During the COVID-19 pandemic, the Tel Aviv Stock Exchange (TASE) has been flooded with initial public offerings from companies developing solar technologies. Two of TASE's solar leaders, Enlight Renewable Energy and Energix, have joined a number of other industry leaders, including Nofar Energy, Doral Renewable Energy Resources and Meshek Energy. At a time when interest rates were slim, green energy was seen as the "next big thing," one that would take the world -- or at least the domestic market -- by surprise.
After three years of sunny euphoria, a shadow hangs over the strip. In recent months, small and medium-sized solar energy companies have submitted several court applications seeking protection from accumulating debts amounting to tens of millions of shekels.
The decline in small business in this sector is consistent with the negative trend of most public stocks over the past year. As silly as it may sound, in the midst of the summer heat, when the demand for electricity continues to soar, the most natural resource of all—the electricity generated by the sun—is having a hard time.
Last March, a company called Tahlit Solar, which installs solar panels on rooftops, requested a fee freeze after borrowing some 20 million shekels. Two months later, TDI Solar filed a similar lawsuit when its debt exceeded NIS 14 million. About two weeks ago, Shahar Energy, which has a debt of 22 million shekels, applied to stop the proceedings, and a meeting of creditors was held.
A review of court documents shows that a combination of high interest rates, higher prices for solar panels in 2022 and difficulties connecting to the Israel Electric Corporation (OVK) grid due to costly regulation have combined to reduce cash flow to the sector.
The case is Shahar Energy, and its secured creditors are Bank Hapoalim and Mercantile Discount Bank, represented by attorneys Dorit Levy Tyler and Mor Nardia of the law firm Levy Tyler & Co. Shahar Energy, which was established in 2009 and has built rooftop solar installations. The panel systems have had significant cash flow problems, in part due to "external global conditions that have nothing to do with how they operate".
Shachar Energy says that since the start of the Covid pandemic, its sales have begun to drop dramatically, while its recent liquidity crunch is linked to project cost.
As a result, and taking into account interest payments, the company's profitability has been declining lately. To cover the shortfall in cash flow, the company had to apply for loans from various financial institutions.”
Shahar Energy notes, among other things, that one of its foreign suppliers “unilaterally increased the prices agreed upon in writing and requested in writing, for which the company paid in advance. Because the company refused to pay the supplier according to the increased price paid, it was said, the supplier unilaterally suspended Supply of goods (panels) until the last supply.
"Severe cash flow problems that require legal protection"
I gave up Solar Akanot, who was sued by the lawyer at the Haifa District Court. As a trustee, Levi Tyler faced a similar crisis. The company also installs solar panels on roofs and has a factory that makes special mounts for these systems. "Over the past year, the solar energy industry in Israel has been subjected to a shock, and companies are forced to review their business model and take effective measures, including layoffs," the court's request states.
According to Talito Solaro, the reasons for this are “high interest rates, inflation eroding profits, many barriers to entry and changing regulations preventing the development of an important market worthwhile for consumers and entrepreneurs, which is already leading to a business shower of avalanche for the industry.” roof vents.
As a result, Tahlit Solar ended 2022 with a loss of NIS 4.8 million, despite its revenues growing significantly to exceed NIS 30 million. The company claims that it "has begun to decline and, despite its activities, has problems with the flow of funds that do not allow it to operate without legal protection."
The continued decline of solar energy companies could make it difficult to achieve Israel's national target for renewable electricity generation: 20% of all electricity production by 2025 and 30% by 2030. 10% target for 2020-2022, independent system operator Govt Noga, which operates the sector Electricity with Ezel, he made his plan. Noga recommended increasing the possibility of installing small rooftop solar systems in areas where there is demand.
Regulatory issues and outdated infrastructure
High interest rates aren't the only thing weighing down solar companies. They argue that regulatory bottlenecks and outdated infrastructure are hampering planned expansion. Obtaining permission to connect to the network is a regulatory hurdle. Solar power accounts for about 91% of all renewable energy production in Israel, and industry insiders have reported difficulties obtaining permits to build new facilities.
The accessible areas are mainly in the north and south of the country, where it is difficult to obtain permission to connect to the electricity grid. There is a difference between the central region of Israel, which suffers from a shortage of energy, and the northern and southern regions, where there are no electricity networks, as both are old, but they can also be completely saturated in areas where there is no network connection. maybe.
Senior executives in the renewable energy industry told the Globes that they have submitted applications to the IEC for "partial approval" — that is, permission to connect to the grid. Requests must be answered within 30 days.
In practice, companies take into account the situation when the answer comes after a year, during which the guarantees established for winning bids are lost. This means that they are paying increased interest on the financing without obtaining the necessary approvals to start construction on the projects. "The correlation between the state of the network and the macroeconomic environment is fatal to this market," the source told the Globe. "This association leads to a significant decrease in the sustainability of mining in the industry."
