The Breakdown | Explaining Southern California's economy

Solyndragate: The problem with solar isn't growth, it's scale

At KPCC's Pacific Swell blog, my colleague Molly Peterson has a snappy take on the aftershocks of Solyndragate: SolarCity isn't likely to get a $274-million DOE loan guarantee is was counting on to install solar panels at more than 100 U.S. military bases.

In the post, she refers to a memo that was sent out by the Sierra Club, supporting the solar industry. Here's a taste:

Earlier this week, The Solar Foundation, in partnership with GreenLMI and Cornell University, released its National Solar Jobs Census 2011.  The Census reported incredibly impressive growth in the solar industry – nearly 7% from August 2010 to August 2011.  The solar industry’s growth is even more impressive when compared with the fossil fuel energy industry, which shrank by 2%. 

No one disputes that the solar business is growing. But as Solyndra found out, growth isn't always enough. You also need scale. Because without scale, you're going to have much more trouble attracting high levels of outside investment — enough to match the many billions that governments like China are throwing at their solar industry. And in Solyndra's case, you need to ramp up sales to the point where you can overcome falling prices driven by Chinese manufactures flooding the market with cheap solar panels. 

Megan McArdle at the Atlantic asked a finance pal to do the math, using $100 in sales as a basis and assuming falling profit margins due to collapsing prices. That person produced a compelling analysis that whatever Solyndra was doing politically, in terms of its actual business it was going for scale:

[You need to take] $100 in sales to $400. Then even at an 8% gross margin you're making $32, which is about what you were making before in dollar terms when margins were 32%. If you can sale up to this level without adding to much to your $20 in operating costs, then you can survive....Further, the additional scale should bring some manufacturing efficiencies. Maybe your 8% gross margin can go up to 10 or 12%. At $400 in sales that's $40-48. If that can happen, you are actually making more absolute dollars than before, even if percentage margins are lower than when you had $100 in sales and $32 in gross profits....But for the above to happen you almost certainly need to build bigger factories, making large-scale purchase commitments for your inputs, etc. etc. You can spend hundreds of millions of dollars on this effort. You're on a treadmill, running full-speed. It might save you. But it's likely to kill you.

And kill Solyndra it evidently did. But there's a lesson here: Green may be growing. But Investors — both private and public — need to understand that without full-scale production, all these companies are risky, and they're going to stay risky for some time.

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Photo: Solyndra