Category: Blogs

Solar panel suppliers fixated on power gains, but is the industry really benefiting?

Turn back the clock to 2012, and the PV sector had gone through an initial growth-related technology shake-out that can largely be seen today in c-Si technologies having 95% of market-share, and only one viable thin-film supplier (First Solar).

After the 2012 PV stock-market crash, the industry went into cost-reduction mode and then product optimization. This optimization phase centred on utility-scale modules moving from 60-cell to 72-cell as the norm, and module design moving from legacy 2-busbar to 5 busbars.

In terms of product variation across the c-Si segment, things were relatively stable and designers of PV plants could choose between 60 and 72-cell module suppliers without having to worry too much about form/fit/function. In reality, plant design for c-Si modules could be left to decide on final supplier-of-choice when construction began.

The major concern for developers, EPCs, O&M’s, asset managers and portfolio owners, at this time, was mainly based around the liquidity of the various module suppliers offering these 72-cell products to the market; would the supplier be around in 25 years to honour the warranty?

Fast-forward to 2019, and the landscape for c-Si modules could not look more different. This article discusses how PV module supply has now become a marketing and trade-show related game of numbers (specifically, a Watt-peak DC bragging-rights platform); what is driving this, and why is it perhaps causing more concern to the very grouping it is meant to impress – the end-user.

The c-Si upgrade frenzy

The introduction of PERC cells – and the move from multi to mono as the cell substrate standard – has undoubtedly been the catalyst behind the plethora of process line changes across ingot-to-module stages that leads us to the extreme diversification in c-Si modules being offered to the market today.

The range of options is not just in looking at the different companies offering products to the market, but can be seen through the growing module types offered by any one of the multi-GW c-Si module suppliers dominating the industry today.

It is almost impossible to keep track of the c-Si module options being supplied today, and if anyone does manage this somewhat academic feat now, everything is likely to change again before the end of the year.

Being an investor today into large-scale utility-solar sites has never been more challenging and risky.

Rear surface passivation (PERC) was the first major process flow change to be implemented by the c-Si cell segment for over a decade. For many of the c-Si cell producers active in 2015-2019, it was the first process flow change they had ever undertaken, and the first they had owned, since cell lines were constructed using equipment suppliers that were tried and tested by the industry. For the new entrants in this time period, new lines were by default PERC (if installed as mono).

The immediate success of PERC (and the obvious efficiency gains seen compared to Al-BSF) basically gave Chinese cell producers the confidence to do anything else that would add to the Watt-peak figures printed on datasheets; and there was no shortage of options waiting to be unleashed, on both front and rear sides of the cells.

Furthermore, we need to add in the shift to bifacial variants, half-cut cell designs, and cell/module changes including multi-busbar arrangements. One could go on and on. Anything that adds to the module power rating is now fair game.

The results have been extremely impressive. Back in 2013, the world was full of 240W 60-cell p-type modules, and rooftops and fields alike utilized this mainstream supply channel. Today, state-of-the-art p-type and n-type designs are trending in the 400-450W range plus.

The focus is certainly on Watt-dc powers at STC, and much of the extra push for power is coming not from real cell efficiency gains, but by simply increasing the size of the module (larger wafers or more cells). Therefore, the real monetary gain is less pronounced, and in many cases, costs are simply then passed on to the balance-of-systems side of things. 

Indeed, changes can also affect the role tracker companies play in this respect, as they need to ready for variations in modules and how this impacts on their unique supply-chains.

However, change in manufacturing comes with its own set of challenges, not simply by the manufacturer in having to ramp up new tools every few months, but most notably in the bill-of-materials employed and control of sub-contractors and OEMs that have been critical for module shipments targets of almost all leading c-Si players today.

c-Si PV module BoM’s, specifications and suppliers seem to change more often than cell phone offerings these days. However, while cell phones have a shelf-life of 2-3 years at most, PV modules (especially for utility-scale sites) are meant to be warrantied for 25-plus years. Outlined in this way, one can see instantly that change is not always good – especially if the customer is not ready for it, or it simply causes them problems.

If things were bad enough, the industry is currently undergoing a wafer-driven change mechanism that is potentially complicating things even more (the push to larger wafer sizes). Coupled with the half-cut cell design growth (6-inch cells are cut in half and then assembled as 144 half-size arrangements), this is now causing packaged module dimensions to become a non-standard parameter.

From an installer standpoint (rooftop or ground), this is certainly not good news. If module dimensions are staring to creep up, then where do I stand in 3-5 years if I need that form/fit/function to replace faulty product? Structure providers are also impacted, with the unenviable task of adapting to different non-standard module sizes and multiple interfaces on a regular basis.

Product availability therefore now becomes the gating factor in the warranty, and even more than the risk associated with module suppliers being in business 10+ years down the line. The chances of any PV module supplier having a hidden stash of warranty-ready PV modules covering the myriad of types supplied in the past 3-5 years is not reality. The buck will stop with the site owner, and any third-party stakeholder that is mandated to sustain site yields at agreed levels.

This characterizes the reality of the wafer size debate ongoing today. For further background, have a read through the article on PV-Tech recently, Why are monocrystalline wafers increasing in size? Larger wafers ultimately do force module producers to increase dimensions of panels. The use of half-cut cells also allows cramming more cells (over and above 144) onto a single panel, again changing module dimensions. The days of standardized 72-cell modules appear to be well and truly in the past.

The snowball effect

It would seem we are now into a vicious circle of module-power bragging-rights taking priority over practical reality and long-term investment returns, and this is entirely a manufacturer-driven phenomenon, from wafer size to cell design to module production and supply.

Let’s restate the main issue at play here: investors want to maximize returns over 25-30 years with minimum risk. It is all about maximizing returns, not appearing to save a few pennies on capex during site build based on a higher-spec module.

Ask any bank or solar site investor if they would trade 10W on a 400W panel for audit-trail security in BoM’s used across multi-stages of a 500MW site, drop-in replacement availability in the future, and product testing/validation that minimizes the risk of failure or underperformance, and they would bite your hand off. Experienced players have learned that manufacturing stability and reliable and durable products are the key drivers behind long-term degradation and minimizing total cost-of-ownership over plant lifetimes.

However, the nameplate power spec game appears to be growing today, with everyone joining in. The fear I guess is that a 380W panel will simply look outdated, if all competitors are pushing 420W-plus equivalents? In some ways, one can sympathise with the sales teams and the need to supply what appears to be market-competitive product at any given time.

If quality could be benchmarked, the world would be a different place.

Module quality and reliability should always be ranked above module power ratings. It seems such an obvious thing to say, and no-one that has ever purchased a PV module would dispute this for one second. So what is the problem?

Perhaps it all comes back to quality having no clear industry-accepted metric (like module power rating), and therefore quality is something that can be interpreted, marketed and benchmarked in many different ways. Just look at the 50-plus module suppliers claiming to be on one of the Tier-1 type listings these days, and thinking this means they have quality product that is bankable?

Indeed, during the past couple of months, since PV-Tech introduced the PV ModuleTech Bankability Ratings, one of the most-asked questions by the industry was: How do you measure module quality? Can suppliers be benchmarked on quality?

It is an extremely difficult parameter to benchmark, as quality is by nature qualitative, and has no scoring mechanism to fall back on. Firms performing quality audits and reliability testing have bespoke means of ranking suppliers, but it is often fab or BoM or module type specific. Such schemes may work, if fixed supply chains existed with limited varieties of modules. However, as discussed earlier, the opposite exists within the industry today.

Therefore, quality and reliability testing becomes case-specific and valid for one product at one point in time. As soon as anything changes (materials supply for manufacturing, process tooling, wafer or cell supply channels, assembly location), then everything needs to be started again from scratch – or should be!

This is the real problem for institutional investors. Undertake any due-diligence and risk-mitigation process for site supply at any point in time, and it is valid almost only for that project, or indeed the first phase of a mega-sized, multi-phase-build project. 

Move 3-6 months on in time, and the entire exercise has to be done again, as more than likely, the makeup of the modules from the same supplier will have changed – albeit with higher power ratings being claimed.

One can only imagine the cost element to all of this. Constantly engaging with IE’s; factory audits per phase of project; certification and testing every time module parameters change. Surely this is not ideal, particularly if the modules won’t be around in 2-3 years if anything needs to be replaced on-site?

In some ways, this explains why factory auditors, reliability and testing laboratories, and certification houses have never been so busy.

PV ModuleTech 2019 full of talks on all these themes

The PV ModuleTech 2019 meeting in Penang next week (22-23 October 2019) will consist of talks covering all the issues above, and will hear from companies driving module changes, those trying to qualify and inspect them, new materials and suppliers feeding the factories, and – most importantly – developers, EPCs and investors that are trying to make sense of everything. 

In contrast to the talks from c-Si module suppliers relating to these themes, First Solar will also present on the company’s manufacturing approach that is unique now within the industry being a single-product offering that avoids almost all of the issues discussed in this article for c-Si module supply.

There is still time to attend the event next week. Click on the link here to register to attend.

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PVEL highlights industry trends and challenges in module manufacturing and technology

The third PV ModuleTech conference takes place in Penang, Malaysia on 22-23 October 2019. One of the key companies participating in the PV ModuleTech event this year is PV Evolution Labs (PVEL). PVEL provides extended reliability and performance tests to evaluate PV modules for the downstream market and produces the annual PV Module Reliability Scorecard. 

Recently, PV-Tech took the opportunity to catch up with Tristan Erion-Lorico, Head of PV Module Business at PVEL and a key partner at the forthcoming PV ModuleTech 2019 event in Penang this month.
 
We talked about some of the new industry trends in module manufacturing and technology, and what attendees of PV ModuleTech 2019 can expect to hear from the company’s presentation at the event.

What changes have you seen in the industry since PV ModuleTech last year?

Tristan Erion-Lorico: ”Since last year’s PV ModuleTech, bifacial modules have catapulted from a niche offering into a mainstream product. While most attendees of last year’s event anticipated growth, few expected the technology to gain so much traction in such a short time. Instead, we’ve seen manufacturers rapidly expand bifacial capacity and bring new products to market. We’re witnessing the development of several 100 MW+ bifacial solar power plants at many sites around the world. 

 At PV Evolution Labs (PVEL), I’ve observed this trend in two ways. First, more and more downstream companies are asking us for bifacial reliability and performance data. Second, more manufacturers are signing up to test bifacial products, and in some cases they’re testing multiple bifacial products with us. Our bifacial testing queue demonstrates that developers and investors still lack important validation and technical diligence data that drives financing for bifacial projects.

In addition to the growth of the bifacial market, another change I’ve observed is the staggering number of new products in mass production from some of the biggest manufacturers.  A few years ago, a module buyer could choose monocrystalline or polycrystalline, 3 bus bar, 60 or 72 cell.  Now there is full cell, half cut, different cell sizes, different numbers of bus bars, n-type and p-type and different interconnection technologies, plus of course bifacial versions of many of those.  The quantity of product iterations has many developers scratching their heads and looking to PVEL for data on the reliability of those various products.”

What do you see as key challenges for bifacial modules?

“Modelling accuracy and site design optimization remain important challenges for the bifacial market. Without bridging these gaps in our understanding of bifacial performance and reliability, the industry will not capture the full value of this innovative technology. The recent bifacial boom has been exciting but we’re still only scratching the surface of the technology’s potential. 

Modelling bifacial performance remains difficult due to a high degree of uncertainty around expected energy generation. There is very little well-validated, independent data that quantifies rear side gain. On the reliability side, we face lack of certainty around degradation rates. Do the back and front side of the module have the same degradation rates across all degradation modes? IEs need more data to address this uncertainty. In the meantime, the industry must contend with overly conservative energy yield forecasts and financial models – it is likely that developers are leaving money on the table. 

There is also considerable uncertainty around bifacial site design optimization. We don’t yet know the value of investing in specialized technologies to increase bifacial gain. When optimally installed, will bifacial modules drive enough additional energy yield to justify more expensive site designs? For example, does it make sense to use engineered ground covers that improve albedo, and what should the ground coverage ratio be? What tracker design is optimal – and how much of a difference does it make? As an industry, we are beginning to understand the implications of these site design changes, but more work is needed.”  

We are seeing the transition to larger wafers and therefore larger modules. What are the challenges associated with moving to larger module sizes?

“Compatibility with existing balance-of-system equipment and legacy systems is an important challenge that comes with moving to a larger wafers and therefore larger modules. Certain racking and tracking systems have strict specifications with regard to frame size and mounting hole location, so larger modules may require redesigned mounting systems. Likewise, most new, larger modules will not be backwards compatible with products that are operating in the field today. This will be a challenge for site owners and operators as well as manufacturers: How will manufacturers support warranties for smaller sizes if they no longer produce the products that must be replaced? The challenge of module replacement underscores the importance of selecting a high-quality, reliable product during the procurement process. 

While this transition to larger wafers and modules is already underway, the industry has not settled on a standard for cell and subsequent module size. The manufacturing equipment in use by different manufacturers today have varying limitations, so different wafer and module sizes are being implemented in different factories around the world.  The result is system design challenges for sites that will be installed in 2020 and beyond. There are no standard dimensions that developers can rely on for crystalline modules. With so many different available dimensions – and SKUs – it can be difficult to select the right module to design for.”

You are going to be increasing the number of tests in future scorecards, why is this necessary?

“PVEL’s PV Module Reliability Scorecard is based on results from our Product Qualification Program (PQP) for PV modules – it’s our comprehensive suite of performance and reliability tests. The PQP is updated annually to support PV module buyers and investors conducting technical due diligence. This year, we added new tests for backsheet durability, LeTID and microcrack sensitivity, but we also removed some tests and updated others. Our next Scorecard will address these changes. 

Annual PQP updates are critical for the program to stay relevant to the global downstream PV buying community. Manufacturer’s product roadmaps are more fluid and dynamic than ever before, and changes to production processes and bills of materials can have quality ramifications. We respond to feedback from our downstream partners and the broader industry at large about the reliability and performance issues they’re experiencing the field, and we update our program to ensure those issues are captured. 

Regular, frequent updates differentiate our PQP from industry standard certifications. Updating IEC standards can take years, and we are proud to contribute to that process. But new technologies are coming out at break-neck speed, and PV module buyers want to start using the latest products right away. Our PQP gives buyers and investors confidence in the quality of new technologies and innovations.”

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PV ModuleTech 2019 to explain why only four module suppliers are AA Bankability Rated today

PV ModuleTech 2019 takes place in Penang, Malaysia on 22-23 October 2019. During this event, I will be giving a 45 minute presentation on the new PV ModuleTech Bankability Ratings, focusing on benchmarking the 14 module suppliers that have rating grades of A or B, and explaining why the other several hundred module suppliers today globally are speculative buys for large-scale utility PV projects.

