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SunEdison Is Just The Latest Casualty Of The Popping Of The Easy-Money Energy Bubble

This article is more than 7 years old.

SunEdison declared bankruptcy yesterday. Its Chapter 11 filing disclosed total assets of $20.7 billion and total debts of $16.1 billion. The collapse of the world’s biggest developer of renewable energy projects comes at something of an ironic time. With oil prices at $43 per barrel we expect oil and gas companies to go bankrupt. Energy XXI and Goodrich Petroleum filed recently; Linn Energy is soon to follow. And most of America’s coal producers have failed too, including the world’s biggest miner, Peabody Energy . We’re talking tens of billions of enterprise value, wiped out.

So why would SunEdison go under at the same time the fossil fuel producers? What’s the connection? Clean energy apologists want you to believe that SunEdison’s failure has nothing to do with their revolution. But that’s not the case.

SunEdison, Peabody and all the rest are victims of the popping of the Energy Debt Bubble. Endless borrowings of easy money acted like methamphetamine on America’s solar power developers just as it did the oil frackers and coal miners. Rosy projections fueled rampant buildouts. Cash flows from those projects have been insufficient to cover debt payments.

SunEdison started as a silicon chip division of Monsanto , which spun it out. The company became a big solar project developer, and then a residential installer. CEO Ahmad Chatila boasted that by 2020 SunEdison would grow as big as Exxon Mobil. But it grew too fast, relying on cheap financing to make acquisitions it couldn’t afford (like the 2014 acquisition of First Wind from D.E. Shaw for $2.4 billion). Chatila tried hard; he created two new publicly traded, tax-advantaged "yieldcos" to help spur growth: TerraForm Power owns projects in developed countries; TerraForm Global would invest in emerging markets. These yieldcos are similar to master limited partnerships in the oil pipeline business. Like MLPs, they pass along all pre-tax profits to unitholders and so enjoy lower costs of capital. By raising capital to acquire “drop-down” assets from SunEdison at (perhaps artificially) inflated prices, the yieldcos enabled SunEdison to keep building. The plan was for reliable cash flows from green energy sold to utilities to both cover debt payments and generate dividends for yieldco unit holders.

Unfortunately, many projects have overpromised and underdelivered. SunEdison has faced financial challenges with some of its own projects. In Hawaii the local utility company pulled out of an agreement to buy power from three of SunEdison's solar installations, citing the company's failure to meet project milestones. (D.E. Shaw is now seeking to acquire the Hawaii projects.) Another troubled project is a wind farm in Andhra Pradesh, India. The company won a government tender to build the wind farm, by agreeing to do it for a rock-bottom tariff of just 7 cents per kwh. Solar analyst Jenny Chase at Bloomberg New Energy Finance notes that some pending projects like that might not be worth completing. What contributed to SunEdison’s downfall was that it had too many marginally profitable projects in various stages of completion and couldn’t monetize those projects quickly enough to pay back creditors.

The solar industry's highest-profile embarrassment has been the $2.2 billion Ivanpah solar project in the Mojave Desert, owned by NRG Energy and Google . More than a year after start up, it’s only generating 40% of expected electricity and may have to be shut down. The 170,000 mirrors at Ivanpah are also infamous for concentrating sunlight into death rays that have burned more than 3,500 birds alive, turning them into flaming “streamers.” It’s a similar story at a plant in Arizona built by Spanish renewables giant Abengoa . Though neither are SunEdison projects, they illustrate a lackluster trend. Abengoa’s U.S. operations filed for bankruptcy in February with $10 billion in debt. Meanwhile, Ivanpah’s troubles indirectly claimed the head of David Crane, who had bet his tenure as CEO of NRG Energy on pivoting the coal-focused power generator towards green energy. (See my 2014 Forbes Magazine profile of Crane.)  Crane spearheaded NRG’s own yieldco, NRG Yield, as a way to finance renewable projects. But investors freaked out over high costs and low returns. He resigned this year, declaring that he couldn’t make the green energy transition work. NRG will refocus on traditional generation.

To be sure, there is money to be made in renewable energy, especially when developers score sweetheart deals from ratepayers. That's what D.E. Shaw has done in Rhode Island with America's first ever offshore wind farm. SunEdison acquired a piece of that one through the First Wind deal, and still owns a less than 5% stake. It will be profitable because the developers joined with Rhode Island politicians to pull a fast one over on the state's ratepayers.

With or without government subsidies, solar power remains economically untenable. It is simply not a competitive, scalable source of power generation. It costs twice as much on average as wind power, and even more for small-scale residential installations. According to the EIA, solar PV systems generate power for about 12.5 cents per kwh. That includes 1.1 cents per kwh in subsidies. If you really want renewable energy, wind is a better option at 7.4 cents. Natural gas costs 7.2 cents per kwh, compared to which coal is a nonstarter at 9.5 cents. Coal supplied from U.S. mines is down 20% in the past two years.

The economics of solar are set to get even worse. Even though residential solar continues to grow, it might soon hit stall speed as politicians and consumers wake up to its regressive social impact and do away with “net metering” laws. Hawaii and Nevada have already decreased the amount of money that owners of home solar systems can make by sending their excess electricity to the grid. In time, analyst Huge Wynne at Bernstein Research thinks such net metering provisions will be done away with altogether as politicians rightly understand their regressive impact on other ratepayers forced to carry a bigger share of the costs to maintain and depreciate the power grid. California will reconsider net metering in 2019. Ending net metering would eliminate a big driver for adoption of residential solar. According to Bernstein, although California and Texas have similar sun exposure, architecture and patterns of settlement, California (with net metering) gets 2.2% of its power from rooftop solar, while Texas (with no net metering) does only .03%. That helps explain why shares of SolarCity are down 40% in the past year.

Another financial giant who has already lost big on SunEdison is David Einhorn. His Greenlight Capital had a stake of almost 7% in SunEdison stock, before selling about half the position in the days before the Chapter 11 filing. SunEdison was one of Greenlight’s biggest losses last year, along with coal miner Consol Energy and chipmaker Micron Technology .

It’s funny. A year ago, in May 2015 at the Sohn Investment Conference, Einhorn presented his now famous bear case against all the shale oil frackers, most notably “Mother Fracker” Pioneer Natural Resources . His argument in a nutshell: “The problem is that oil fracking is high cost.” He could have made nearly the same argument against SunEdison.

Pioneer has recovered 50% off its lows and is down just 13% over the past 12 months. Investors have come to appreciate the potential of the company’s extensive position in the Permian Basin, which is proving to hold the most economic tight oil formations in the United States. In the aftermath of the easy-money energy bubble high-cost oil may prove to be a better investment than SunEdison’s high-cost renewables.

For more on SunEdison’s collapse, check out the extensive coverage by my Forbes colleague Antoine Gara.

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