Renewable Energy Stumbles Toward the Future
It
was just last summer that SunEdison was a Wall Street darling, the very
air around the fast-growing company seeming to shimmer with potential.
SunEdison
was, after all, a red-hot company in a red-hot space — renewable
energy. Its market capitalization reached nearly $10 billion, putting it
on a par with the likes of Wynn Resorts of Las Vegas. Among the
believers betting on its stock was the hedge-fund heavyweight David
Einhorn of Greenlight Capital. With plans to buy Vivint Solar for $2.2 billion, SunEdison appeared unstoppable.
And
then the company went supernova. Its shares fell from around $32 last
summer to 34 cents this week. Mr. Einhorn furiously tried to dump his
stake in recent weeks. In early March, Vivint said, “thanks, but no
thanks” and exited the deal with SunEdison.
On Thursday, to the surprise of no one, SunEdison filed for bankruptcy — one of the largest in a series of recent green-energy failures.
There
is a timeless element to SunEdison’s swift demise: an executive with an
Icarus complex chasing a fast-growing market embarks on an aggressive
strategy fueled by cheap debt. Soar. Crash. Burn. Repeat.
Yet the collapse raises a bigger question: Can renewable-energy companies be profitable? Can green make green?
The answer, of course, is yes. Just as soon as they cross over a fundamental hurdle: finding a strategy that actually works.
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“We
haven’t totally figured out exactly what the business models are going
to look like, for who wins and who loses,” said Jason Bordoff, director
of the Center on Global Energy Policy at Columbia University.
Significantly, though, the sudden decline in oil
prices isn’t largely to blame. The difficulties run much deeper,
echoing industrial collapses of earlier eras — the telecom-industry boom
and bust of the 1990s and early 2000s, and disruptive cycles before
that.
On
the surface, the various green-energy companies all seem to be pursuing
different strategies. But there is a unifying problem they have yet to
overcome: Finding enough customers to support the costly infrastructure
they must first build.
SunEdison is far from being the only troubled green-energy business.
Abengoa,
which grew from a small electrical equipment company in Seville, Spain,
to a multinational solar and biofuel giant, is in restructuring proceedings
in the United States and abroad. Solazyme, a once-promising maker of
algae-based biofuels, has abandoned the energy markets and changed its name
in favor of focusing on ingredients for personal care and food products
for companies like Unilever and Hormel. And NRG has pulled back from
its headlong rush into alternative energy as it restructures to focus on
its conventional operations after the ouster of its chief executive, David Crane.
What’s
remarkable is that these leading energy companies are struggling at a
time when regulatory, public and investor support for the
renewable-energy industry has arguably never been greater.
On
Friday, world leaders are signing the Paris agreement on climate
change, a sweeping commitment to lower carbon emissions that practically
requires that renewable development be steeply ramped up. At the end of
last year, American lawmakers extended important tax credits for green
energy several more years, while in recent days, the Senate approved a
broad energy bill that would further promote clean power.
Moreover,
investors around the world sank hundreds of billions of dollars into
clean-energy technologies last year even as the prices of competing
fossil fuels — oil and natural gas — tumbled.
Though
development in renewable energy climbed in the last 15 years, the
industry is still widely considered to be in its early stages.
Nonetheless, there has been a race among companies to develop,
commercialize and eventually prosper from what many see as one of the
largest tectonic economic shifts in decades.
Last
year, China started construction on a massive solar farm in the Gobi
desert that is expected to generate enough power to light up one million
homes. Dong Energy is developing a multibillion-dollar wind farm off the Yorkshire coast that could eventually power even more.
And
in the United States, the federal government recently approved a major
new transmission line to move wind-generated electricity east from the
Great Plains.
But
all good bubbles burst. What is happening in renewable energy now has
similarities to the telecommunications bubble of the 1990s. Led by
hard-charging executives seeking big paydays, giants like WorldCom,
Global Crossing and Adelphia started far-reaching acquisition and
capital-expenditure programs — burning through billions of dollars — to
buy cable companies or bury long-haul fiber-optic cable under land and
sea. They were all chasing expected high demand and soaring revenues
from the dawn of the Internet.