Within this talk, I will address one of the main questions I have received during the past few weeks, since the full methodology on the PV ModuleTech Bankability ratings was outlined across six articles on PV-Tech, starting here, and ending here.

The specific question centres on why only four module suppliers are in the top-rated category today for module suppliers: AA. (Recall that there are no PV module suppliers today meeting the requirements of the highest rating band of AAA.)

Often, the questions were along the lines of: why is company X not AA-rated? Or more pertinently: why is my company not in the top category today? Of course, many other people simply wanted to know who the 14 companies are with A or B grades, or where the rankings had placed the company they were representing. This broader question will be addressed over time, but for now, the key issue is to provide some explanation on why only four module suppliers are in the highest-grade band of AA.

For those wanting the detailed explanation for this – in addition to the answers to most of the other questions highlighted above – the best option is definitely to be at the PV ModuleTech event in Penang in two weeks from now (22-23 October).

In this article, I will address the main factors surrounding the including of JinkoSolar, First Solar, LONGi Solar and Canadian Solar as the most bankable module suppliers in the sector today.

Manufacturing and financial strength are both essential for bankability

During the series of six feature articles on PV-Tech, I discussed many times that bankability has two key elements: manufacturing, within which the highest weighting is applied to trailing 24 months of module shipment volumes to commercial (non-residential) market segments; and secondly, financial, based on converting Altman-Z scores to a PV-specific 0-10 ranking scale.

This removes the several hundred PV module suppliers that have sub-GW shipment volumes, many of whom operate typically with varying capacity utilization rates, serve a select group of residential-friendly markets, or operate as third-party OEM outlets without any credible own-brand status. It also removes companies (many of whom do have multi-GW shipment volume credentials in the past 3-5 years) but have dreadful financial health and are essentially technically-bankrupt.

While most people tracking the PV industry are long-accustomed to hearing many PV module suppliers shouting about being on one of the various tier-1-type ranking tables that have been in existence within the industry for many years, anyone buying PV modules today for a 100-MW-plus utility-scale solar site is generally only looking at a subset of between five and ten companies.

Therefore, even without doing the full analysis, it is fairly simple to draw a line through all but a few dozen module suppliers. The beauty of the new PV ModuleTech Bankability Ratings output is that these select companies can be benchmarked across different manufacturing and financial strengths and weaknesses.

Only by doing this, can it be seen why a select group of just four PV module suppliers (JinkoSolar, First Solar, LONGi Solar and Canadian Solar) have higher bankability ratings than everyone else.

Overview of what is differentiating the top-4 today

There are certain qualitative pre-requisites that apply, which preclude many of the leading top 20-30 module suppliers from being top-four AA-rated today.

One of these relates to the cumulative non-commercial shipment volumes, going back over a trailing 24 month period (at the end of any given quarter, when the ratings are updated for all companies). This is entirely valid, as consistent and repeat shipments by quarter over an extended time period is one of the most credible means of qualifying market-winners and those that have been consistently approved for large-scale project financing.

The criteria applied in the PV ModuleTech Bankability analysis also classes module shipments as own-brand only (and not OEM supplied, or in the cases where multi-GW capacity owners sublet facilities for tolling). Companies operating predominantly in this mode cannot be considered bankable from a brand perspective, although of course they may have a very workable business plan that satisfies company shareholders or investors.

To be included in the AA-ratings band, multi-GW of annual shipments over the past few years is a must. In fact, the threshold is nearer to 5 GW (utility-specific) these days. However, not all the 3-5 GW annual shipment suppliers qualify of course, as there is the financial aspect to factor in.

Indeed, the second pre-requisite is that financial stability with good financial health is also in place going back 24 months. So much confusion still prevails in the market on this issue today, not helped by companies often simply quoting turnover (revenues, often also of parent entities) as being the metric of value in terms of bankability. However, operating health is a blend of profitability, assets, liabilities, working capital, liquidity, retained earnings, leverage, equity value and sales generation levels.

It has been shown time-and-again that companies operating with strong revenues in the PV industry (especially Chinese firms) can also be carrying excessive debt, losing money every quarter, and having limited working capital to do anything to reverse inevitably bankruptcy. Indeed, when one looks at Chinese module suppliers that are PV-sector specific, only a small handful have operated with consistent and stable financial metrics, and absent of red-flags or risk in terms of ongoing operations.

In this context, for most of the GW-scale Chinese PV module suppliers, shipment volumes have to be very high (and consistently high every quarter), with operating margins positive, given that financial strength is likely contingent on having a non-module-based revenue stream. More on this below that mainly explains why JinkoSolar, Canadian Solar and LONGi Solar are the sole (Chinese-run) representatives in the AA-ratings band today.

Now, let’s look at the four companies and why each is qualifying in the AA-rated band today for PV ModuleTech Bankability.

JinkoSolar

Having operated for some time with downstream activities, Jinko is now a fully-fledged pure-play PV module producer/supplier, with a remarkably simple business model that can be summarised as follows.

Jinko’s business today is all about module supply growth, investing in having full in-house vertical integration (now all mono prioritized) across ingot-to-module stages. Profitability (operating) therefore relies upon having a 15-20% delta when comparing blended module ASPs with cost-of-good-sold. Keeping operations in check, this translates to an operating margin or around 5%.

There is very little wiggle-room here. Revenues come from selling modules. Therefore, the higher the volumes, the higher the earnings each quarter.

The model works perfectly so long as volumes are high (more than 10 GW annual shipments, growing to 20 GW in the next few years), and costs are keep within target bounds (run factories flat out and hope that polysilicon stays sub-10$/kg going forward). The higher the premium for sales, the better the final earnings are.

Jinko qualifies as AA-rated mainly from its very high module shipment volumes, not by having financial performance that would alone jump out as a special feature.

If shipment volumes drop (sales pipelines slow down) or costs hit any problems at all, then the company would lose its AA-rating grade. Indeed, the business model means that when things are good, they are very good; shipping as much as possible when profitable is great; doing the same when gross margins slip is conversely bad if doing so quarter-on-quarter.

For now however, Jinko does remain the only Chinese PV module supplier (ever) that seems to have worked out how to be master of this business model. To do this, you need to be one step ahead of all your competitors in terms of markets to serve, quality levels to supply, and technologies to invest in. Ultimately, this differentiates Jinko from most other Chinese module suppliers that prioritized leading shipment ranking position over having any long-term plan to stay there.

While Jinko is the only company today to have excelled in module production/supply pure-play operations, the other two Chinese-headquartered module suppliers to have AA-ratings owe their inclusion (as AA) to having other highly profitable non-module-sales revenue streams.

Canadian Solar

While Jinko sets the gold-standard in terms of c-Si module supply operations, Canadian Solar has a similarly unique position as possibly the only PV module supplier to have successfully combined having dual upstream/downstream strategies that work at the same time.

This goal has been the Achilles heel of so many PV companies over the years, with many of them wrongly thinking that the skill set involved in being a profitable module producer within the sector somehow automatically qualifies them to have similar business acumen when it comes to PV plant investment and market-trading of completed assets.

Inclusion as AA-rated for Canadian comes from having regularly been a top-ranked PV module supplier by volume in the past few years, having one of the more profitable module manufacturing operations (best-in-class typically in terms of being flexible for in-house/third-party component supply), and being smart enough to operate its downstream business at arms-length.

This final point turns out to be key. The mistake many companies seem to make in running dual upstream/downstream operations is trying to couple the strategies into one. This manifests itself often by efforts to grow project pipelines, as a means to create a module supply channel, rather than seeing downstream projects as what they ultimately are: an asset class that is there to be traded as and when market circumstances allow.

Many companies have fallen foul of this trap. Only a few – most notably Canadian Solar – have decoupled upstream from downstream operations. In effect, this allows module operations to be set up optimally (on the basis of selling modules as value-added in their own rights), while it frees up decision-making on project development and secondary asset sales through a different part of the company that for all purposes is fully decoupled from module sales.

In fact, often with Canadian Solar in the past few years, module sales teams were completely unaware of the project pipelines held by the company’s project development teams. While this may sound to many as a company with communication problems, it is the ideal situation. It frees up the downstream operations to make the best commercial decisions, including whose modules (in-house or third-party) are best to optimize site returns on a case-by-case basis.

Ultimately company management can then decide what to do with owned assets, selling them if the company needs cash in the short-term, or if market circumstances make asset sales preferential. Having this revenue stream option, while simultaneously being among the most profitable of the Chinese multi-GW module producers, is what merits Canadian Solar’s inclusion in the top-4 grouping today, although it should be pointed out that the company is the most at risk of moving to A-rated status (based mainly on shipment volumes being some way off the sheer volume of market-leader Jinko).

LONGi Solar

The third of the three Chinese-headquartered module supply majors featuring as AA-rated suppliers is LONGi, and the reasons for its inclusion are different to the other two companies outlined above.

LONGi is a special case today within the industry, having a highly profitable revenue stream coming from another part of the PV manufacturing value-chain; namely, wafer sales. The growth trajectory of the company has been clear to see over the past 4-5 years, with LONGi implementing highly-ambitious and completely-successful mono ingot/wafer capacity expansion phases within China that have been the catalyst to the whole sector moving from p-type multi to p-type mono as the mainstream technology offering.

However, while simply managing the process of site construction and ramp-up at such a grandiose level is highly laudable, the key has managed to retain cost-control and margins (at a time when component ASPs have been on a steep downward trend). This has been the basis of LONGi’s operating strength, driving the company’s valuation to levels much higher than would have been possible from a stand-alone module supply business model.

The resulting financial strength of the company (from its wafer business), coupled with having annual module shipments now moving into the 10-GW-territory (and increasingly more each year outside China), is what sees LONGi firmly in the AA-rating band as a module supplier today.

As a case-study, LONGi is unique in having a highly profitable PV manufacturing business unit (for wafers), and remains in an enviable situation as virtually all its cell manufacturing customer-base rushes to have mono-PERC based capacity to remain competitive.

This is allowing increased investments into cell and module capacity, as one of the few companies today with cell/module expansion plans that exceed 20-GW and are credible.

However, ongoing favouritism from the investment community (retaining valuation and facilitating expansion plans) is not without risk, in particular from wafer ASPs and the level to which the company can remain in control of this to the market.

It is a precarious position to be in, within the value-chain, if companies producing around you (polysilicon and cells in this case) are seeing a more challenging operating environment and prone to loss making with limited scope to return to profitability. At some point, the squeeze does happen, and margins get compressed to levels seen across the whole manufacturing sector; in particular, at each point where module pricing needs to have a downward adjustment to sustain investor returns in utility-scale solar.

Were it not for a highly-profitable wafer business, LONGi would not have the top-rated module supplier status is commands today. However, if module shipments move into the 10-20 GW annual level (as the company is planning for), and cost-control measures can be industry-leading here, then this situation would only be to the company’s advantage.

First Solar

The final company today with AA-rated module supplier status is First Solar, and is the only non Chinese-run company in this top grouping.

Indeed, the company is the only western-run PV company (across every PV manufacturing segment from polysilicon to modules) that can be considered a success-story today. In fact, this unique position is further emphasized when one looks forward over the next 2-3 years in terms of business booked at attractive levels of investment return. I will explain more on this below; however, while most PV manufacturers globally are consumed by filling order books for the next quarter.

First Solar is in the almost unheard-of territory in being sold-out for years ahead, at a time when new Series 6 panel factories are being fully ramped up.
There is not a single PV module supplier globally that would not love to be in this position today.

The success in moving from Series 4 to Series 6 and the billion-dollar investment in new factories with bespoke tooling is a strong part of First Solar’s inclusion at one of the four AA-rated module suppliers today. But, as I discussed above, module shipments alone are not sufficient to be highly rated. AA-rating (especially for any module supplier outside of JinkoSolar that is still commanding a significant GW-scale delta as the number-one by volume) needs finances to be strong, and in this regard, First Solar is in a different league to all other PV companies that rely heavily on module operations for their overall performance.

Any investor-based analysis on First Solar’s books over the past years shows consistent and well-managed operations, and decision-making in terms of upstream/downstream priorities, leading to the make-up of the company today that is focused again on profitable module supply (of Series 6) and the other complementary areas where First Solar has a value-added proposition in the geographies in which the company is strong.

First Solar has taken advantage perfectly with the opportunity that has arisen from the strong utility-drive for solar PV in the US, and much of the pipeline is effectively derisked in this way also. This makes the forward-looking issues (pertinent for the other AA-rated companies above) less questionable. In short, assuming ongoing business-as-usual – and the expected continued fast ramp of module supply from factories being ramped globally – First Solar will comfortably stay in the AA-rating grouping during the next couple of years. Whether the company again becomes the only supplier to be AAA-rated is more likely to depend on how just how profitable Series 6 manufacturing turns out to be in the end.

PV ModuleTech 2019 to explain other 10 A/B-rated module suppliers

For those attending PV ModuleTech 2019 in Penang on 22-23 October 2019, they will be able to hear my take on the other 10 leading PV module suppliers with A or B grades, and what merits their inclusion, what it would take for each to move up or down Bankability Rating grades, and where each company will be at risk going forward.

For anyone currently doing due-diligence on PV module selection for 50-MW-plus utility-scale projects in 2020 and 2021, hopefully this fully independent and unbiased overview will provide some issues they are either not known today (both from a positive and negative viewpoint); or my talk will simply offer valid benchmarking to internal conclusions already reached.

There are still a few remaining places to attend PV ModuleTech 2019 – click on the tabs here to access information on how to attend the event in Penang on 22-23 October 2019.

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Inclusion of privately-held PV module suppliers within PV ModuleTech Bankability Ratings

During the recent series of articles on PV-Tech - outlining the drivers, methodology and validation of the new PV ModuleTech Bankability ratings for PV module suppliers – one of the key inputs required to generate the overall supplier bankability score (and rating class) was the financial strength of each company.

Indeed, to create a useable metric (bankability score, between zero and ten), it is necessary to know both the financial and manufacturing strengths of PV module suppliers. Therefore, it invariably raises questions as to how companies that are publically-traded and privately-held can be benchmarked.

This issue is of course part of a wider debate on how to benchmark all PV module suppliers from a financial standpoint, regardless of whether they are listed or not.

The topic is highly contentious within the PV industry: most of the PV module suppliers today are headquartered in China. In this country alone, PV module suppliers can be listed on Asian stock exchanges, be part of listed entities within which the solar operations (module supply or other sector related) is a minor business unit, or fall under the category of state-owned/controlled. A few of course are listed on New York stock exchanges, but this is becoming a less-desired option now compared to a few years ago.

