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
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
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
The solar industry's highest-profile embarrassment has been the $2.2 billion Ivanpah solar project in the Mojave Desert, owned by
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
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 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.