Q&A: First Solar CFO Mark Widmar

After opening Australia's biggest solar power plant, the 10 MW Greenough River Solar Farm in WA, First Solar's Chief Financial Officer Mark Widmar discusses with Climate Spectator editor Tristan Edis:

-- The importance of the first large-scale solar farm in Australia;

-- The problems facing solar manufacturers;

-- The performance of different solar cells;

-- The future for the solar sector; and

-- Why government support is important.

Tristan Edis: This 10 megawatt project is quite small by the standards of First Solar.

Mark Widmar: Right.

TE: Should this project be seen as more important than perhaps reflected by the size?

MW: Yeah, I think so. I think every market needs to evolve over time and we look at this as the first step in a very promising market. So think of this as it's 10 megawatts with an opportunity to generate hundreds of megawatts of volume after that.

TE: So, is this about a learning demonstration process for you guys?

MW: Clearly there are significant learnings you capture off of the first site. While you could look at that we've done 10 megawatt plants, similar size, greater size, across the globe, every environment is unique and different that you need to understand – especially as it relates to the EPC side, and actually even how the module is going to perform, and how to optimise the performance of the module in that particular environment. So, we'll get significant learnings from this first site which we'll then be able to leverage as we continue to develop other sites.

TE: So, you would actually feed it into the module design itself, are you saying?

MW: Yeah.  How we do the actual construction or how we design the layout will come into consideration if… Each environment has unique characterisations that you have to take into consideration and as you do the engineering and design of the site.  So, you'll capture those learnings from this first small site and we'll leverage that in the follow on business.

TE: Okay, great. It seems every day we hear about a solar company going bust – some of the biggest names; Q Cells, for example [subsequently bought by Hanwha Group] – and margins are being pressed to the bone due to a huge overhang of excess supply. How do you manage to make money in such an environment?

MW: At the end of the day the way you make money is you get close to the customer and you figure out what is the customer's unmet need and then you design the solution that addresses that, and so there's a value chain.

The asset generates energy which ultimately there's a customer on the back-end who associates value with that energy and is willing to pay you for that. Along a value chain there's the module, there's the EPC and then there's the O and M (operating and maintaining of the asset). Your point that you referenced around oversupply really resides on the module. Initially as the industry evolved there was a supply constraint. So, I will argue there was an artificial profit pool associated with the module at that point in time and once some of the barriers to entry or access supply came into market, you know, you've got to commoditise pretty quickly at the module level. 

So, where you're seeing the guys who are actually running into financial distress, largely it's because they're sitting on the module. You need to move forward in the value chain. You need to get closer to the customer.  You need to be ultimately the one who's standing behind that energy curve that somebody is associating value with.  And that's why we've moved forward into doing the engineering, procurement and construction and doing the operation and maintenance of that asset because the value proposition to the customer is I can optimise the performance of that asset, so you get the best return on your invested capital over its life.

TE: And you guys capture a bit more of a margin than what's there in the normal, commoditised component of the…

MW: Right. And the other thing too is that we have, even at the module level, yet again we have a different shade of technology. So in general our process is much simpler than the crystal silicone and it's lower cost. The predominance of our competition is crystal silicone and so with the differentiated technology it allows you to compete differently, it allows you to potentially capture some profit pool at the module level, but you really have to get the entire value chain to optimise the profit pool.

TE: On that, the cadmium telluride doesn't have the same extended performance history of silicon-based solar cells and we know that there's been some recent news about First Solar increasing its warranty provisions. What have been the causes for this and what kind of reassurance can you give customers around that First Solar panels will last the test of time?

MW: So, if you go back and if you look at the increasing of the warranty rate and the reserve that we are booking; primarily it's related to the fact that more of our modules will be shipped into the hot climate environment. You can look at any independent assessment and see modules, whether it's thin film, cad tel, thin film crystal, CAGS, or crystal silicone, the modules will perform and integrate differently in a hot climate environment than they will in a temperate climate environment. I mean it's intuitive. 

