While at its core, a five-year extension to the Investment Tax Credit (ITC) by the US Congress is a long-term boon to the solar industry, the short-term results are wreaking havoc on certain industry leaders.

In the past two weeks, both SunPower and SolarCity have announced that their chief executives would voluntarily cut their annual pay to $1 in the face of underperformance and restructuring.

SunPower

SunPower came first, with its 10 August announcement that despite higher-than-expected quarterly earnings – the company reported $420.5 million in earnings for the second quarter compared to an expected $345.08 million – it foresaw full-year losses before interest, tax, depreciation and amortisation of about $175 million as opposed to projected earnings from May of $50 million.

Along with the lowered guidance and the announcement that chief executive Tom Werner was docking his pay to $1, SunPower said it was slashing its workforce by 15%, with 1,000 workers being cut due to planned relocation of its manufacturing facility from the Philippines to Mexico and 200 more being laid off from downstream and corporate divisions.

SunPower expects to incur restructuring charges of between $30 million and $45 million.

In the day following the announcement, SunPower’s stock fell by more than 30%, further dropping to a 52-week low of $10.03 by 4pm on 23 August.

Werner placed the bulk of the blame for lagging business on the ITC extension and aggressive pricing practices by new entrants into the solar space. 

“The extension of the Investment Tax Credit (ITC), as well as the bonus depreciation credit, while beneficial to the long-term health of the industry, has reduced the urgency to complete new solar projects by the end of 2016, with many customers adopting a longer-term timeline for project completion,” Werner said in a statement. “Additionally, near-term economic returns have deteriorated due to aggressive PPA pricing by new market entrants, including a number of large, global independent power companies.”

Werner said that the company is seeing customer project IRRs rising in the near term as buyers have increased their “hurdle rates” as well as continued disruption in the yieldco space, both of which were key factors to the disruption of its annual earnings outlook.

SolarCity

Seven days after SunPower’s announcement and eight days after its quarterly earnings report was released, SolarCity announced that it would cut operating costs and slash the pay of chief executive Lyndon Rive and his brother chief technology officer Peter Rive to $1 from $275,000 per year.

The company said in a 17 August filing with the Securities and Exchange Commission (SEC) that it plans to cut operating expenses to match lowered guidance for solar installations than it had previously expected. SolarCity expects to face restructuring charges of $3 to $5 million, with the bulk of that coming from severance payments.

The next day, SolarCity entered a filing with the SEC offering to sell up to $124 million of 18-month bonds at an interest rate of 6.5%. An SEC filing showed that Elon Musk purchased $65 million of the bond offering, and the Rive brothers each bought up $17.5 million. The total amount raised through the offering was not disclosed.

That compares to the company’s first such bond offering in October 2014 of one- to seven-year bonds with interest rates between 2% and 4%. In August 2015, SolarCity issued five- to 10-year bonds bearing interest of 4% to 5%. Detractors have posited that the company, which spent $216 million last quarter and reported at the time having only $146 million cash on hand, looks to either be becoming increasingly cash hungry or that investors are becoming less interested in buying its bonds.

With these things in mind, the $2.6 billion offer to buy out SolarCity by Tesla – which on 23 August announced a new 100kWh battery in its Model S P100D – is taking on the appearance of a bailout rather than a merger.

S&P Global Market Intelligence analyst Efraim Levy said earlier this month that while the agency sees the benefits of a combined solar and storage offering and the manufacturing efficiencies that would ostensibly come along with the SolarCity-Tesla merger, it remains concerned about cash flows and capital needs.

Looking ahead

Critics of the solar industry are raising the volume on their protest against unsustainable economics with good reason, because it appears that the largest companies are failing to learn lessons from failures of the past. Bidding at unsustainably-low prices for contracts continues even despite this practice, contributing greatly to the ongoing bankruptcies of SunEdison and Abengoa.

Meanwhile solar panels are reportedly being turned out at higher rates than demand calls for, a situation that echoes that which drove several solar companies into bankruptcy in 2012 including Energy Conversion Devices, LDK Solar, Suntech Power and Solyndra.

As something of an indicator for the health of the solar market post-ITC extension, Guggenheim Solar ETF has fallen 30.1% so far in 2016 and has dropped 62% since August 2011—this amidst record closes posted by the S&P 500, DJIA and Nasdaq.

Even in the face of lower-than-expected bookings for the first half of 2016 – the company now expects to install between 900MW and 1GW through 2016 as opposed to a previous expectation of between 1GW and 1.1GW due to a drop in residential demand – spokesperson Kady Cooper has said the company fully expects to grow again in 2017. 

SunPower, on the other hand, told investors that it expects to sustain losses of between $100 million and $200 million next year.

While the general consensus is that the industry will likely see a renaissance beginning in 2018, as the outside limit of the ITC draws near, that provides little comfort for investors into companies with cash-strapped and debt-laden balance sheets today.

Shawn Qu, chief executive of Canadian Solar – which has decided not to pursue a yieldco and posted above-expectation shipments gross margins, revenue and shipments in the second quarter – noted in an investor call that the key to weathering the expected industry downturn is inventory control.

“In previous downturns, even in the worst quarters – let’s say in 2011 and 2012 – if you didn’t have inventory problems… you still made money,” Qu said. “This is the situation we observe today as well.”