First Solar Inc. (FSLR) Chief Executive Officer Jim Hughes is stepping up efforts to manage power plants that generate electricity from the sun, helping utilities use the technology in a way his rivals in China can't.
The biggest U.S. solar panel maker plans to build new projects from the Middle East to Australia and use proprietary systems that help power-purchasers manage the amount they buy from solar farms, Hughes said in his first interview since taking the CEO position in May.
The company's pitch to utilities is that it will help them predict uneven power flows from solar panels, giving grid operators the ability to integrate the facilities into their networks alongside those that burn fossil fuels. That's making First Solar less dependent on manufacturing, an industry dominated by Chinese companies led by Suntech Power Holdings Co. (STP)
"We're still far ahead of them," Hughes, 49, said at First Solar's headquarters in Tempe, Arizona. "We'll keep our distance and potentially expand it."
Hughes's comments are the most detailed explanation to date about First Solar's strategic shift from a panel maker toward a vertically integrated energy company that builds and operates power plants using its solar modules. The company granted access to its flagship Agua Caliente project in Arizona and facilities where it's working to perfect systems that monitor and route solar power to the grid.
Reliable Forecasts
Network operators are accustomed to reliable supplies from steady-burning coal and nuclear plants. First Solar says it's helping them adjust to the booming flow from intermittent, renewable generators. Making those flows predictable lets grid controllers order power from solar plants the way they do from facilities fired by coal or natural gas.
"They're the only one with the track record, expertise and balance sheet to make solar a solution for utilities instead of a problem," said Sanjay Shrestha, an analyst at Lazard Capital Markets in New York. "They get the true value of solar as a complement to coal and gas with a predictable supply that peaks with power demand."
First Solar built and manages more than 500 megawatts of solar farms in the U.S. and Canada, and will complete another 4,000 megawatts by 2015. It expects to generate $3.4 billion in revenue from its current project pipeline.
The company needs to sell additional projects to keep the pipeline filled beyond that, and Shrestha said its experience has given investors confidence the company will survive the glut that's caused more than a dozen bankruptcies in the past year.
International Targets
First Solar's expansion into developing projects for customers including Warren Buffett and NRG Energy Inc. (NRG) helped make it only profitable panel maker in the second quarter. And with about three years of experience, Hughes says his company is in the best position to offer utilities predictable, low-cost renewable power.
He's pursuing utility customers in Australia, India, Africa and the Middle East, where sunlight is plentiful and solar is still an emerging technology. The company expects to sign by 2016 contracts to build as much as 3,000 megawatts of new solar farms annually. Hughes is already purchasing land and investing in local supply-chain partners. The company is also financing initial construction costs, a move that accelerates the development process and makes projects easier to sell.
'Costly' Financing
"Development in these markets is very low," Hughes said. "We'll execute some projects on our balance sheet and then finance them later. We take the issue of costly construction finance off the table."
At an operations center in its headquarters, First Solar technicians monitor color-coded images of its power plants that display the output for each section of panels connected to an inverter. That helps them predict the next hour's production with 84 percent accuracy on average. With a mouse click, operators may view current and historic performance, and an automated work order is issued any time a section dips 4 percent below expectations.
That data lets the company warn grid operators hours in advance of anticipated changes in output. Technicians remotely reduce output when grid operators need less and "clip" output in specific sections to lengthen the life of inverters and other equipment when panels produce too much.
Fuel Arbitrage
By making an unreliable power source more predictable, First Solar lets utilities reduce the cost of electricity by taking solar power more often and scaling back consumption of fossil fuels, Hughes said.
"It's a simple fuel arbitrage," said the former executive at Accelergy Corp. and Enron Corp. "Consume less fuel during daylight and you save money."
Those capabilities will appeal to utilities and grid operators, which sometimes impose penalties for "imbalances" between forecasted power supplies and actual deliveries, said Steve Greenlee, a spokesman for the California Independent Grid Operator. "We are concerned about the dispatchability of wind and solar power and we're pleased to see any improvements in forecasting accuracy."
Hughes, a former executive at Accelergy Corp. and Enron Corp., was hired as CEO in May. He took over from Chairman Mike Ahearn, who stepped into the position on an interim basis after ousting Rob Gillette in October.
Expanding Abroad
He's already made moves to expand in other regions. First Solar opened an office in Bangkok last month and started a joint testing program with King Adbullah University in Saudi Arabia in June. The company formed development unit in India in May and hired a General Electric Co. (GE) executive, Sujoy Ghosh, to run it.
"First Solar commands a lot of respect and this is probably the best strategy for them to pursue in an increasingly competitive environment," Michael Liebreich, chief executive officer of Bloomberg New Energy Finance, said in a interview. "They can be the best at utility-scale solar and carve out a healthy niche for their thin-film panels."
Chinese competitors have caught on to First Solar's strategy and are building their own utility-scale projects. Trina Solar Ltd. (TSL) said last month it's shifting to downstream project development to boost sales of its panels and increase profit margins. It announced plans this week to separate its manufacturing and development operations.
"Downstream is going to be our major focus," Chief Financial Officer Terry Wang said on an Aug. 21 conference call with analysts and investors. "We're making money with a higher profit than the average manufacturing margin."
Difficult Job
The competition will make Hughes's job more difficult, said Rob Stone, an analyst at Cowen & Co. in Boston.
"Trina's aspiring project business means more competition for First Solar," Cowen said. "It's a mystery to me why First Solar has any particular advantage."
Where the company does have an advantage is in managing power spikes and improving production forecasting, said Mark Bachman, an analyst at Boston-based Avian Securities. Those capabilities set it apart from Chinese rivals that are beginning to develop power plants now and lack the expertise to manage them with the same proficiency.
"This is a new piece of their long-term strategy," Bachman said. "They need to get the story out there and start showing some ability to build out their pipeline because time is running out. They need big commitments on big plants soon or the party will end."
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