Those
revenues eventually materialized, but they came too late for the first
movers of the revolution. After creating a broadband glut, and buried
under mountains of debt — let’s not forget the various accounting scandals and frauds — the many companies collapsed into bankruptcy.
But
the infrastructure they created lived on. Last weekend, when you
binge-watched the fourth season of “House of Cards” or streamed your own
cooking show on Facebook Live, chances are better than not that your
data zoomed through at least some of those networks.
In
that case, it turned out that if you build it, they will indeed come.
But as many renewable energy companies are learning, building it costs
dearly.
Even before SunEdison, the landscape of green energy companies was littered with failed strategies.
Dozens
of solar-focused companies around the globe have disappeared, through
bankruptcy, insolvency or just shutting their doors, since 2009 when prices for solar panels plunged as competition from China increased.
Among the high-profile failures was that of Solyndra,
a solar module manufacturer, which became a symbol of green energy
ambitions gone awry for the Obama administration after it burned through
$527 million in government loans.
Oil Prices: What’s Behind the Drop? Simple Economics
The oil industry, with its history of booms and busts, is in a new downturn.
Part
of the conundrum for these companies is that the most effective way to
cut costs has been to grow, to take advantage of economies of scale,
certain forms of financing and generous subsidies that were set to
expire.
But with all that growth has come debt, and an inability to show a profit, even if the companies are creating value.
“Clearly
in a market that has had a lot of growth, you are going to have some
companies — and in this case many companies — that try to do too much,
too fast,” said Shawn Kravetz, founder of Esplanade Capital, which
invests in solar power. “We’re going to continue to see a shakeout.”
The vulnerability to shifting conditions has been evident for industry leaders like SolarCity and SunPower, companies whose stock prices can swing wildly with energy markets and policy changes.
But
it is especially the case at SunEdison, where its chief executive,
Ahmad R. Chatila, set about expanding, seemingly in all directions at
once.
With
roots in making components for solar panels, SunEdison aimed to become
the world’s largest renewable energy development company. It bought
ventures in wind and energy storage, looked to increase manufacturing,
entered big new markets and created new subsidiaries known as yieldcos to help it raise cheaper financing by buying the projects it developed.
That strategy was further complicated by questionable accounting and opaque financial reporting — SunEdison has received
an inquiry from the Securities and Exchange Commission and a subpoena
from the Justice Department — that confounded even experts in the field.
”This
is going to be a big industry globally, but we’re stumbling and
bumbling to get there,” said Erik Gordon, a clinical assistant professor
at the Ross School of Business at the University of Michigan. “If they
weren’t trying to beat each other to the next rooftop they wouldn’t be
needing to do this financial engineering.”
Still, industry analysts and executives say that despite the fall of SunEdison, the future for renewable energy is bright.
Indeed, there are a few stalwarts in the renewable-energy race.
Take
First Solar. The company, which supplies solar panels and develops
solar farms, has had its share of troubles. It has been the target of
shareholder lawsuits claiming it hid big problems and misrepresented its
prospects. Its stock, at $62 a share, is a far cry from its bubble-peak
of $311 in the spring of 2008.
But
by adopting a slower-growth strategy and reducing debt, First Solar is a
rarity in the green-energy industry. It is profitable. Last year, the
company made $546 million on $3.6 billion in revenue.
For
now, First Solar may be an anomaly, particularly amid uncertainty
around the presidential election and the policy stances of candidates
like Hillary Clinton and Donald J. Trump on renewable energy sources.
Some warn that a lull could settle over the industry in the short term.
“The
Secretary Clinton perspective on lots of distributed clean energy
couldn’t be more different than the Trump view,” said Daniel M. Kammen,
the director of the Renewable and Appropriate Energy Laboratory at the
University of California, Berkeley. “That could mean hugely different
things for the growth of the industry.”
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