One of the brightest lights in the Canadian solar energy firmament – Day4 Energy Inc. (TSX:DFE) – is facing dark days ahead.
But so are other renewable energy companies, say industry insiders, who blame a saturated market, falling prices and cuts to government subsidies for the alternative energy sector’s sudden reversal of fortune.
Day4, which makes photovoltaic modules, announced this week it is laying off 30 employees, which will reduce the company’s staff from 200 to 170.
The company is hoping the layoffs will help it stay afloat over the next six to 12 months.
But Day4’s own auditors – PricewaterhouseCoopers LLP (PwC) – are questioning the Burnaby-based company’s ability to survive. In Day4’s consolidated financial statements for December 31, 2010, and 2009, PwC expresses “significant doubt about the company’s ability to continue.”
“The company has not yet realized profitable operations, has generated negative cash flows from operating activities and has an accumulated deficit of $84,824,923 at December 31, 2010,” PwC stated.
George Rubin, Day4’s president and CEO, told Business in Vancouver that, because of an oversupplied market and subsequent price drops of 5% per month, 2009 was a difficult year for solar energy companies in general. Day4 fared better in 2010, but Rubin expects 2011 to be another tough year.
Despite PwC’s dire warnings, Rubin believes his company is now well-established as a premiere producer of photovoltaic (PV) modules, which convert sunlight into electricity, and will emerge at the end of 2011 on solid ground.
“As long as you manage yourself carefully in the next 12 months, frankly the future is a lot better than what it was 12 months ago,” he said.
Day4 isn’t the only renewable energy company facing increasing competition and falling prices.
Matthew Campbell, marketing and communications manager for Schneider Electric, which makes inverters and other PV components, said “the industry, as a whole, is experiencing those same sorts of challenges.”
Day4’s financial woes underscore the pitfalls of relying on government subsidies, said Ross McKitrick, a Guelph University professor and Fraser Institute senior fellow who specializes in environmental economics.
“I would expect that any company that’s dependent on public subsidies for its profitability is going to be in trouble.”
Day4’s primary markets are in Germany and Italy, which heavily promoted solar energy through feed-in tariffs. Those tariffs are now being scaled back.
But even as European markets become saturated, new ones are opening up in the U.S., Australia, the U.K. and Ontario, which introduced feed-in-tariffs for renewable energy in 2009.
Paul Kariya, executive director for Clean Energy BC, said there’s a general glut of power generation. In the U.S., for example, he said “Obama dollars” bolstered wind power to the point of saturation.
He added that a looming natural gas rush resulting from new discoveries found in shale rock formations (see Gunning for an oil glut – issue 1121; April 19-25) could add to renewable energy company challenges.
“We’re quite nervous that government is being pressured by industry … [to] go with the gas option, and let’s be done with all these expensive renewables,” he said.
McKitrick, on the other hand, said it’s folly for governments to subsidize solar energy in the first place.
“Fundamentally, the problem is solar power is the most expensive renewable at this point and it’s just not competitive,” he said. “It was never really clear why these governments all signed up for these subsidy programs to begin with.”
Uneconomic though it may be, renewable solar power generates no greenhouse gases, which is why some governments have encouraged it through feed-in tariffs.
The tariffs typically pay end users a guaranteed price for 20 years – something Rubin compares to buying an annuity.
The subsidies have been so successful in Europe that the market is becoming saturated and manufacturers are forced to cut their prices.
The upside is that it puts solar energy on more of an even footing with traditional power sources, Rubin said.
And while he doesn’t believe it will replace traditional power generation on the utility level, Rubin said there’s a good market in the residential and commercial sectors for solar.
“In the medium to long term, these price corrections are going to [make] solar even cheaper than what it is today,” he said.
“And that, by itself, then creates a real market for solar energy as a real energy solution, as opposed to just a subsidized investment scheme.”
Burnaby
CEO: John MacDonald
Employees: 168
Market cap: $16.1m
P/E ratio: N/A
EPS: ($0.22)
Sources: Stockwatch, TSX, globe investor