However, the main questions I got, following the announcement of the four AA-Rated suppliers recently, went along the lines of: The four AA-Rated suppliers are all listed – did you not consider private companies? Others simply asked how private companies were dealt with within the analysis, partly out of curiosity, but also recognising that this is something no-one has addressed with any discipline or vigour until now.

This article describes how public-traded and privately-held PV module suppliers are benchmarked, as part of the overall PV ModuleTech Bankability analysis. In so doing, I will explain the methodology behind the approach, and show how the results were validated and tested. In particular, I will discuss error bounds associated with the new approach.

Let’s start with the obvious question though: Why bother at all?

Why explaining the methodology is key

The subject of benchmarking public and private companies is not new; anywhere, or at any time. Within the PV industry, due-diligence experts within certain financial circles will no doubt have their bespoke means of doing this. Credit ratings suppliers are also readily available to subscribe to (such as Dun & Bradstreet for example), but often they are relied upon only on a case-by-case basis as a means of minimizing risk associated with any payment terms or contract negotiations.

It is probably fair to say that, until now, no-one has proposed (or likely developed) any robust method to benchmark PV module suppliers, whether public or private. It is likely those that needed some kind of audit trail on private entities have relied upon accessing company accounts as required, ideally third-party verified.

Configuring a means of benchmarking any PV module supplier – at any time and with competitors that are public-traded or privately-held – is a whole new proposition; no doubt, many would suggest ideas but fall short by not disseminating any form of validation or gathering good source data in the first place.

Within the rest of this article, I will explain systematically how this challenge is addressed within the PV ModuleTech Bankability Ratings; why the issue turns out not to be as important as many fear; and finally, why having a practical means of getting up-to-date numbers from privately-held companies rather dominates the problem in the first instance.

Before diving into the details, I will now explain why the whole issue is not quite as critical today, especially when considering large-scale solar module supplier selection.

Framing the importance of privately-held PV module suppliers

In looking at the 14 PV module suppliers that have ‘A’ or ‘B’ ratings (i.e. fall outside the Speculative ‘C’ zone), only two of these companies are privately held today (Trina Solar and JA Solar). The rest are public, or part of parent companies that are listed (and by default act as module supplier unit guarantor). 

Recall that the full list of 14 companies will be revealed during the forthcoming PV ModuleTech 2019 event in Penang, Malaysia on 22-23 October 2019.

In fact, even the two companies (out of the top-14) that are the exception (Trina Solar and JA Solar) have a fully-audited multi-year track record of financial operations until the past 2-3 years when each company delisted: Trina until the end of 2016, JA Solar until the end of 2017. 

During the intervening time period, it would be fair to say that neither company has made any radical changes to its business operations or dominant source of revenues; nor have they diversified operations through any acquisitions or mergers. In short: how these companies operate today is likely to be very similar to the period before they delisted.

Therefore, even if there was no appetite to do any privately-held benchmarking, it would almost suffice to merely pro-rate the performance of Trina Solar and JA Solar for the current (intermediate) time-period (between delisting, up to the expected relisting in China/Asia in the near future), starting with all the historic filings that reside at the SEC.

The good news is that, in the case of these two companies, the pro-rated approach comes out within +/-5% of the method outlined below in the case of privately-held PV module supplier companies. I will likely explain this in a dedicated PV-Tech article in the coming weeks.

Putting privately-held suppliers into perspective

The vast majority of the privately-held PV module suppliers today simply don’t have the manufacturing strength to be ‘A’ or ‘B’ class rated, regardless of their finances. This was one of the fundamental drivers behind the PV ModuleTech Bankability Ratings: to be a top-performer, both manufacturing and financial strength have to be in place going back 12-24 months.

This was critical to differentiate between the companies that can supply to 300-400 MW utility sites, and those that barely produce this quantity over 12 months, or choose to sell in kW-volumes to residential rooftop markets globally without ever adding any new capacity, diversifying globally, or investing in R&D, for example.

Therefore, if the goal is simply to have a short-list of 10-20 PV module suppliers that are in the running for 100-MW-plus utility-scale projects today, it is possible to draw a line through about 95% of the PV module supplier universe, based entirely on manufacturing score (risk of supply).

However, there are still many strong reasons to develop a method to account for any privately-held company: there is no guarantee that the 14 companies currently A/B graded will remain listed in the future; to account for the 5-10 that fall into the border of the B/C grades; and to allow objective analysis and peer-based ranking of the 50-100 module suppliers that are often heard claiming to be on somebody’s ‘tier-1’ module supplier list. (This appears to be one of the most requested issues based on industry feedback to the new PV ModuleTech Bankability Ratings.)

Retaining the Altman Z starting point

I outlined in (previous articles on PV-Tech) why the Altman Z method (Altman, E.I., Journal of Finance, Vol. XXIII, No. 4, pp 589-609, 1968) was adopted as the starting point in the financial score analysis within the PV ModuleTech Bankability Ratings. Here is a quick summary again.

Most third-party industry firms – and plenty that have a form of bias that precludes them from being classed as independent – that have sought to benchmark PV module suppliers until now have used the Altman Z scores, confined to the 1968 ratios/coefficients/zones that were proposed by Altman over fifty years ago to assess the likelihood of bankruptcy for manufacturing companies with turnover above a certain threshold.

No assumption was made whether this is the best approach for PV module suppliers now, or in the past. The method was used simply because it has been, by far, the most frequently cited and adopted approach used across a wide range of sectors. Everyone identifies with it; the methodology is crystal-clear; and anyone can yield known data/scores from company filings, with limited accounting knowledge. The use of it avoids doubt, uncertainty and questioning; it offers a starting point that is credible and workable.

The way in which we took the Altman Z scores for public-listed PV module suppliers (or parent entities) and converted the scores (based on number of standard deviations from a mean value) to a PV-specific 0-10 scoring system, was covered recently in the article on (PV-Tech here). This is probably the first time this type of analysis has been proposed within the sector.

https://www.pv-tech.org/editors-blog/pv-tech-research-ranks-pv-module-suppliers-by-financial-health

The mapping to the new 0-10 band – and making it more aligned to PV industry operating zone terminology – was done entirely to have a means to then combine the financial scores with the manufacturing scores (also ranked 0-10) in the overall bankability calculation. It completed the quantitative nature of the studies, and allowed direct benchmarking to be done across a host of different areas.

The key thing to note though is as follows: the PV financial output in the PV ModuleTech Bankability studies is simply using the Altman Z calculations, then mapped to a 0-10 PV scoring band. Bankrupt companies score zero; chronic performing companies typically score below one. Any score above five (or 50%) is in what I refer to as the ‘Comfort Zone’ of PV module supplier operations, as seen looking at sector-specific data going back 5-10 years.

Therefore, when the challenge of benchmarking privately-held PV module suppliers was addressed, an obvious route was to align with the Altman approach, but look at a practical and approximate variant, using readily-obtainable financial data from private companies.

Reality-check on privately-held companies

Before I proceed to explaining the new approach and its validation, it is perhaps prudent to get some reality on what type of information one can expect to get from any privately-held organization – PV or otherwise – as this ultimately guides what any model can be based upon.

Simply put, if you can’t access full company accounts for any private company at any time, don’t set up a model that uses this as an essential pre-requisite. Don’t base any model also on a reporting requirement that is country-specific, even if there is a platform that one can go to in order to get (often well-outdated) company accounts. Don’t think for a second that private companies’ reporting is remotely in line with listed companies, or is even available covering the past 12-18 months (at best). And don’t use company-specific terminology (such as from a Dun & Bradstreet report for example) that is source-specific and not amenable to widespread benchmarking.

Therefore, the final approach adopted was guided by two key themes discussed above: first, equate with the public-listed specific Altman ratio-discriminant model; second, choose inputs that can be realistically obtained from companies (without relying upon a full audited set of accounts every three months dropping into your inbox!).

The new methodology adopted

It should be mentioned that there is an Altman equivalent for privately-held companies (see for example, Altman, E.I. (2000) in Handbook of Research Methods and Applications in Empirical Finance, Vol. 5). It retains the concept of summing terms based on liquidity, leverage, profitability, solvency and activity, but substitutes the working capital and market capitalization entries with alternate numbers/terms. It requires eight accounting terms to be known (compared to the public listed version that is based on seven terms).

It also creates different scoring values and zones, which makes any benchmarking even more challenging. In fact, the best that can be done is to use each model in isolation; not collectively.

To address the challenge of preserving the Altman ratio-based starting point, I opted to look at a modification of the public-listed Altman equation that reduced the terms and ratios to a minimum, while keeping the error bounds on the final financial score within certain acceptable bounds.

In essence, what is the minimum number of terms/ratios that allows getting scores to within +/- 10% of what they would be had all the terms/ratios been applied. For example, this allows us to decouple the market-cap issue, and not try to find any equivalent value for private companies (such as the book value of equity).

This was done by looking at all the Altman Z scores accumulated in-house for listed PV module suppliers (or parent entities), and identifying the significance of the terms (while also factoring in the type of data that that could be expected from private companies in practice, so they were not seen to be divulging too much confidential information to the outside world).

Importance of identifying different company profile groupings

In looking at all the PV module suppliers (and parent entities) that are publically-listed, there is of course a wide range of different business models in place. For example, you would never seek to find any commonality with SunPower and Yingli Green, or First Solar and BYD. 

Therefore, to establish any short-cut to reaching financial strength scores, it is first necessary to form test groups where selected companies have similar characteristics and can be correctly benchmarked or pro-rated.

As a prelude here, it should be pointed out that the fundamental driver is to benchmark PV module suppliers mainly in China that are not public-listed, such as JA Solar and Trina Solar; but also to account for a grouping of 5-10 other suppliers that may be perceived as competition for non-residential (in particular large-scale) business today outside China. Understanding this is key, as it helps increase the relevance and accuracy of the approach undertaken, and also avoids wasting time on PV module suppliers that are not in the mix for investor-driven projects.

It should be pointed out also that the requirement to broaden the scope for Japanese, South Korean or Taiwanese module suppliers is less important because virtually all PV module suppliers across these regions are part of larger public-listed organizations. The question of India is also an anomaly of sorts, with the financial health of Indian companies in general being somewhat unique; coupled with the fact that few Indian PV module suppliers have any appreciable market-share today outside India in terms of large-scale utility-based site deployment.

Returning then to the China challenge, the list of traceable public-listed PV module suppliers (or parent entities) was divided up into three different focus groups based on company profile (how much PV module supply dominates proceedings) and known operational performance (more on this topic below).

PV module supplier categories

In terms of splitting out the public-listed PV module suppliers, the first category was based upon current (or former) US-listed PV-sector revenue-dominant suppliers, and included JinkoSolar, Canadian Solar, JA Solar and Trina Solar.

The next group included Chinese-listed entities of which PV operations were a part (business unit or otherwise), such as Talesun, Risen, Astronergy and Jinergy. 
The final grouping was specific to Chinese PV module suppliers whose operations today were heavily constrained by ailing financial performance (including for example, Yingli Green).

Other companies were assessed but largely fell into one of the three categories above, or were clear outliers (extreme cases) and should not be used in any benchmarking exercise.

Keeping the goal at +/-10% equivalence to the scoring generated from the initial 5-ratio Altman Z approach, the number of ratios was able to be reduced from five to three for each grouping. (Note, the final three ratios chosen are the same for each grouping selected, not varied.)

Once this was done, the final coefficients for the three chosen ratios (noting that a scaling constant is essential now) were determined using a routine least-squares linear regression analysis, where the ‘residual’ is the difference between the original full 5-ratio Altman derived F score and the new reduced 3-ratio approach.

Therefore, unique weighting coefficients (and constants) are derived for the three different groupings, which should not come as any surprise, given the different operating models at play across the selected company groups chosen. Essentially, different ratios dominate when public-listed companies are performing well, compared to when they are in trouble.

With the three fixed numbers determined (two ratio coefficients and an additive constant) for each of the three ‘test’ groups, the only question was to determine the level of accuracy for the reduced-fit model when applied to the known dataset (public-listed PV module suppliers/parent-companies).

I will explain this more clearly below now, in reference to the figure shown also.

Validation of the model

Being able to show the validation in a simple graphical format was considered fundamental, as this allows anyone to see how accurate the approach is and make their mind up as to the approach used in the ratings system.

To convey this, I have plotted (on the x-axis) the original (full-analysis) Altman Z scores going back 3-4 years for each company, converted to the 0-10 (F) scoring band as explained previously; and on the y-axis, the equivalent 0-10 financial (F) score, using the new shortened variant (three ratios, with the best-fit coefficients/constant) that is to be used to normalize scores from privately-held companies.

The match with the shortened variant to the original Z score value is then a test of the approach validity. This is shown in the graphic below, where the 1:1 line-fit reference would represent 100% accuracy. How much the points deviate then from the 1:1 line-fit is a useful visual measure here of the approach accuracy/validity (without having to rely on statistical terminology for now).

Shown also in the scatter-plot are two dashed straight lines above and below the 1:1 fit. These show the upper/lower bounds at the +/-10% accuracy levels for any given value.

The conclusion here for now is that it is possible to use a reduced model (down to four values, excluding market-cap, and three ratios), that allows accuracy of the final financial score (0-10) within +/-10% accuracy; as long as companies are properly assigned to comparative groupings.

Red flags are rarely wrong

Indeed, the key is knowing which public-listed PV module supplier grouping to benchmark against, for any privately-held company that is likely to be competing globally for large-scale site deployment.

To do this, one does need good a-priori knowledge of the companies in question. This is probably a barrier to many third-party organizations that may have strong accounting or credit-benchmarking skills, but are not connected or knowledgeable enough of the sector. 

It also comes over in many of the legacy Altman Z comparisons done in the sector that these can lack a good dose of reality-checking, and can be comprised of entities no longer actually making solar modules!

Anyone embedded in day-to-day PV dealings will know intimately that there are many ‘signs’ that are indicative of how a PV module supplier is performing from an operational standpoint, without needing to be privy to any financial data!

In this regard, market-related activities tend to be most pronounced when PV module suppliers are going through difficulties, and are often accompanied by issues such as: lack of capacity expansions; reductions in headcount; litigation in respect of contract deliverables; cash-constrained enforcement limiting any technology upgrades to existing capacity; or unexpected and abrupt C-level resignations or forced removal from office.