Many small solar companies entered the sector after a favorable temporary law passed in 2018, in which the Electricity Authority set a rooftop agreement of 0.45 shekels per kilowatt-hour per rooftop generating 200 kilowatt-hours, instead of 100 kilowatt-hours. watts in the previous hour. This move caused fluctuations in the market, but the rules ended and prices returned to 0.42 shekels for a 100 kWh installation and 0.33 shekels for a 200 kWh installation. So the lawsuit by Tahlit Solar argued that the price change made rooftop installation unattractive and led to an absurd situation where most of the solar rooftops contractors wanted to install were small rooftops because the larger the area, the lower the price.
About three months ago, to make it easier for these small and medium-sized players, the Electric Power Authority issued new rules to include them in the solar energy storage windfall. The rules stated that the authority would allow the construction or expansion of existing facilities up to 630 kilowatts, provided that the installation includes storage and feeding it into the grid during peak demand hours when there is no solar power generation.
However, installing small warehouses requires building and fire safety permits, which takes a lot of time. Therefore, it now seems doubtful whether it can save small businesses from the crisis.
The Electricity Authority has previously acknowledged the many challenges faced by low-voltage solar contractors. This week, Electricity Authority Chairman Amir Shavit and Director General of the Ministry of Infrastructure, Energy and Water Resources Jacob Bletstein met with 70 entrepreneurs from the sector.
During the meeting, the participants discussed the latest regulations, short and medium term solutions, as well as challenges and obstacles affecting entrepreneurship from various aspects, including licensing, taxation and ownership.
"Small companies have to get through the current period of tight interest rates and hopefully lower equipment prices will reflect more on a less volatile exchange rate for the dollar," a senior industry official told Reuters. "Globe".
“It is also important to solve the network problem, especially in cities, but crises like the current one will pass. If businesses can survive, they will also benefit from a recovery in demand. In a few months, when there will be more good macro period, They will be able to grow."
Significant reduction in the cost of solar panels
Despite all this, a six-month review of the sector by IBI Investment House indicates that 2022 was a record year for renewable electricity capacity additions. Israeli state-owned companies in Israel and around the world added 107 gigawatts of electricity, and the estimated total installed capacity of 440 gigawatts is expected to continue to grow at a rapid rate.
The investment house noted that in the rest of the year, there is more good news. “Unlike in 2022, when solar panel prices rose for the first time since 2010, there was a significant drop in costs due to a sharp drop in the price of polyacrylic (the material from which panels are made. Likewise, there was a drop in transportation prices.
“We estimate that polysilicon prices will decline by 15-25% in 2023, but the decline turned out to be much larger than our previous expectations. Since the beginning of the year, polysilicon prices have fallen by about 50%, while transport prices have fallen by 40%.
“It is fortunate for companies in this sector,” an executive in Israel's renewable energy industry told the Globe. However, even this possibility is limited, given the decline in the shekel price against the dollar, which has intensified since the beginning of this year and undermined the improvement in profitability, as well as the rise in interest rates, which has harmed companies this year. section. . .
“Even though stock prices are down, they are still very expensive.”
The current situation in the solar energy industry highlights the gap between small companies and listed giant companies, which in recent years have focused on building huge projects abroad. However, rising interest rates, which are not just an Israeli problem, is bad news for industry leaders working on crowd-funded projects, especially solar installations in Israel, Europe and the United States.
Shares of Doral Energy, for example, have fallen 43% in the past year, while shares of Ellomay Capital, which has operations in Europe and a stake in the "traditional" Dorad power plant in Ashkelon, are down 29%. Shares of Nofar Energy have fallen at a more moderate pace of about 9% over the past year, while shares of Enlight Energy, the sector's largest company by market value, are down 10%. The Tel Aviv CleanTech Index, which includes producers of renewable energy as well as companies developing new technologies, is down about 26% in the past year.
“The industry is less attractive for investment today. Even though stock prices are down, these companies are still a bit too expensive,” notes the high-ranking CEO of the organization. “The reason is simple. After all, why would I invest in a project that yields 5% when that's what I'm getting for US Treasury bonds? Two years ago these companies were thought to be growing strongly in the country but you have to remember that building a megawatt costs about $1 million. So if a company wants to build a gigawatt (1,000 MW), it needs a billion dollars. Where does the money come from? At the expense of the growth of equity, which implies the weakening of shareholders or the increase in debt in an era of high interest rates.
He adds that “companies in other industries generally grow at the expense of EBITDA. But the big renewable energy companies don't have enough cash to generate the production growth they want, so they have to raise cash.
“It means that as an investor I am getting weaker and weaker. In the recent past, they only looked on the side of increasing the amount of electricity that companies wanted to produce. They forgot the money that was set aside two years ago. These companies trade at 3x and sometimes 4x multiples, and today they trade below the 1.5-2 multiple which Still not attractive enough for me.
By Globes, Israeli Business News - en.globes.co.il - Jul 17, 2023
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