If you think about it, it's inherent in the size, that with the hotter the environment, most things that are exposed to a hot, harsh environment are going to perform differently from a temperate environment. So, we've made a decision that as we've seen our mixed shift go towards hot climate installations, we are actually increasing the reserve to represent that change of degradation and performance we anticipated in a hot climate environment. Now, in terms of how do we get our customers comfortable: because we're the leading industry cad tel provider and because of the size of the projects that we have done… I mean this here is 10 megawatts, but we have projects in the US that are 300 to 550 megawatts AC. They had to go through tremendous diligence on the technical side. They would not only get the Department of Energy comfortable with it but also get our banks comfortable with it, and get our customers and independent engineers comfortable with it.  There are bonds that have been issued associated with funding these projects as well that require an element of technical diligence as well.

TE: So, were they bonds that First Solar is paying for or are they bonds that other people…?

MW: No.  Just… the public debt was erased. 

TE: Okay.

MW: So, there has been a lot of evaluation as it relates to our product and capability and I think if you talk to most of our customers, while there have obviously been items that have come up recently in the press, when they actually have a chance to understand and really sit back and evaluate and learn, most of them come away very comfortable. And I think as an example, a large project in desert sunlight we did in the US has recently seen Sumitomo come in and buy 25 per cent interest in that asset.  So, when you look at the kind of the pedigree investors that are in our projects, they've all done thorough diligence around the technology to get comfortable with it.

TE: Obviously you've spoken about vertical integration as one of the ways that you've tried to cope with what is a commoditised industry in terms of modules, but I mean can you guys see some light at the end of the tunnel after going through a restructuring stage that it seems inevitable over the next few years and what you think the solar industry might do? But what do you think the solar industry might look like in another say five, 10 years' time versus what it looks like now?

MW: You know, the crystal ball I wish we all had, right…

TE: Yeah, yeah.

MW: It's difficult to really say with some amount of certainty of what it's going to look like in terms of size because there are many things depending on how particular markets and geographies develop can have a significant impact on really the ultimate size of the market. What I can tell you, though, is that solar is going to be much more diverse. 

It started off basically Europe and primarily Germany, Italy, Spain, France, and what we're seeing now is it's continuing to evolve across the globe.  It's becoming more affordable, more competitive and it's becoming more important to utilities as they think about their energy mix and ultimately what is the energy source they want to use to meet peak demand – and solar is more competitive from that standpoint. Utilities like the diversification of solar, even in the US as you think about… well, even low natural gas prices. They like the fact that solar can come in and provide an element of diversification and hedge against their gas exposure because there is no input cost. So if you want to hedge yourself against commodities or just general inflation, solar is a very viable strategy from that standpoint. So, to say how big the market will be, it's hard for me to say the size. What I can tell you is it's going to be much more diverse and I think you'll see Australia is an example here of…

TE: Sorry. In terms of the end demand will be more diverse in terms of the number of markets.

MW: Right, yeah. So, you're going to see… you know, I would see Australian ramping up.  You'll see the Middle East start to evolve. You'll see South Africa. I would think India and China are going to be there as well. And South America. So, I think you're going to get a much more global footprint and diverse footprint than we have today.

TE: Lastly, solar to be viable presently requires substantial government support, what does government and, I suppose, society more generally get in return for this level of support that they're providing right now or will all of this investment pay back?

MW: I guess I would just step back just from the standpoint of solar needing government support and ultimately to be competitive. I would say in general we're looking at going into creating demand in new markets that would allow us to compete without the need for subsidies or feed in tariffs or whatever it may be. Now, that may evolve over time, but we think solar can be very cost competitive without the need for government policy and government support. To the extent the governments do provide support for solar to help a nascent industry kind of develop over time. We've talked about it today in terms of job creation. We've talked about it in terms of establishing a local supply chain; that is, solar comes in now, we'll be able to localise the supply chain and then create jobs not only through the construction process but actually through the procurement of the materials that we buy for the projects. And then I think clearly it gives them a source of CO2 emission free energy, so from the environmental aspects, I think the paybacks are unquantifiable from that perspective.

TE: I suppose the thing is a lot of people say oh we've got cheaper ways of reducing our emissions than using solar electricity, so why not just focus on those?

MW: I think the question you've got to ask yourself is – look solar is unique that it basically meets peak power demand – so I think if you look across your energy stack, you really focus on what is your source of energy you are using today to meet peak power demand? And I think when you look at that corner of the energy stack, solar looks very favourable. You're displacing diesel and gas-fired turbines or whatever it may be and we can do that more economically. So, I think you've got to look at where we sit and the alignment of your peak supply demand and ultimately, what's the right energy source to achieve that peak supply demand at the lowest cost?

TE: Thanks very much for your time.