However, in such extreme cases, it is somewhat futile to seek to benchmark these companies. The risk in engaging with this subgroup is considerable and should be clear to anyone looking at the sector. Or at lead, it should be…

Sadly, the PV industry appears to be highly adept in overlooking often blindingly obvious red-flags that hover around a number of PV module suppliers (many of whom have been included in ‘tier-1’ type listings in the past few years).

Aside from rather questionable due-diligence (assuming this even took place), the reason that distressed and technically-bankrupt PV module suppliers still seem to sell product for large-scale utility projects must surely come down to one simple fact: price (ASP). 

Related to this is product availability (limited pipeline owing to sales inefficiency), and perhaps payment terms that end up being hugely in favour of the buyer who ends up concluding that they have nothing to lose.

But in these cases, it is likely someone will indeed lose out over the next 25 years of desired site yield and targeted performance ratios, even if the original buyer of the modules has long since cashed in on their up-front investment and exposure to risk.

Applying to the private PV module supplier universe

In summary, just four data-points (two from the balance sheet, two from the income statement) allows for fairly good benchmarking of private companies. In fact, it gets somewhat easier if the company is mostly a pure-play module supplier (revenues dominated by PV module sales). In this case, revenues themselves are of course easy to estimate (normally to within +/-10%) based on annual module shipments and blended ASP sector trends.

Ultimately however, the driver is not to rank the 100-plus companies with sub-100-MW annual module shipment volumes (normally confined to their local markets and rooftops), alongside any 5-10 GW global utility-scale module supplier. This comparison benefits no-one at all, is highly misleading, and incorrectly normalizes companies based purely on them being able to produce/source/ship a PV module.

Going forward, I will be looking at validating further the new approach when required, and also doing any changes that increase its accuracy (or indeed flagging any one-off outliers that are simply extreme values and have no means of aligning, such as chronic-performing near-bankrupt companies).

Forthcoming PV ModuleTech Bankability findings

During the next couple of months, expect to read more on PV-Tech about the new PV ModuleTech Bankability Ratings. The goal for now is simply to explain clearly how to rate, rank and assign classification to PV module suppliers, and to provide validation and discussion at every stage of the process.

I will soon be addressing one of the other frequent questions received in the past few weeks: How many so-called ‘tier-1’ companies are unbankable? This question is of course not as black-and-white as many suspect. I will explain more on this topic shortly on PV-Tech, but very quickly for now…

Over the past ten-years-plus, there have been various ‘tier-1’ type listings generated by different organizations, some of the first being muted on PV-Tech back in 2010. Some are widely circulated on social media platforms; others are held in-house and rarely seen. 

More than 50 companies today can be heard claiming to be ‘tier-1’, and within this list, there is a wide range of company strengths and weaknesses.

For example, can one really consider companies like Risen Energy and Winaico (both on ‘tier-1-type’ lists) to be remotely comparable? Therefore, one can understand why there is so much confusion about this somewhat redundant terminology; more on this shortly with supporting analysis and why indeed it may be time for the industry as a whole to finally consign this classification to the history books. 

The next major company-name disclosure from the PV ModuleTech Bankability Ratings will occur during my presentation at the forthcoming PV ModuleTech 2019 meeting in Penang, Malaysia on 22-23 October 2019. Details on how to attend this event can be found here.

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Inclusion of privately-held PV module suppliers within PV ModuleTech Bankability Ratings

During the recent series of articles on PV-Tech - outlining the drivers, methodology and validation of the new PV ModuleTech Bankability ratings for PV module suppliers – one of the key inputs required to generate the overall supplier bankability score (and rating class) was the financial strength of each company.

Indeed, to create a useable metric (bankability score, between zero and ten), it is necessary to know both the financial and manufacturing strengths of PV module suppliers. Therefore, it invariably raises questions as to how companies that are publically-traded and privately-held can be benchmarked.

This issue is of course part of a wider debate on how to benchmark all PV module suppliers from a financial standpoint, regardless of whether they are listed or not.

The topic is highly contentious within the PV industry: most of the PV module suppliers today are headquartered in China. In this country alone, PV module suppliers can be listed on Asian stock exchanges, be part of listed entities within which the solar operations (module supply or other sector related) is a minor business unit, or fall under the category of state-owned/controlled. A few of course are listed on New York stock exchanges, but this is becoming a less-desired option now compared to a few years ago.

However, the main questions I got, following the announcement of the four AA-Rated suppliers recently, went along the lines of: The four AA-Rated suppliers are all listed – did you not consider private companies? Others simply asked how private companies were dealt with within the analysis, partly out of curiosity, but also recognising that this is something no-one has addressed with any discipline or vigour until now.

This article describes how public-traded and privately-held PV module suppliers are benchmarked, as part of the overall PV ModuleTech Bankability analysis. In so doing, I will explain the methodology behind the approach, and show how the results were validated and tested. In particular, I will discuss error bounds associated with the new approach.

Let’s start with the obvious question though: Why bother at all?

Why explaining the methodology is key

The subject of benchmarking public and private companies is not new; anywhere, or at any time. Within the PV industry, due-diligence experts within certain financial circles will no doubt have their bespoke means of doing this. Credit ratings suppliers are also readily available to subscribe to (such as Dun & Bradstreet for example), but often they are relied upon only on a case-by-case basis as a means of minimizing risk associated with any payment terms or contract negotiations.

It is probably fair to say that, until now, no-one has proposed (or likely developed) any robust method to benchmark PV module suppliers, whether public or private. It is likely those that needed some kind of audit trail on private entities have relied upon accessing company accounts as required, ideally third-party verified.

Configuring a means of benchmarking any PV module supplier – at any time and with competitors that are public-traded or privately-held – is a whole new proposition; no doubt, many would suggest ideas but fall short by not disseminating any form of validation or gathering good source data in the first place.

Within the rest of this article, I will explain systematically how this challenge is addressed within the PV ModuleTech Bankability Ratings; why the issue turns out not to be as important as many fear; and finally, why having a practical means of getting up-to-date numbers from privately-held companies rather dominates the problem in the first instance.

Before diving into the details, I will now explain why the whole issue is not quite as critical today, especially when considering large-scale solar module supplier selection.

Framing the importance of privately-held PV module suppliers

In looking at the 14 PV module suppliers that have ‘A’ or ‘B’ ratings (i.e. fall outside the Speculative ‘C’ zone), only two of these companies are privately held today (Trina Solar and JA Solar). The rest are public, or part of parent companies that are listed (and by default act as module supplier unit guarantor). 

Recall that the full list of 14 companies will be revealed during the forthcoming PV ModuleTech 2019 event in Penang, Malaysia on 22-23 October 2019.

In fact, even the two companies (out of the top-14) that are the exception (Trina Solar and JA Solar) have a fully-audited multi-year track record of financial operations until the past 2-3 years when each company delisted: Trina until the end of 2016, JA Solar until the end of 2017. 

During the intervening time period, it would be fair to say that neither company has made any radical changes to its business operations or dominant source of revenues; nor have they diversified operations through any acquisitions or mergers. In short: how these companies operate today is likely to be very similar to the period before they delisted.

Therefore, even if there was no appetite to do any privately-held benchmarking, it would almost suffice to merely pro-rate the performance of Trina Solar and JA Solar for the current (intermediate) time-period (between delisting, up to the expected relisting in China/Asia in the near future), starting with all the historic filings that reside at the SEC.

The good news is that, in the case of these two companies, the pro-rated approach comes out within +/-5% of the method outlined below in the case of privately-held PV module supplier companies. I will likely explain this in a dedicated PV-Tech article in the coming weeks.

Putting privately-held suppliers into perspective

The vast majority of the privately-held PV module suppliers today simply don’t have the manufacturing strength to be ‘A’ or ‘B’ class rated, regardless of their finances. This was one of the fundamental drivers behind the PV ModuleTech Bankability Ratings: to be a top-performer, both manufacturing and financial strength have to be in place going back 12-24 months.

This was critical to differentiate between the companies that can supply to 300-400 MW utility sites, and those that barely produce this quantity over 12 months, or choose to sell in kW-volumes to residential rooftop markets globally without ever adding any new capacity, diversifying globally, or investing in R&D, for example.

Therefore, if the goal is simply to have a short-list of 10-20 PV module suppliers that are in the running for 100-MW-plus utility-scale projects today, it is possible to draw a line through about 95% of the PV module supplier universe, based entirely on manufacturing score (risk of supply).

However, there are still many strong reasons to develop a method to account for any privately-held company: there is no guarantee that the 14 companies currently A/B graded will remain listed in the future; to account for the 5-10 that fall into the border of the B/C grades; and to allow objective analysis and peer-based ranking of the 50-100 module suppliers that are often heard claiming to be on somebody’s ‘tier-1’ module supplier list. (This appears to be one of the most requested issues based on industry feedback to the new PV ModuleTech Bankability Ratings.)

Retaining the Altman Z starting point

I outlined in (previous articles on PV-Tech) why the Altman Z method (Altman, E.I., Journal of Finance, Vol. XXIII, No. 4, pp 589-609, 1968) was adopted as the starting point in the financial score analysis within the PV ModuleTech Bankability Ratings. Here is a quick summary again.

Most third-party industry firms – and plenty that have a form of bias that precludes them from being classed as independent – that have sought to benchmark PV module suppliers until now have used the Altman Z scores, confined to the 1968 ratios/coefficients/zones that were proposed by Altman over fifty years ago to assess the likelihood of bankruptcy for manufacturing companies with turnover above a certain threshold.

No assumption was made whether this is the best approach for PV module suppliers now, or in the past. The method was used simply because it has been, by far, the most frequently cited and adopted approach used across a wide range of sectors. Everyone identifies with it; the methodology is crystal-clear; and anyone can yield known data/scores from company filings, with limited accounting knowledge. The use of it avoids doubt, uncertainty and questioning; it offers a starting point that is credible and workable.

The way in which we took the Altman Z scores for public-listed PV module suppliers (or parent entities) and converted the scores (based on number of standard deviations from a mean value) to a PV-specific 0-10 scoring system, was covered recently in the article on (PV-Tech here). This is probably the first time this type of analysis has been proposed within the sector.

https://www.pv-tech.org/editors-blog/pv-tech-research-ranks-pv-module-suppliers-by-financial-health

The mapping to the new 0-10 band – and making it more aligned to PV industry operating zone terminology – was done entirely to have a means to then combine the financial scores with the manufacturing scores (also ranked 0-10) in the overall bankability calculation. It completed the quantitative nature of the studies, and allowed direct benchmarking to be done across a host of different areas.

The key thing to note though is as follows: the PV financial output in the PV ModuleTech Bankability studies is simply using the Altman Z calculations, then mapped to a 0-10 PV scoring band. Bankrupt companies score zero; chronic performing companies typically score below one. Any score above five (or 50%) is in what I refer to as the ‘Comfort Zone’ of PV module supplier operations, as seen looking at sector-specific data going back 5-10 years.

Therefore, when the challenge of benchmarking privately-held PV module suppliers was addressed, an obvious route was to align with the Altman approach, but look at a practical and approximate variant, using readily-obtainable financial data from private companies.

Reality-check on privately-held companies

Before I proceed to explaining the new approach and its validation, it is perhaps prudent to get some reality on what type of information one can expect to get from any privately-held organization – PV or otherwise – as this ultimately guides what any model can be based upon.

Simply put, if you can’t access full company accounts for any private company at any time, don’t set up a model that uses this as an essential pre-requisite. Don’t base any model also on a reporting requirement that is country-specific, even if there is a platform that one can go to in order to get (often well-outdated) company accounts. Don’t think for a second that private companies’ reporting is remotely in line with listed companies, or is even available covering the past 12-18 months (at best). And don’t use company-specific terminology (such as from a Dun & Bradstreet report for example) that is source-specific and not amenable to widespread benchmarking.

Therefore, the final approach adopted was guided by two key themes discussed above: first, equate with the public-listed specific Altman ratio-discriminant model; second, choose inputs that can be realistically obtained from companies (without relying upon a full audited set of accounts every three months dropping into your inbox!).

The new methodology adopted

It should be mentioned that there is an Altman equivalent for privately-held companies (see for example, Altman, E.I. (2000) in Handbook of Research Methods and Applications in Empirical Finance, Vol. 5). It retains the concept of summing terms based on liquidity, leverage, profitability, solvency and activity, but substitutes the working capital and market capitalization entries with alternate numbers/terms. It requires eight accounting terms to be known (compared to the public listed version that is based on seven terms).

It also creates different scoring values and zones, which makes any benchmarking even more challenging. In fact, the best that can be done is to use each model in isolation; not collectively.

To address the challenge of preserving the Altman ratio-based starting point, I opted to look at a modification of the public-listed Altman equation that reduced the terms and ratios to a minimum, while keeping the error bounds on the final financial score within certain acceptable bounds.

In essence, what is the minimum number of terms/ratios that allows getting scores to within +/- 10% of what they would be had all the terms/ratios been applied. For example, this allows us to decouple the market-cap issue, and not try to find any equivalent value for private companies (such as the book value of equity).

This was done by looking at all the Altman Z scores accumulated in-house for listed PV module suppliers (or parent entities), and identifying the significance of the terms (while also factoring in the type of data that that could be expected from private companies in practice, so they were not seen to be divulging too much confidential information to the outside world).

Importance of identifying different company profile groupings

In looking at all the PV module suppliers (and parent entities) that are publically-listed, there is of course a wide range of different business models in place. For example, you would never seek to find any commonality with SunPower and Yingli Green, or First Solar and BYD. 

Therefore, to establish any short-cut to reaching financial strength scores, it is first necessary to form test groups where selected companies have similar characteristics and can be correctly benchmarked or pro-rated.

As a prelude here, it should be pointed out that the fundamental driver is to benchmark PV module suppliers mainly in China that are not public-listed, such as JA Solar and Trina Solar; but also to account for a grouping of 5-10 other suppliers that may be perceived as competition for non-residential (in particular large-scale) business today outside China. Understanding this is key, as it helps increase the relevance and accuracy of the approach undertaken, and also avoids wasting time on PV module suppliers that are not in the mix for investor-driven projects.

It should be pointed out also that the requirement to broaden the scope for Japanese, South Korean or Taiwanese module suppliers is less important because virtually all PV module suppliers across these regions are part of larger public-listed organizations. The question of India is also an anomaly of sorts, with the financial health of Indian companies in general being somewhat unique; coupled with the fact that few Indian PV module suppliers have any appreciable market-share today outside India in terms of large-scale utility-based site deployment.

Returning then to the China challenge, the list of traceable public-listed PV module suppliers (or parent entities) was divided up into three different focus groups based on company profile (how much PV module supply dominates proceedings) and known operational performance (more on this topic below).

