million loan from the Federal Financing Bank, and the loan is guaranteed through the U.S. Energy Department.

First Solar also has a 550-megawatt plant named Desert Sunlight underway in Riverside County, Calif. that got $1.46 billion in loans from an investor group, and the Energy Department is partially guaranteeing those funds.

And it has a 230-megawatt plant, Antelope Valley Solar Ranch, underway in Los Angeles County, Calif., that got a $646 million loan guarantee.

A First Solar official said he was confident the Energy Department funded projects were not at risk because of the heat issues.

"We are fully confident the plants are designed robustly to meet their performance targets," spokesman Ted Meyer said.

He also said the company's testing shows its thin-film panels made from cadmium telluride perform better than silicon panels in hot climates.

"We are talking about an increase of warranty accrual of one percent (to handle heat-related claims)," he said. "It is based on limited data we have and we are being very prudent in terms of setting aside additional funds (to pay for warranty issues)."

He said the company's warranty is among the best in the industry, covering workmanship for 10 years and guaranteeing output for 25 years.

First solar spent $125.8 million in the last quarter replacing faulty panels it made in 2008 and 2009, but most of those went to temperate places in Europe, and were not likely related to temperature, officials said. The company went beyond its warranty obligations replacing those panels, officials said.

First Solar recently finished a much smaller power plant in Gila Bend that serves Arizona Public Service Co.

APS spokesman Jim McDonald said the 17-megawatt plant was tested in July before going online in August, both searing months in the desert, and that the plant has been performing about 3 percent better than anticipated.

"It is performing at a high level," he said, adding that APS has a warranty should that change.

First Solar had a flood of bad news this week -- a net loss of profits for the fourth quarter, financial writedowns, potentially lost subsidies in Germany. But some analysts said the heat issues stood out.

"The warranty issues are a big deal, to us at least," Credit Suisse analyst Satya Kumar wrote in an investor note Wednesday.

He said thin-film panels have a shorter track record than traditional panels, so the problems with First Solar's relatively young solar plants are cause for concern. The company was established in 1999, and most of its business has come in recent years.

"This is the first time First Solar is talking about this issue, although we have heard of this issue in our discussions with industry contacts," Kumar wrote. "The fact that First Solar is reporting performance issues in the field in the first few years and is accruing higher charges on an ongoing basis is worrying, as the hotter regions tend to make more sense for solar. We are concerned this may not be the last time we hear of the warranty-related issues for First Solar."

Kumar also said that the 550-megawatt Topaz Solar Farm the company is building east of San Luis Obispo, Calif., is being built at 586 megawatts, possibly to compensate for reduced output.

"We think there is some risk that this 'over spec' is to provide protection given the minimum energy performance specs that First Solar has committed to in the project given the lower confidence on field performance," he wrote.

First Solar officials said their problems have been with older solar panel models and that they have moved on to the next generation of solar panels.

Analyst Chris Kettenmann of Miller Tabak and Co. asked company executives for more details on the heat-related problems, but did't get many.

"Well, at this time, we don't have a lot of data," interim CEO Michael Ahearn said.

He said that it is known that solar panels degrade faster in hot climates, and the company tests its panels for extreme heat.

"We just started really shifting the mix into hotter climates in the last couple years," he said. "So we'll have to continue to reevaluate it as we see results, get more data."


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