Evergreen Solar Inc.: Anatomy of a 'Green' Bankruptcy (Part I)

Earlier this month, Evergreen Solar Inc. filed for chapter 11 bankruptcy protection, claiming the lower costs of Chinese competitors drove it to restructure. The Massachusetts Economic Assistance Coordinating Council, the Commonwealth board charged with overseeing MassDevelopment tax breaks to business, had previously voted May19 to end the 20-year, $15 million property tax break and terminate the $7.5 million in state tax credits for Evergreen, two months after the company shut its state-aided manufacturing plant in Devens, Massachusetts built and eliminated 800 jobs.

Adding insult to injury, Evergreen borrowed money to build a new solar manufacturing plant in China.

‘Clean-Energy’ Investments Up, but Performance Lags

According to Bloomberg New Energy Finance, new global investment in the clean energy sector (including solar) was up 27% to $41.7 billion in Q2:2011 from the prior quarter–and 22% higher than a year ago. This included several very large utility scale solar thermal projects including the BrightSource $2.2b 392-MW Ivanpah project in California, the 100-MW FPL Termosol project in Spain and Eskom’s 100-MW Upington project in South Africa.

Solar energy investment in the U.S. was also up 195% in Q2 to $10.5 billion according to Bloomberg, largely driven by successful financing of the Alta and Ivanpah wind and solar projects in California.

But after lusting for clean energy investment opportunities, the performance of many of those investments is not very satisfying. The WilderHill New Energy Global Innovation Index (NEX), which tracks 98 clean energy shares worldwide, fell 13% in Q2 2011 after a strong first quarter. Bloomberg New Energy Finance says the story is the same in every corner of the global with continued strong interest in investment in clean energy but poor performance has often been the result.

Evergreen blamed falling prices from Chinese competitors for solar panels, reductions in feed-in-tariff subsidies in Europe and the failure of the US to adopt supportive policies.

What!?#$%&! 

Let’s face it, if you can’t make a project go in a market where the state permits the project, mandates that utilities must buy renewable energy even above cost (and where the deals are done typically on long term power purchase agreements that substantially reduce the risk), and where the U.S. government writes you a Treasury Tax Grant check for 30% of the cost, the problem CANNOT BE a lack of policy support.

Let’s go back to the Evergreen example. In its 2009 Annual Report (p. 14) the company reported:

Although solar power can provide a cost-effective alternative for off-grid applications, we believe the principal challenge to widespread adoption of solar power for on-grid applications is reducing manufacturing costs so that the cost of installed solar panels is equal to or less than the cost of grid-generated electricity without impairing product reliability. This concept is known as reaching grid parity.

And (p. 19):

Many of our existing and potential competitors have substantially greater financial, manufacturing and other resources than we currently do. Our competitors’ greater size and, in some cases, longer operating histories provide them with a competitive advantage with respect to manufacturing costs because of their economies of scale, production facilities located in low cost manufacturing regions and their ability to purchase raw materials at lower prices. For example, those of our competitors that also manufacture semiconductors may source both semiconductor grade silicon wafers and solar grade silicon wafers from the same supplier. As a result, such competitors may have stronger bargaining power with the supplier and have an advantage over us in pricing as well as securing silicon wafer supplies at times of shortages.

“We may need to raise significant additional capital in order to continue to grow our business and fund our operations, as planned, which may not be available on acceptable terms or at all.” (page 20)

We must continue to invest significantly in research and development to support our unique wafer technology, and these efforts may not result in continued and necessary improvement in our technology (page 20).

“The success of our business depends on the continuing contributions of our key personnel and our ability to attract and retain new qualified employees, especially in China.” (page 24)

Evergreen Solar thus described its risk position as being unable to assure investors that its business will generate sufficient cash flows from operations, or that future borrowings will be available in amounts sufficient and on terms reasonable to support liquidity needs.

If Evergreen is ever unable to generate sufficient cash flow to service debt obligations, it may need to refinance or restructure debt, including senior convertible notes, sell assets, reduce or delay capital investments, or seek to raise additional capital. It may incur additional indebtedness. If it does so, increased debt service requirements may adversely affect the ability to meet payment obligations on currently outstanding senior convertible notes and otherwise successfully grow and operate the business.

The question is NOT why did Evergreen Solar fail, the question is what were the investors in Evergreen Solar thinking?

Part II tomorrow will examine the sustainability lessons from Evergreen’s demise.