PV module supplier categories

In terms of splitting out the public-listed PV module suppliers, the first category was based upon current (or former) US-listed PV-sector revenue-dominant suppliers, and included JinkoSolar, Canadian Solar, JA Solar and Trina Solar.

The next group included Chinese-listed entities of which PV operations were a part (business unit or otherwise), such as Talesun, Risen, Astronergy and Jinergy. 
The final grouping was specific to Chinese PV module suppliers whose operations today were heavily constrained by ailing financial performance (including for example, Yingli Green).

Other companies were assessed but largely fell into one of the three categories above, or were clear outliers (extreme cases) and should not be used in any benchmarking exercise.

Keeping the goal at +/-10% equivalence to the scoring generated from the initial 5-ratio Altman Z approach, the number of ratios was able to be reduced from five to three for each grouping. (Note, the final three ratios chosen are the same for each grouping selected, not varied.)

Once this was done, the final coefficients for the three chosen ratios (noting that a scaling constant is essential now) were determined using a routine least-squares linear regression analysis, where the ‘residual’ is the difference between the original full 5-ratio Altman derived F score and the new reduced 3-ratio approach.

Therefore, unique weighting coefficients (and constants) are derived for the three different groupings, which should not come as any surprise, given the different operating models at play across the selected company groups chosen. Essentially, different ratios dominate when public-listed companies are performing well, compared to when they are in trouble.

With the three fixed numbers determined (two ratio coefficients and an additive constant) for each of the three ‘test’ groups, the only question was to determine the level of accuracy for the reduced-fit model when applied to the known dataset (public-listed PV module suppliers/parent-companies).

I will explain this more clearly below now, in reference to the figure shown also.

Validation of the model

Being able to show the validation in a simple graphical format was considered fundamental, as this allows anyone to see how accurate the approach is and make their mind up as to the approach used in the ratings system.

To convey this, I have plotted (on the x-axis) the original (full-analysis) Altman Z scores going back 3-4 years for each company, converted to the 0-10 (F) scoring band as explained previously; and on the y-axis, the equivalent 0-10 financial (F) score, using the new shortened variant (three ratios, with the best-fit coefficients/constant) that is to be used to normalize scores from privately-held companies.

The match with the shortened variant to the original Z score value is then a test of the approach validity. This is shown in the graphic below, where the 1:1 line-fit reference would represent 100% accuracy. How much the points deviate then from the 1:1 line-fit is a useful visual measure here of the approach accuracy/validity (without having to rely on statistical terminology for now).

Shown also in the scatter-plot are two dashed straight lines above and below the 1:1 fit. These show the upper/lower bounds at the +/-10% accuracy levels for any given value.

The conclusion here for now is that it is possible to use a reduced model (down to four values, excluding market-cap, and three ratios), that allows accuracy of the final financial score (0-10) within +/-10% accuracy; as long as companies are properly assigned to comparative groupings.

Red flags are rarely wrong

Indeed, the key is knowing which public-listed PV module supplier grouping to benchmark against, for any privately-held company that is likely to be competing globally for large-scale site deployment.

To do this, one does need good a-priori knowledge of the companies in question. This is probably a barrier to many third-party organizations that may have strong accounting or credit-benchmarking skills, but are not connected or knowledgeable enough of the sector. 

It also comes over in many of the legacy Altman Z comparisons done in the sector that these can lack a good dose of reality-checking, and can be comprised of entities no longer actually making solar modules!

Anyone embedded in day-to-day PV dealings will know intimately that there are many ‘signs’ that are indicative of how a PV module supplier is performing from an operational standpoint, without needing to be privy to any financial data!

In this regard, market-related activities tend to be most pronounced when PV module suppliers are going through difficulties, and are often accompanied by issues such as: lack of capacity expansions; reductions in headcount; litigation in respect of contract deliverables; cash-constrained enforcement limiting any technology upgrades to existing capacity; or unexpected and abrupt C-level resignations or forced removal from office.

However, in such extreme cases, it is somewhat futile to seek to benchmark these companies. The risk in engaging with this subgroup is considerable and should be clear to anyone looking at the sector. Or at lead, it should be…

Sadly, the PV industry appears to be highly adept in overlooking often blindingly obvious red-flags that hover around a number of PV module suppliers (many of whom have been included in ‘tier-1’ type listings in the past few years).

Aside from rather questionable due-diligence (assuming this even took place), the reason that distressed and technically-bankrupt PV module suppliers still seem to sell product for large-scale utility projects must surely come down to one simple fact: price (ASP). 

Related to this is product availability (limited pipeline owing to sales inefficiency), and perhaps payment terms that end up being hugely in favour of the buyer who ends up concluding that they have nothing to lose.

But in these cases, it is likely someone will indeed lose out over the next 25 years of desired site yield and targeted performance ratios, even if the original buyer of the modules has long since cashed in on their up-front investment and exposure to risk.

Applying to the private PV module supplier universe

In summary, just four data-points (two from the balance sheet, two from the income statement) allows for fairly good benchmarking of private companies. In fact, it gets somewhat easier if the company is mostly a pure-play module supplier (revenues dominated by PV module sales). In this case, revenues themselves are of course easy to estimate (normally to within +/-10%) based on annual module shipments and blended ASP sector trends.

Ultimately however, the driver is not to rank the 100-plus companies with sub-100-MW annual module shipment volumes (normally confined to their local markets and rooftops), alongside any 5-10 GW global utility-scale module supplier. This comparison benefits no-one at all, is highly misleading, and incorrectly normalizes companies based purely on them being able to produce/source/ship a PV module.

Going forward, I will be looking at validating further the new approach when required, and also doing any changes that increase its accuracy (or indeed flagging any one-off outliers that are simply extreme values and have no means of aligning, such as chronic-performing near-bankrupt companies).

Forthcoming PV ModuleTech Bankability findings

During the next couple of months, expect to read more on PV-Tech about the new PV ModuleTech Bankability Ratings. The goal for now is simply to explain clearly how to rate, rank and assign classification to PV module suppliers, and to provide validation and discussion at every stage of the process.

I will soon be addressing one of the other frequent questions received in the past few weeks: How many so-called ‘tier-1’ companies are unbankable? This question is of course not as black-and-white as many suspect. I will explain more on this topic shortly on PV-Tech, but very quickly for now…

Over the past ten-years-plus, there have been various ‘tier-1’ type listings generated by different organizations, some of the first being muted on PV-Tech back in 2010. Some are widely circulated on social media platforms; others are held in-house and rarely seen. 

More than 50 companies today can be heard claiming to be ‘tier-1’, and within this list, there is a wide range of company strengths and weaknesses.

For example, can one really consider companies like Risen Energy and Winaico (both on ‘tier-1-type’ lists) to be remotely comparable? Therefore, one can understand why there is so much confusion about this somewhat redundant terminology; more on this shortly with supporting analysis and why indeed it may be time for the industry as a whole to finally consign this classification to the history books. 

The next major company-name disclosure from the PV ModuleTech Bankability Ratings will occur during my presentation at the forthcoming PV ModuleTech 2019 meeting in Penang, Malaysia on 22-23 October 2019. Details on how to attend this event can be found here.

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Jinko, First Solar, LONGi and Canadian Solar revealed as top AA-Rated bankable PV module suppliers

The PV-Tech market research team can now reveal that the four solar PV module suppliers meeting AA-Rated bankability status are JinkoSolar, First Solar, LONGi Solar and Canadian Solar.

In the first quarterly release of the PV ModuleTech Bankability Ratings, effective Q3’19, no module suppliers qualify in the highest AAA-Rated band, with just four companies (mentioned above) meeting the next-highest rating of AA.

The company names were revealed this week during a set of two webinars I delivered, explaining the methodology, validation and output underpinning the new PV ModuleTech Bankability Ratings system that scores/grades and benchmarks any PV module supplier in the industry today.

This article provides further details on the number of companies meeting ‘A’ and ‘B’ grade status; the two most important grading categories for bankable PV module suppliers to commercial, industrial and utility PV sites. I will also show historic trends of the four leading AA-Rated companies forming the key results from the Q3’19 bankability rankings generated by the PV-Tech research team.

Why generate a Bankability Ratings system for the PV industry now?

For those that dialled in and listened to either of the webinars I delivered this week, much was spoken about the need for a credible, fully-independent, transparent and professional ranking system to differentiate between the hundreds of companies selling PV modules today; and also within the high-number (40-50) of PV module supplier currently claiming to be on someone’s tier-1-type membership grouping.

Occasionally, during the series of six articles I posted on PV-Tech between 30 June and 8 August 2019 (starting here, and ending here), I alluded to the chronic need for the PV industry to mature from the somewhat academic approach of ranking and benchmarking PV module suppliers. As the stakes get higher (the more the industry moves to 100MW-plus utility site deployment as the norm), the requirement to differentiate between suppliers becomes even more paramount.

During the webinars, I pointed out that the role of such benchmarking platforms should be firmly to allow investors, banks, project developers and EPCs to short-list potential suppliers during the initial stage of the overall module supplier selection process. This should provide clear guidance as to the financial and manufacturing (supply in particular) strengths and weaknesses of potential module suppliers, and crucially, how they benchmark relative to one another today, and over the past 12-18 months.

How banks and lenders (and of course developers and EPCs) generate their short-lists is their business, but few have sufficient (and independent) means of doing this to everyone’s satisfaction, or in keeping track of changes to their select group of PV module suppliers as changes occur within the sector.

It has alarmed me more than once over the years to scan through lists of bank’s ‘approved’ PV module suppliers, only to learn that their lists had not been changed for over two years, and that many on the lists were technically bankrupt and going through Chinese-style asset reassignment to a new owner-entity.

The short-listing – or whitelist generation – phase ultimately sets the basis for proper module supplier due-diligence and final choice for site delivery. The due-diligence phase is where the IE’s, auditors, reliability testing and certification bodies enter the scene. This grouping typically performs steps here to a very high standard, and many in fact are able (by virtue of business volumes accrued over the years) to generate their own ‘rankings’ or ‘top-performer’ lists. However, these are based entirely on work these bodies are contracted to do at any given time.

Therefore, like any competitive analysis, the key issue is how and when to use the output best, rather than to extend optimistically the scope and expectations from any single part of the whole module-selection process.

In the webinars, I used the example of Yingli Green to show how a company, that had been on several tier-1-type or top-performer listings until 2016, had in fact declined to our speculative risk grade category in 2014, and had been in the highest risk-category (C-Rated) since 2017. While Yingli Green was used as a case-study here, there are countless other module suppliers that have been known to shout loudly about being a tier-1 module supplier, but were in fact technically insolvent and exhibiting chronic financial results.

It seems incredible that the PV industry has been operating in this manner for the past 10 years or so, and in particular when solar moved into asset-class territory, and out of the cottage-industry residential FIT-frenzy that stimulated its initial commercial growth phase (where bankability was barely relevant).

Ultimately then, the driver for the PV ModuleTech Bankability Ratings was to provide full and transparent benchmarking of any PV module supplier (selling to commercial, industrial and utility segments globally); without any bias, prejudice, naïve assumptions or loaded pre-conditions of entry into a media-hyped membership grouping.

Fundamental to this entire process is being able to correctly balance the contributions from module supply (manufacturing) and corporate solvency (financial). It requires a broad range of knowledge across technology and production issues and supply globally, in addition to understanding exactly how the whole upstream and downstream segments operate in practice; where the key drivers are profitability, financial health, asset returns and risk. Framed in this way, it is perhaps not a surprise why professionally produced company rankings and benchmarking have been somewhat alien concepts until now within the industry. Hopefully, this will change going forward.

More explanation of using Altman Z score for PV module suppliers

I used the webinar platform also to explain more on the use of the Altman Z model (Altman, E.I., Journal of Finance, Vol. XXIII, No. 4, pp 589-609, 1968.) for PV module suppliers. It was discussed in length during the six-part series of articles recently on PV-Tech, but it remains critical that this part of any credible bankability analysis is done properly (and fully explained).

It should be remembered that the Altman Z score method was proposed over 50 years ago, to predict the likelihood of manufacturing companies (above a pre-set annual turnover threshold) going bankrupt in the near future.

The model has stood the test of time, and is so well known and accepted across different sectors that using this as a starting point is probably still the best place to begin for the PV industry. It allows everyone to know clearly what the starting parameters are (namely the five accounting ratios employed within the Altman Z model).

To back this up, many third-party observers to the PV industry routinely cite Altman Z scores for publically-listed PV companies. However, there is one major problem here: the output shown does not seem to be aligned to how the PV industry actually operates: or else almost every company would be bankrupt by now!

In fact, simply applying the 1968 equations of Altman to the PV industry of 2019 can and does create more questions than answers. Anyone that has read perspective-based studies by Altman and others – looking at the applicability of the Altman Z model – will know that the key thing is to understand the numbers in the context of the industry in question. This is obvious, but it does require the user to actually know how the PV industry works in the first place. This may be part of the problem.

As an example, let me state now where uneducated-use of Altman Z data creates problems in the PV industry today.

In the past few weeks alone, I have come across a couple of statements issued in the context of tier-1 and top-performer analyses from various third-party bodies. Essentially – at the same time – it was stated that only three PV module suppliers were not at risk of bankruptcy today, and then there was a list of 40-50 module suppliers that were assigned tier-1 status.

Quod erat demonstrandum: virtually all tier-1 companies are at risk of bankruptcy in the next couple of years. Judge for yourself if this truly makes sense? Or if it is remotely useful for anyone today trying to decide which module suppliers to short-list for site selection?

During our research phase in understanding the operating results of PV module suppliers (going back 5-10 years), it became clear that the use of the Altman Z ratios was not the actual problem. The mistake related entirely to an incorrect interpretation of the numeric values generated and a misunderstanding of PV module supplier operations and the overall sector.

How we converted the Altman Z scores to solar module financial strength scores (in a 0 to 10 scale) was covered in detail within part five of the PV-Tech article series.

It is worth pointing out that starting from Altman Z scores – and doing statistical analysis to convert these to the 0-10 scale – is done solely to preserve the starting point being the Altman Z approach that has widely accepted.

A more correct method would be to do a PV-specific regression or multivariate discriminant analysis based purely on ratios derived from PV module suppliers during the past 5-10 years. It is likely no-one has even attempted this, but may well be something to consider in the future. This would almost certainly have to discriminate between non-Chinese and Chinese headquartered companies, with a further differentiation between Chinese (listed on US stock exchanges) and state-owned/controlled Chinese entities within which is a subsidiary solar module operation operating as a dedicated business unit.

It may seem I am somewhat labouring the point; but the fact that tier 1 lists have routinely been comprised of companies that either have red-flags in abundance or are operating close to technical bankruptcy, should serve to highlight why correct assessment matters.

The four PV module suppliers with top-performing AA-rating status in Q3’19

It would be fair to say that most of the people that dialled into the webinars this week were doing so to learn which four PV module suppliers were in the top-performing AA-Rating band today.

The graphic below reveals this set of ‘most-bankable’ PV module suppliers today: JinkoSolar, First Solar, LONGi Solar and Canadian Solar.

No PV module supplier scores the highest rating of AAA, and in fact, rarely over the past 10 years, has any PV module supplier been in this band. More on this below.

A total of eight companies have ‘A’ rated status (four AA-Rated as outlined above, and four others with A-Rating). Interestingly, only six companies fall into the three ‘B’ rating categories. Therefore, just 14 PV module suppliers (out of a pool of several hundred in the industry today) have PV ModuleTech Bankability Ratings of B or higher.

All other PV module suppliers (several hundred in total) fall into the ‘Speculative’ zone (CCC, CC, and C), and are therefore assigned as risky propositions when large-scale solar site deployment is under consideration. Normally, the companies in ‘C’ bands either have limited capacity availability, have failed to keep shipment volumes (to non-residential segments) up with overall industry growth rates, or are in poor financial health; or for many it is a combination of both.

To show some further detail on the four AA-Rated top-performers today, the webinar talked through different graphics for these suppliers; this was done to support the overall methodology validation. A version of this is shown in the graphic below now.

I decided that looking at either quarterly ratings (going back 12 quarters from today), or year-end ratings (covering six years including forecasted year-end 2019 ratings), was most useful during the webinar discussion. The choice of annual or quarterly trending for each company depended on which option best showed changes over the defined period. In reference to the graphic above, we can interpret the bankability scores and ratings for each as follows.

  • JinkoSolar: The graphic above shows that Jinko is the only PV module supplier to have AA-Ratings for the past 12 consecutive quarters. It confirms what is seen in the market, especially when one considers how the company has been so effective in gaining market-share globally in the regions that truly matter for utility-scale solar.
  • LONGi Solar: The trending here by year confirms the company as the high-growth supplier of the past few years, moving from CCC-Rated to AA-Rated bands. Key here is the growth trajectory relative to the other AA-Rated companies, suggesting that 2020 is going to be the year that LONGi finally reaches widespread global brand recognition as a PV module supplier.
  • First Solar: The choice of annual data here is done to highlight that First Solar is the only PV module supplier to have been AAA-Rated during the past six years. The cyclic trending is directly related to the operational reset that has been occurring at the company during the past few years, in reprioritizing its manufacturing module supply strategy, and in making massive investments into new Series 6 panel facilities. Assuming profitability targets are hit with regards Series 6 production, it is possible that First Solar could return to AAA-Rated territory during 2020.
  • Canadian Solar: When looking at Canadian Solar’s strategy, it is clear that the company has managed to effectively pursue a dual manufacturing/downstream business within the industry that most other have desired but failed at. This comes over in the graphic above (upstream specific of course) that shows an almost straight-line scoring output (conveyed also in annual figures). It confirms that Canadian Solar has managed to keep its module output at premium-bankable levels, with overall corporate operations benefiting from the timely sale of short-term owned assets (flipping).

Correlating historic trends forms part of the overall validation process of the PV ModuleTech Bankability Ratings methodology. Any PV module supplier, present or in the past, has to be validated in this manner, in order to confirm that the scoring system, and rating bands, are what is seen within the sector. As we reveal companies in the A, and ‘B’ bands, over the coming months, we will show that bankability scores and rating categories for all other PV module suppliers can be understood in this way.

PV ModuleTech 2019 conference becomes go-to bankability forum for the industry

PV-Tech’s annual PV ModuleTech conference was originally configured to provide developers, EPCs and utility-scale investors the opportunity to understand factors relating to module quality, reliability and performance.

With the release of the PV ModuleTech Bankability Ratings, the event now becomes a must-attend platform, where module suppliers will be addressing specifically how their offerings can maintain or elevate them to AA-Rated status or better.

The latest agenda for the forthcoming PV ModuleTech 2019 event was released in the past few days, and can be viewed here. It shows that three of the four AA-Rated module suppliers, highlighted above, will indeed be explaining many of the factors that are implicit in their top-performer rating grades.

Complementing these talks are most of the leading third-party bodies that conduct due-diligence phases on short-listed or selected module suppliers for large-scale project globally; IE’s, auditors, reliability testing and certification bodies. Speakers are confirmed from companies such as PV Evolution Labs, RETC, PI Berlin, STS, Clean Energy Associates, and Kiwa Asia.

The whole event will in fact start with a 45-minute presentation I will give, where all companies occupying bankability ratings in the ‘A’ and ‘B’ categories will be previewed, including benchmarking guides that will assist developers and EPCs guidance going forward.

To attend the PV ModuleTech 2019 event in Penang on 22-23 October 2019, please follow the registration link here.

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Top-4 most bankable PV module suppliers to be revealed on PV-Tech webinars this week

The leading four PV module suppliers, having PV ModuleTech bankability ratings in the highest A-rated category, are set to be revealed on a webinar series to be presented by PV-Tech on 21 and 22 August 2019.

Details on how to register for one the webinars can be found though the link here. The two webinars cover the same material/slide content, but are timed to allow dial-in participation across western and Asian time-zones. Therefore, it is only necessary to register for just one of the webinar sessions.

The new PV ModuleTech Bankability Ratings list

During the past few weeks, the new PV ModuleTech Bankability Ratings methodology has been outlined clearly across a series of six PV-Tech articles that explained how PV module suppliers can be graded (from the top AAA-rated to the lowest/highest-risk C-rated). The final ratings system overview can be found on the final of the six articles here, with links to each of the series features highlighted at the bottom of this webpage also.

The new PV-Tech Ratings system is the first industry analysis that combines each company’s track-record in large-scale global shipments, with its financial health, on a rolling quarterly basis. The analysis uses data collected over 10 years at PV-Tech, across a wealth of manufacturing and financial inputs; these are all covered in the series of six articles on PV-Tech recently.

In contrast to all other tier-based or top/leading-supplier related tables and lists disseminated throughout the industry over the past few decades, the PV ModuleTech Bankability Ratings system uses statistical analysis and modelling, carefully validated against each company’s historic and current status within large-scale PV module deployment.

The driver for the new ratings system has been from downstream PV module users and investors who have been constantly confused about which module suppliers were truly bankable, being able to supply volumes with confidence and having a balance-sheet that reduced the risk of imminent bankruptcy or in-house manufacturing re-organization.

This PV ModuleTech Bankability Ratings system finally allows project developers, EPCs, site investors and asset owners to understand the key investment differences across the range of PV module suppliers bidding to supply to commercial, industrial and utility-scale PV solar sites globally. It is ideal for competitive benchmarking, and shows the strengths and weaknesses of each PV module supplier from each of the key manufacturing and financial perspectives. It is perfect for short-listing potential suppliers, prior to factory audits and reliability tests that are essential to meet specific investor requirements.

Only four PV module suppliers meet AA-rated qualifications

During the webinars this week, I will reveal the leading – and most bankable – PV module suppliers to the industry; and why only a select group of companies (even from among the 40-50 companies currently featuring on tier-type tables) have both the track-record and financial stability to be considered as key contenders for some of the largest utility PV plants currently in planning or construction globally.

The webinars will not only reveal these four companies, but also show historic ratings over the past 3-5 years, on a quarterly and year-end basis. The use of historic checks has turned out to be one of most important validation steps within our entire bankability analysis done in-house at PV-Tech; it allows forward-looking conclusions to be reached on all PV module suppliers, indicative of any ‘red-flags’ that may be forthcoming from a manufacturing or financial standpoint.

The webinars will also show that no company today meets the top-performer AAA-rated grade, and that this has rarely been obtained by any PV module supplier in the past. This is not too much of a surprise however, as I will explain during the webinars, and is in part arising from a still-fragmented landscape where the market-leaders command typically a 10% market-share of module supply; and where some 200-plus companies fight over business globally. It is also arising from the rather precarious financial health of companies that have been overly-dependent on revenue streams from module sales that have been impacted regularly by ASP declines well above cost-reduction measures implemented internally.

The highest ratings grade achieved by a PV module supplier today is AA-rated, and there are only four companies within this top-performer category only. The webinars will therefore focus on why these four companies have top bankability status within the industry, and what can be learned from this in terms of the chasing pack – most of whom are at best CCC-rated or worse (higher-risk).

The graphic below has the names of the top-4 rated PV module suppliers anonymized. They will be revealed for the first time in the webinars, where the historic values are shown to make perfect sense given the status of each company by quarter over the past three years.

PV ModuleTech 2019 to provide further details on suppliers’ ratings status

The forthcoming PV ModuleTech 2019 conference in Penang, Malaysia on 22-23 October 2019 will see many of the AA-rated and A-rated companies presenting and in attendance. This event will start with a 45-minute talk I will deliver, specific to the PV ModuleTech Bankability Ratings. To register to attend PV ModuleTech 2019, go to the link here.

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R&D spending analysis of 21 PV manufacturers

PV Tech has been covering analysis of R&D expenditures of PV manufacturers for over a decade. This blog looks at some of the key trends, which are being detailed in full in the forthcoming edition of technical journal Photovoltaics International.

This is the second sequential year that R&D spending exceeded the US$1.0 billion level, although down slightly from US$1,086.86 million (US$1.08 billion) cumulative annual R&D spending of these 21 key PV manufacturers, in 2017. 

Spending pattern divergence

It is interesting to note that R&D spending doubled over a five-year period, growing from 2013 (US$504 million) to 2017 ((US$1.08 billion). Almost all 21 PV manufacturers under analysis were public in 2013 and all had reached that status by 2014. 

However, a continued trend since 2014 has been the growing number of companies that lowered R&D spending, compared to those increasing spending on a year-on-year basis.

Only two companies lowered R&D spending in 2014, while the crossover point was reached in 2017, when 10 companies reduced spending compared to the previous year. This trend continued in 2018, as for the first time the number of companies lowering R&D spending (11) exceeded the number (9) increasing spending on this front.  

There are also two companies (First Solar and Yingli Green) that have lowered spending for four consecutive years since 2015. 

In the 2018 analysis, two companies (Eging PV and Hareon Solar) have lowered spending for three consecutive years, while two companies (ZJ Sunflower, Wuxi Suntech and ) had lowered spending for two consecutive years.

The spending pattern divergence is primarily driven by the financial condition of some of the companies, such as Yingli Green, Hareon Solar, SunPower and others in the past. 

However, the growing number of companies reducing spending in 2018, is also due to the weaker downstream PV market in China, after the Chinese government announced the ‘531 New Deal’ that put a halt to utility-scale and DG markets, as installations were viewed to have far exceeded plans and the market was subsequently overheating. 

It is also interesting to note that due to this trend, only two companies since 2012 (LONGi Group and Zhongli Talesun) have consistently increased R&D spending, year-on-year.

Other companies that increased spending in 2018, included: JinkoSolar, Canadian Solar, SunPower, Tongwei, Hanergy Thin Film, URE, TZS and Comtec. 

The chart below covers the last five years of annual R&D spending of the 21 key PV manufacturers.

The chart shows a group of five companies (First Solar, LONGi Group, Hanergy Thin Film, SunPower and GCL Group) are clearly separated from the pack by a minimum of over US$100 million in cumulative R&D spending over the last five years. 

Despite First Solar and SunPower dropping in the annual rankings, the changes over a five-year period are less pronounced for First Solar, which remains the cumulative R&D spending leader.

These companies are in the high US$500 million spending range through to the low US$400 million spending range, over the last five years. 

However, SunPower’s position dropped two places in the 2018 rankings and has also been replaced by LONGi Group and Hanergy Thin Film in the last five year period. However, GCL Group was closing in fast in SunPower until a significant reduction in R&D spending took place in 2018. 

LONGi Group and Hanergy Thin Film have been two of the three fastest growing companies in terms of R&D spending, notably in the last three years as shown in the chart.

The chart also highlights that three companies (Zhongli Talesun, TZS and Tongwei Group) have formed a second strong group accelerating R&D spending in the last four of five years. 
Zhongli Talesun, TZS and Tongwei Group have an R&D spending range between the very high US$200 million level to mid US$250 million level. 

Below TZS, things also look interesting as the low levels of spending by Yingli Green in the last three years highlight its declining position in the rankings, while Hareon Solar collapsed.

That means the accelerated R&D spending by Risen Energy, JinkoSolar and Canadian solar in the last two years underscores the ability to move ahead of Yingli Green very soon. 

However, it also indicates that they remain a significant distance behind the second leading pack of Zhongli Talesun, TZS and Tongwei Group. Despite the potential to climb slowly up the ranking, primarily because otherS are falling by the wayside, there is every chance the gap to the second group will widen, locking the two major SMSL members in lower middle range rankings. 

This may also be exacerbated by the expected return of two other SMSL members, Trina Solar and JA Solar into the R&D analysis in 2019, as they return to Chinese stock markets. 

As for those companies below Canadian Solar, five years of R&D spending have mainly highlighted the chasm to the lead and secondary leadership group that increasingly looks insurmountable. 

On a side note, we always get questions over the fact that we have previously not published data and charts related to companies’ R&D expenditure as a percentage of revenue. In the past, a key reason was the almost universal rule that companies’ R&D expenditure as a percentage of revenue lay in the 0.8%-to-3% range. The exception had always been First Solar and Sunpower with higher percentages. 

Plotting that in charts would have just shown a very thick slightly wavering line with two occasional spikes. Basically, not much use at all.

However, there is more variability today, so we have shown two examples of R&D expenditure as a percentage of revenue.

 

In the first sample chart, we have included First Solar and Sunpower to represent the historical high-end of R&D expenditure as a percentage of revenue as well as the inclusion of the two major SMSL’s (JinkoSolar and Canadian Solar) that had been perennial laggards in total annual R&D spending. We have also included a typical example of a relatively small PV manufacturer in the form of Eging PV. 

This selection of companies is a good representation of the historical highs and lows of R&D expenditure as a percentage of revenue.

A key takeaway is that proprietary technology used by First Solar and Sunpower requires, compared to the others, much higher R&D expenditure as a percentage of revenue.

However, being laggards in total annual R&D expenditure as well as a percentage of revenue has historically had little negative impact on JinkoSolar and Canadian Solar, as both have become the largest crystalline PV module manufacturers in the world today. 

In the second sample chart below, we have included three major, China-based integrated PV manufacturers, LONGi Group, TZS and GCL Group and arguably the most closely matched from a business model perspective. 

The main deviation here is that GCL Group can be deemed as the historical major incumbent and has been the largest company in the PV industry by revenue and scale in polysilicon and multicrystalline wafer capacity for many years. 

LONGi Group and TZS have become fast growing companies that have strong R&D spending regimes coupled to strong revenue growth. Indeed, in 2018 both companies R&D expenditure as a percentage of revenue declined at almost the same rates but the reality was that both companies’ total revenue significantly increased over the previous year, while R&D spending increased but clearly at a slower pace than revenue. 

In contrast, GCL Group reported markedly lower revenue in 2018, compared to the previous year. GCL Group companies significantly cut R&D spending, year-on-year, due to financial constraints, causing R&D expenditure as a percentage of revenue to decline. 

Therefore, it could be argued that emerging major players displaying high R&D spending in the last five years have gained significant market share against an historical incumbent. However, GCL has been an investor in TZS as well as SunPower, muddying the waters for a clear-cut comparison. 

Despite continued upheaval in the companies being tracked and those untracked that will surely occur in 2019 as well, it remains somewhat remarkable that over US$1.0 billion was allocated in R&D expenditure in 2018.

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First PV module supplier bankability ratings tool created by PV Tech research team

This article represents the concluding part of a six-part series on PV-Tech over the past couple of weeks, introducing new methodology to allow leading PV module suppliers to be categorized, ranked and short-listed by manufacturing and financial strength metrics; ultimately providing an investor-risk (or bankability) profile of PV module suppliers for non-residential end-market selection.

Collectively, the six articles on PV-Tech.org provide transparency into the methodology used to assign investment risk to PV module suppliers selling to commercial, industrial and utility segments of the industry. The full dataset captures research findings by PV-Tech going back more than 10 years.

The first five articles explained the full methodology behind the two key metrics/scores that are essential to ultimately rank PV module suppliers by way of a bankability ratings tool: manufacturing and financial health.

This article completes the jigsaw. It is the final part that allows readers to understand why a PV module supplier needs to have strong health scores for both manufacturing and financial operations to be bankable, at any given time.

The ongoing research and methodology tracking the bankability rankings of PV module suppliers will be explained in greater detail during forthcoming webinars I will deliver over 21-22 August 2019 (register here), and my opening talk at the PV ModuleTech 2019 conference in Penang, Malaysia on 22-23 October 2019.

Methodology overview

The entire methodology has been founded on the basis that PV module supplier bankability (B), is a function of the supplier’s manufacturing (M) and financial (F) health scores as:

where k is a scaling factor that maps bankability scores to a 0-10 band, m and n are power coefficients derived from regression analysis, and i is a variable that is module-supplier and time-period specific.

The first four articles covered the three key components (supply, capacity, and technology) within the manufacturing health score/ranking, M, variable; and how these components are combined to yield the M values for each company by quarter.

The previous article (number five in the series) focused on the financial health score/ranking, F, variable.

This article now deals with the end-goal of the whole study: forming a scoring system to grade PV module suppliers by bankability health scores between 0 and 10, and how these can be interpreted through a new dynamic bankability ratings tool that is directly analogous to the credit ratings system widely in use today to assess the creditworthiness and risk profile of governments and corporate entities.

By mapping PV module suppliers into clearly-defined, letter-graded categories (ranging from AAA-rated to C-rated), the new PV ModuleTech Bankability tool should finally provide a high-quality, independent and validated means of shortlisting potential module suppliers for commercial, industrial and utility site selection.

Bankability strength (B) score methodology

Let’s return now to the equation that underpins the entire PV module bankability study:

First, I will talk through why the relationship here is actually quite intuitive; in particular, in terms of the bankability score (B) directly scaling (proportional) to powers of each of the manufacturing (M) and financial (F) health scores.

Consider the following. To be bankable, a PV module supplier must first have manufacturing strength (for example through a strong demonstrated track-record of utility-scale shipments, having the capacity strength to sustain future shipment levels at the GW-level, and investing into capex and R&D). Additionally, the company must have demonstrated financial stability and health status over a prolonged period of time.

The two conditions must be met simultaneously. Being a shipment leader, but having poor financial standing, is not a condition that can ever meet leading-bankability status. Conversely, no matter how strong the company’s books are, a lack of product availability (reflected in a low manufacturing health score) ultimately renders the company as ‘unbankable’ (carrying excessive risk).

Weakness in either of the two variables (M and F) therefore precludes commercial-deployment bankability status, for any PV module supplier.

By default, the bankability score (B) must be derived from the product of the two terms, as opposed to any weighted summation. In short, no matter how strong manufacturing or finances are, risk-mitigation during investor due-diligence (supplier short-listing) cannot be compensated by just one of the M or F factors being at the upper end of its respective 0-10 score bands.

Once this premise is accepted, the challenge is simply to identify the scaling constant (k), and the power factors (m and n), within the above equation; and test this against different module suppliers, going back as far as ten years ago if needed.

Solving the bankability equation

The solution to the constants (k, m, n) turned out to be relatively straightforward, when looking at different observables derived from various PV module suppliers during the past few years, in addition to the current industry landscape today.

The constants should be time invariant, meaning that the equation can be applied to any company, at any point in time, and should always be a true reflection of that company’s bankability status, as seen by the industry.

The solution starts by considering the anchor points of the bankability, B, scoring band, from the lowest bankability score (zero) to the maximum (ten). The lower bound is self-explanatory:

The conditions governing the upper band turned out to be slightly more complicated however. In theory, one would expect the maximum bankability score to be obtained as follows:

While this is theoretically possible, it is practically unattainable. If the coefficients are set using this boundary condition then few, if any, PV module suppliers would ever achieve a bankability score above 5/10. (Think of this like some kind of real-work reality-check. Being almost-perfect at two different things, at exactly the same time, never actually happens!)

To address this, it is necessary to remove any one-off outliers (extreme values) in the datasets for each of the M and F scores. In reality, it turns out that the issue is mainly one of removing F score outliers (as opposed to M values). This is now explained in more detail.

When looking at PV module suppliers to the industry over the past decade, leading companies rarely exceed a market-share of more than 10% of shipments. Indeed, to account for 90% of global annual shipments (confined simply to the commercial, industrial and utility segments), it is necessary to consider almost fifty different module suppliers. Moving to 95% coverage demands almost 100 different module suppliers to be analysed.

Therefore, the M scores are relatively bunched today within a band 1-8 (maximum, M=10). As such, there are no clear anomalies (or extreme score outliers) in the M category, especially when accumulating data for 95% of global shipments (about 100 module suppliers).

The variance is revealed however in the F score, with this being emphasized because finance dominates over manufacturing in final bankability ratings of PV module suppliers. (More on this below during the discussion of the power coefficients, m and n.)

The model is therefore adjusted to account for potential outliers, as it pertains to setting the maximum value for B, as shown in the equation above.

The solution to this is to introduce percentiles, which effectively allow the removal of the extreme outliers, with the maximum value of B now governed by the following conditions:

Here, Mv and Fv are the percentile values of M and F across a total or Nm and Nf data entries over a trailing three-year period (t3y), and Pm and Pf are the input percentiles for M and F.

If the percentile for either M or F is set to 100%, this is equivalent to simply using the maximum value seen by any company for either M or F during the past three years. As discussed above, this is not reality; for the F score to make sense in the overall bankability calculation, establishing the F percentile (number of extreme outliners to remove) is essential.

Once the percentile values are derived, the next issue is to set the ratio of the power coefficients, n and m. The solution is achieved relatively quickly by recognizing that financial health is always more important than manufacturing health (when dealing with supplier bankability).

Once n and m are derived, the solution to the scaling coefficient, k, is shown to be:

This completes the methodology overview, and how to generate the three constants that are required to calculate PV module supplier bankability scores (in a 0-10 band), given knowledge of the respective company’s manufacturing and financial scores, at any given quarter-end.

Introducing PV module supplier bankability terms & definitions

Before looking at the bankability scores for a sample group of GW-level PV module suppliers, it is essential that the final part of the model is explained. This involves putting classification, terminology and description to the numbers generated above.

The bankability scores (0 lowest, 10 highest) fall into three pre-assigned grade categories; premium, second-tier, and speculative. The naming here is done such that module suppliers with bankability scores in the range 5-10 are placed in the upper, premium grade; in contrast, the lowest performers (scores between 0 and 2) are in the speculative grade. The middle grade is called second-tier, and has the companies with scores in the range 2-5.

Each of the three grades (premium, second-tier, and speculative) has three different rating grades (or simply ratings). For example, premium includes AAA, AA, and A ratings. This is shown clearly in the image below.

Therefore, the highest performers in the sector are referred to as AAA-rated (read as triple-A-rated). PV module suppliers with this rating label are likely to be setting benchmarks for all other PV module suppliers, across a wide range of operational metrics; not to mention getting a modest ASP premium through having a brand-value delta.

We elected to use letter-designation ratings, analogous to those issued by credit ratings agencies (such as Standard & Poor’s that can be seen here) when they assess the creditworthiness of entities (governments or companies, for example).

Credit ratings affect the likelihood of a company being approved for a loan. By analogy then, PV bankability ratings should affect module suppliers’ chances of being considered for any volume supply contract.

This is a key point; bankability scores/ratings are best used to form shortlists of companies as potential suppliers; third-party agencies then tick the final boxes (factory auditing, pre-shipment inspection, certification, full independent engineer due diligence, reliability testing, inspection, etc.); buyers also of course have price offers from different suppliers, and run their own ROI projections. Having a means however of sanity-checking the companies behind the offers, or knowing which half-dozen to focus on most, is hugely important.

Another good analogy to credit rating nomenclature arises when noting that credit takes time to build up, and as such, high scores/ratings reflect the entity’s track-record (to repay loans). Similarly, the module bankability ratings have a strong supply track-record element built in, with the leading companies being the ones that have the strongest brand ‘value’ in the industry at any given time, built up over time.

Indeed, the grade category ‘premium’ was so named because module suppliers at the upper end of this category are normally the ones with premium brand, resulting in premium ASPs compared to the rest of the industry.

Complementing the image above (explaining credit rating grades), the nine bankability ratings are better understood through a brief description of each one. While simply a two-line summary in most cases, it nonetheless gives a quick check on the generic characteristics of the companies that share unique rating grade lettering.

This is shown in the image below. (Over time, the precise wording will certainly evolve, to be as succinct and accurate as possible.)

Bankability sample group study

During each stage of the six-article series, every effort has been made to validate the model; in particular, for the five scores across the manufacturing and financial health analyses, asking the question “does this match with what is seen in the industry, now and at any point in time during the past 3-5 years?”

Validation of the bankability ratings is undoubtedly the most important part of this exercise, prior to releasing (in the public domain) the findings as they relate to specific companies; and indeed ahead of periodic updates going forward.

By default largely, most articles posted on PV-Tech regarding the PV ModuleTech Bankability ratings over the next six months will feature aspects of ratings validation. In particular, every quarter when the bankability scores are updated for the PV module suppliers, validation must be done.

One of the initial validation checks done on the bankability scores and supplier ratings grades is now discussed and reviewed. Here, eight leading PV module suppliers were chosen, satisfying the following criteria:

• Annual module shipment levels >1 GW for the calendar year 2018
• Listing within Top-10 PV module suppliers by volume, for one or more of the past three calendar years
• (Specific to Chinese-based module suppliers) >10% annual module shipment volumes to overseas markets (non-China) during the past three years
• Claim of being in any third-party agency list, such as Tier 1, etc.
• Brand awareness across decision-making parties overseeing selection of large-scale utility solar site builds in excess of 50 MW

All suppliers satisfied at least four out of the five conditions, with many of them comfortably meeting all five.

The choice of the criteria above was important as part of our initial validation checks. Often, when a host of companies each claims the same thing (industry top-performer, top-10 supplier, tier-1 status, etc.), it is easy to conclude erroneously that there is little to choose between group members. Indeed, this is one of factors that prompted the bankability methodology to be developed in the first place.

There is an extra caveat introduced in the selection process. As opposed to choosing several companies with similar profiles today (in terms of module supply tactics and strategy), the eight companies were selected because they were considered to have different strengths and weaknesses (from the buyer’s perspective).

The graphic below shows the calculated bankability scores for the eight different module suppliers, over a ten quarter period to the end of Q1’19. The module supplier names are anonymized here: the main issue is to check validity at this point, not analyse companies per se.
 

The graphic shown above turns out to be incredibly informative. It confirms – with crystal clarity – that the bankability scores/grades of companies (all producing and shipping GW-plus of solar modules each year) can indeed range from AA-rated to the lowest-grade and highest-risk category at the bottom.

It goes some way to debunk the myth that simply being in some random top-10 or tier-based table carries any real substance (other than membership of a group), or that being a GW-status module producer is something of value in today’s PV industry.

Over the next few months, graphs similar to the one above (colour-coded, with trended bankability scores and rating grades) will be commonplace in articles on PV-Tech, where specific companies are discussed and reviewed. In addition, since the ranking system methodology is ultimately of most use to module buyers/investors, I will provide clarity on how accurate various aspects of the model turn out to be, from a predictive forecasting perspective.

Getting more details about PV ModuleTech Bankability ratings

So far, during the two-week period where I have outlined the full methodology behind the PV ModuleTech Bankability rating system, I have been making a note of the most common questions that have come my way. It seems fitting to list these quickly now:

• Which module suppliers are the most ‘bankable’?
• Where does “my company” rank compared to Jinko?
• How many top-10 or tier-listed companies today are ‘unbankable’?

Over the coming months, hopefully these questions will be discussed in more detail. In the meantime, there are a couple of dates to note for the diary, when I will be speaking more on the new PV ModuleTech Bankability ratings and the suppliers featuring within the premium grade categories.

I will deliver online webinars over 21-22 August 2019 (register to watch here), and give the 45-minute opening talk at the forthcoming PV ModuleTech 2019 conference in Penang, Malaysia on 22-23 October 2019.
In particular, during the forthcoming webinar presentations on 21-22 August 2019, I will reveal for the first time which PV module suppliers fall into the highest PV ModuleTech Bankability ratings grade today!
 

PV Tech’s bankability analysis series links are below

Part 1. PV-Tech research set to reveal investment grades for global PV module suppliers

Part 2. PV-Tech research reveals how to assess PV module suppliers’ capacity claims

Part 3. PV-Tech research establishes technology-leadership scorecard for top-100 module suppliers

Part 4. PV-Tech research reveals ranking tool for manufacturing strength of global module suppliers

Part 5. PV-Tech research ranks PV module suppliers by financial health

Part 6. First PV module supplier bankability ratings tool created by PV Tech research team

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PV-Tech research ranks PV module suppliers by financial health

This article continues our series of features introducing new methodology that allows leading PV module producers to be categorised, ranked and short-listed by manufacturing and financial strength metrics; ultimately providing an investor-risk (or bankability) profile of PV module suppliers for non-residential end-market selection.

This is the fifth of six articles on PV-Tech.org providing full transparency on the methodology used to assign investment risk to PV module suppliers selling to commercial, industrial and utility segments of the industry. The full dataset captures research findings by PV-Tech going back more than 10 years.

The first four articles focused on the manufacturing health of PV module suppliers, with the final ranking model explained in the fourth article of the series, PV-Tech research reveals ranking tool for manufacturing strength of global module suppliers, earlier this week.

This article explains the research conducted by PV-Tech to allow PV module suppliers to be grouped into three zones, through looking at the finances of companies in the sector over the past decade.

The ongoing research and methodology tracking the investment rankings of PV module suppliers will be explained in greater detail during forthcoming webinars I will deliver over 21-22 August 2019 (register here), and my opening talk at the forthcoming PV ModuleTech 2019 conference in Penang, Malaysia on 22-23 October 2019.

Methodology overview

Previous articles revealed the basic relationship between module supplier bankability (B), manufacturing (M) and financial (F) scores as:

where k is a scaling factor that maps bankability scores to a 0-10 band, m and n are power coefficients derived from regression analysis, and i is a variable that is module-supplier and time-period specific. The manufacturing health score/ranking, M – and its constituent elements – were the subject of the first four articles of the series.

This article focuses on the financial score, F, needed to establish the final bankability score/rating, B.

Financial strength (F) score methodology

Most of the PV industry’s downstream community (project developers, EPC’s, and asset owners, to name just three examples) have, for many years, lacked any credible means of understanding and benchmarking PV module suppliers, with more concerns typically raised about the financial health of the companies than the state of its manufacturing output.

Some PV module suppliers (mainly the few that are currently publically-traded on US stock exchanges) tend to be scrutinised the most, but largely from an investor standpoint. For this small grouping, the financial health coverage of these companies by certain financial analysts is often of the highest standard.

However, the trend in recent years has been for leading Chinese PV module suppliers to delist from US stock exchanges. Scanning across the PV module suppliers that comprise the top-100 in the sector today, most are obviously Chinese entities operating within larger (often state-owned or controlled) organizations. As such, there has been a lack of benchmarking analysis performed, not simply regarding the financial health of the PV module suppliers (or parent organization), but across the whole range of financial and manufacturing metrics that come together to complete the bankability picture.

Therefore, it comes as no real surprise that buyers of PV modules (or the institutions that provide the financing) have been operating in a state of constant confusion. Various third-party observers have sought to create temporary solutions to this, including Top-10 shipment tables (typically of mixed quality), or tier-based listings (often with a binary yes/no inclusion and no scoring mechanism, or featuring a broad mix of module suppliers that rarely compete with one another in practice).

When it comes to benchmarking the financial health of PV module suppliers, a common technique that has been routinely applied over the past decade is the model originally developed in 1968 by Robert Altman (Altman, E.I., Journal of Finance, Vol. XXIII, No. 4, pp 589-609, 1968) as a measure of financial distress relative to potential corporate bankruptcy. Indeed, some PV module suppliers themselves have used this type of benchmarking to convey financial superiority against competitors, most often when a graphic produced by a third-party organization paints them in a positive light at the specific point the benchmarking analysis was undertaken.

The use of Altman methodology is not in question; it has been one of the most widely used tools over the past few decades to generate metrics that can track a company’s financial health (sector and turnover specific). The problem so far when applied to the PV industry (in the case of PV module suppliers in particular) is the lack of qualifiers or checks on the validity of the scoring system, and comparison with historic and current due-diligence checks on the companies in question.

The remainder of this article will explain how it is possible to retain the integrity of the Altman scoring system, but adapt this through new methodology for PV module suppliers, in a way that more accurately tracks and benchmarks the financial health of companies operating in this space.

Mapping Altman data for PV module suppliers to a new scoring system

The use Altman’s Z Score model is widespread across different sectors, and, as discussed above, the PV industry is no exception. The model was developed by Altman more than 50 years ago and was originally designed to help predict the likelihood of public-listed companies (with revenues above a certain threshold) – manufacturing specific – going bankrupt. Crucially however, the output is also a means of assessing financial strength (by default, least likely to go bankrupt during a forward-looking period).

First, however, a very quick overview of the statistical model approach. A number (Z Score) is generated for each company based on the weighted sum (linear combination) of key accounting ratios. Multiple ratios are used (multivariate in nature). The choice of ratios– and their weightings – are derived by classifying the observations (output) into different, mutually-exclusive (discriminated), qualitative, a priori groupings (safe, grey, distress zones). This explains why the statistical technique is referred to as multivariate discriminant analysis, or MDA.

The output (Z Score) is a number, and this places the company into one of the three zones; safe (>2.99), grey (1.81-2.99) and distress (<1.81), when using the original model version that applied to listed manufacturing companies. Note that the model used is absent of any constant numerical term that would shift the boundary condition between the distress zone and the non-distressed zones (grey/safe) to zero. The Z Scores represent the number of standard deviations above or below the mean of the original sample set (explaining why scores can be positive or negative).

It is simple and straightforward to generate Altman Z Scores for PV module suppliers (or corporate holding entities). The challenge is how to best interpret and understand them in context.

Indeed, it is hard to imagine that the exact 50-year old zonal categories should be instantly applicable to the PV industry of 2019, which – like any sector – is subject to its own set of dynamics, and is prone to fluctuations arising from rapid cycles in demand, policy, pricing and competition; and furthermore, is a sector that is dominated now by Chinese conglomerates (fully or part state-owned in many occasions) of which the PV module operations can be a very small part.

However, our goal here is firmly to start with the integrity and common-place acceptance of the Altman model; and then to adapt the scores to have direct meaning within the PV industry (as seen over the past decade).

The model proposed has two steps, starting from the Altman Z Scores and ending up with financial health scores (F) that rank companies between 0-10 across new zones (score bands) that align with data observed over the past decade in the PV sector (for leading PV module suppliers).

The basis of the model is illustrated pictorially in the graphic below:

The first stage of the model involves gathering Altman Z Scores for PV module suppliers or parent companies (module warranty ‘guarantors’) where appropriate. The data collection stage here uses quarterly-reported information, as opposed to simply relying on annual (reporting period specific) information only; more on this distinction shortly.

This is where traditional approaches have basically stopped, and chosen to categorize Z Scores of PV module companies within the legacy zones. However, in doing this, typically more than 50% of the top-20 module suppliers (at any given time during the past 10 years) have been scoring at levels that would imply imminent bankruptcy. Furthermore, often the analyses have been limited to one data point per year, and are therefore highly sensitive to one particular accounting ratio that has an extreme value at that particular point in time.

The next step is to set new Altman Z Score limits that represent the ten-year upper and lower values of PV module suppliers to the industry, shown in the centre image of graphic above by the terms Best-in-Class (PV-BiC) for the upper value, and Technically Bankrupt (PV-TB) for the lower value. The technically bankrupt value is taken at the point of ‘no-return’ for the company in question, driven mainly by the fact that some of the Chinese-listed companies have tended to go into a prolonged state of financial distress as they seek to restructure operations (normally offloading assets to other existing or newly-formed entities/vehicles).

Next, it is necessary to adjust the Altman bands (safety, grey, distress) to ones aligned with PV. Here, I have retained a basic 3-level traffic-light colour-coding (green, amber, red) but have named the bands as comfort zone (green), zone of uncertainty (amber), and distressed zone (red). The renaming here is a minor cosmetic adjustment to assign more accurate descriptions to PV module suppliers’ business models: the main change relates to altering the Altman score values that were applied to the boundaries of the safety/grey (2.99) and grey/distress (1.81) zones.

So far, we have not done any adjustment to the Altman Z Scores themselves, other than rework the three zones and place upper and lower bounds, as shown by the mapping of the left image above to the centre one. The renaming of the mid band to zone of uncertainty is done because this terms more accurately sums up what has been seen in the last decade in the sector. PV module suppliers in this band can be seen to either recover operations (move up to the comfort zone) or descend rapidly (ultimately becoming unbankable for project deployment).

The next step to the model turns out to be useful as a visual tool in the final F score output analysis (simple 0 to 10 scoring), but is essential in being able to combine financial health (F) with manufacturing health (M), in order to derive the final bankability factor (B); and ultimately to allocate a risk designation to provide a guide to the investor community when looking at PV module suppliers for site selection.

This involves assigning PV financial scores (F) in the 0-10 band, with F scores above 5 all falling into our comfort zone, and the other zones in the 0-5 range.
Mapping Altman Z Scores (now labelled simply as A for the analysis) to our new PV financial health scores (F) is not linear in nature (in part due to the change in zone ranges and limits imposed above), but can be done relatively easy through a few simple mathematical procedures, as outlined below now.

The mapping process can be expressed as:

The key term above (in the middle) is best mapped through a polynomial of order n (coefficients given by the β terms).

The best-fit solution to the polynomial is now determined by approximating the upper and lower values of F (10 and 0) to successive local minima/maxima, mapping the boundary data sets (distressed/uncertainty and uncertainty/comfort), and finally reducing to a set of simulations equations that can be readily solved.

This now allows us to take any Altman Z Score of a PV module supplier, and map it to a PV-specific 0-10 scale, where anything above 5 is representative of a PV module company operating financially in an industry comfort zone.

A final correction turns out to be needed when looking at the overall analysis, to remove any one-off accounting issues and smooth out seasonal lumpiness that tends to characterize PV module suppliers whose corporate entities have a strong weighting to PV related business. To account for this, trailing twelve months (ttm) averages are taken, based on the previous four calendar year quarters, at each quarter-end.

While several of the Altman based values are cumulative in nature (and therefore largely invariant to doing quarterly or annual scoring calculations), Z Scores can swing from quarter to quarter, or when simply taking single datapoints from annual filings. One key entry here relates to company valuation (market cap) and share prices used to derive this at any given time. It turns out that it is preferential to have more frequent Z Score refreshes (quarterly at a minimum) than rely simply on a Z Score once a year, when using the market cap at this one point in time.

The ttm averaging process can be done either before or after the mapping step. I have chosen to implement this once the F scores have been derived from the quarterly Z Scores.

In this way, the resulting F scores show a clearer long-term trend, and would appear to prevent the often-cited industry practice of taking one-off Altman Z Scores of companies and rushing to quick conclusions that are not representative of long-term factors.

To convey this point, consider the graphic below where two multi-GW suppliers to utility-scale solar over the past 5-10 years are analysed using the new model. We have confined the output here to seven quarters up to end Q1’19, simply to best visualize the issues discussed above.

Each of the time-period specific case-studies in the graphic above serves to illustrate how taking the Altman Z Scores at face-value (and purely based on quarterly datapoints) can lead to erratic – and sometimes erroneous – conclusions regarding the financial health of PV module supplier companies (or parent guarantor entities).

While the above analysis has been confined largely to the mechanics behind the mapping process, the ultimate validity can only come from looking at the results from an extensive dataset of leading PV module suppliers going back in time, and assessing if the current scores reflect what is happening in the market in 2019. This is now reviewed in the final section of the article.

Manufacturing strength (M) score output

The following graph shows a subset of leading companies, where we have chosen mainly GW-scale PV module suppliers (during the past few years) that have been featuring prominently on the bankability short-lists of various lenders. In addition, one module supplier was chosen that was suspected to be in the zone of uncertainty for the past couple of years.

With all of the companies we selected here (except for the one selected that was known to have areas of concern) falling into the comfort zone region (and many just hovering above the uncertainty zone), this would appear to be an excellent validation of the scoring system we intent to use as part of the bankability ratings, to be explained in the final part of the blog series this week on PV-Tech.

Furthermore, F scores are shown to follow more graduated trending, compared to the lumpy output that can arise from benchmarking companies purely on Altman Z Scores at a specific point in time.

In the graph above, we have chosen to highlight/label LONGi Solar, as one of the few companies whose F score has been consistently in the mid-range of the comfort zone band. Again, knowledge of the company in question here is another validation that the model is tracking real-world industry activity.

Another key scenario we had to factor in was the case of a company whose F scores started in the comfort zone, moved downward to the zone of uncertainty, and then fell into the distressed zone. This is clearly an extremely important leading indicator within the PV industry, and in part forms the basis of what has been the most frequently cited concern of the investment community, normally along the lines of: “How do I know the module supplier I have chosen is not going to go bankrupt?”

This issue is of course why so many people gravitate to the scoring system and zonal categories created by Altman in the first place, and apply these to the PV module suppliers or the parent entity as the guarantor.

It would obviously be great if life was so simple that bankruptcy could be predicted, but this is not why the F scoring system for PV module suppliers has been established. It is firmly to track and benchmark the financial health (on a 0-10 scale) of PV module suppliers, within the overall bankability rating system.

Ultimately, companies failing to emerge from the distressed zone should simply be assigned a risk parameter that feeds into any due-diligence exercise, and likely eliminates the company in question from any short-listing in the first place.

Whether the company goes bankrupt is immaterial. Everything is about risk and being able to benchmark this for any initial short-list of PV module suppliers under consideration. Indeed, anyone looking at the PV industry over the past decade knows that bankruptcy is far from a binary transition process.

Previewing the next part of the article series

The final article (part six) will explain how the manufacturing strength (M) and financial strength (F) values are combined to form an overall bankability/risk score for PV module suppliers (B), offering the first fully-researched benchmarking tool for investors, developers, EPCs, and asset owners of global solar PV sites today.

Attend PV ModuleTech 2019 to hear the first presentation on the findings

The full results of the overall study will be released by the PV-Tech market research team before the end of August, with the key findings presented, explained and discussed in the 45 minute opening talk I will be giving at the forthcoming PV ModuleTech 2019 event in Penang on 22-23 October 2019.

PV Tech’s bankability analysis series links are below

Part 1. PV-Tech research set to reveal investment grades for global PV module suppliers

Part 2. PV-Tech research reveals how to assess PV module suppliers’ capacity claims

Part 3. PV-Tech research establishes technology-leadership scorecard for top-100 module suppliers

Part 4. PV-Tech research reveals ranking tool for manufacturing strength of global module suppliers

Part 5. PV-Tech research ranks PV module suppliers by financial health

Part 6. First PV module supplier bankability ratings tool created by PV Tech research team

Read the entire story

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