During the Covid-19 pandemic, the Tel Aviv Stock Exchange (TASE) was awash with IPOs of companies developing technologies for the solar energy industry. The two TASE solar pioneers, Enlight Renewable Energy and Energix, were joined by a series of other prominent companies in the sector, including Nofar Energy, Doral Renewable Energy Resources, and Meshek Energy. In those days when interest rates were negligible, the green energy field was seen as "the next big thing", one that was expected to take the world - or at least the domestic market - by storm.
Three years after sunny euphoria, a shadow is cast over the sector. In recent months, several applications have been filed with the courts by small and medium-sized privately held solar energy companies, requesting protection due to mounting debts of tens of millions of shekels.
The collapse of small companies in this sector goes hand-in-hand with a negative trend for most publicly traded shares over the past year. As absurd as it may seem, precisely in the midst of a summer heat wave, when demand for electricity continues to rise, the most natural resource of all - electricity generated from the sun - has hit hard times.
Last March, a company called Tahlit Solar, which installs rooftop solar panels, requested a stay of proceedings after incurring debt of about NIS 20 million. Two months later, a similar request was submitted by TDI Solar, when its debt crossed the NIS 14 million mark. About two weeks ago it was Shahar Energy, with an estimated NIS 22 million debt, that requested a stay of proceedings, and a creditor meeting convened.
A review of the applications to the courts indicates that the confluence of higher interest rates, an increase in the prices of solar panels in 2022, and difficulties in connecting to the Israel Electric Corporation (IEC) power grid due to onerous regulation, combined to cut off cash flow to the sector.
Such is the case with Shahar Energy, whose secured creditors include Bank Hapoalim, and Mercantile Discount Bank, represented by attorneys Dorit Levy Tyller and Mor Nardia of the law offices of Levy Tyller & Co. Shahar Energy, which was established in 2009 and builds rooftop solar paneling systems, ran into severe cash flow difficulties in part, "due to global external circumstances unrelated to its mode of operation".
Shahar Energy states that with the outbreak of the Covid pandemic, its revenue began to fall significantly, while the cash flow crisis it encountered recently was due to, "Heavy financing expenses, as financing of renewable energies projects ranges from 80% to 100% of project cost.
"Therefore, and bearing in mind the interest costs, recently the company's profitability has worn thin. In order to deal with the bottomless cash flow pit, the company was forced to apply for credit from various and diverse financial entities."
Among other factors, Shahar Energy notes that one of its foreign suppliers, "unilaterally increased the prices agreed in writing and ordered in writing, and for which the company paid in advance. In view of the company's refusal to pay the supplier in accordance with the prices that were increased, as mentioned, unilaterally, the supplier ceased shipping the goods (panels) and even delayed deliveries."
"Severe cash flow difficulties requiring court protection "
Tahlit Solar Atkanot, for which the Haifa District Court appointed Adv. Levy Tyller as a trustee, suffered a similar crisis. The company also installs rooftop solar panels, and, in addition, has a factory that fabricates special mounts for these systems. The application to the court stated that, "Over the last year, the solar energy industry in Israel has undergone an upheaval, and businesses are forced to re-examine their business model, and carry out efficiency measures, including layoffs."
The reasons are, according to Tahlit Solar, "rising interest rates, inflation which erodes profits, many barriers to entry and changing regulations, all of which prevent development of a significant market that is worthwhile for consumers and entrepreneurs, and is already leading to the collapse of solar rooftop businesses."
As a result, Tahlit Solar ended 2022 with a NIS 4.8 million loss, even though its revenues increased significantly and crossed the NIS 30 million mark. The company claims, "it has begun to spiral, and despite activity, has encountered difficulties with cash flow that prevent its operation without court protection."
The continued collapse of companies in the solar sector may make it difficult to achieve Israel's national target for electricity production from renewable energies: 20% of total electricity production by 2025, and 30% in 2030. To meet these targets, (which are even farther away as the electricity sector reached its 2020 target of 10% only in 2022), government company Noga Independent System Operator, which manages Isael’s electricity sector, presented its own plan. Noga recommended increasing the potential for installation of small solar rooftop installations in areas where there is demand.
Regulatory hardships and outdated infrastructure
Higher interest rates are not the only thing burdening companies operating in solar energy production. Regulatory bottlenecks and outdated infrastructure, they claim, are blocking their planned expansion. Getting permission to connect to the grid is one regulatory hurdle. Solar electricity makes up about 91% of the total renewable energy production in Israel, and industry insiders report difficulties in obtaining permits for the construction of new facilities.
The areas available are mainly in the north and south of the country, where it is hard to obtain a permit to connect to the electric grid. There is a disparity between Israel’s energy-hungry central region, and the northern and southern regions, which lack a supply network, because it is both outdated but can also be completely oversupplied in areas where connecting to the grid is impossible.
Senior executives in the renewable energy industry have told "Globes" they submitted requests for "partial approval" from IEC, that is, approval to connect to the grid. The requests are supposed to be answered within 30 days.
In practice, the companies tell of a situation where the answer was received after a year, during which time the guarantees put up to win the tenders were forfeited. Meaning, they pay increased interest on financing, while not receiving the approvals to move ahead and start building projects. "The connection between the state of the grid and the macroeconomic environment is fatal for this market," an informed source told "Globes." "This connection is causing a significant decrease in the viability of operating in the industry."
Many of the smaller solar energy players entered the sector following a favorable temporary law passed in 2018, in which the Electricity Authority determined an arrangement for rooftops at a rate of NIS 0.45 per kilowatt hour (kWh) for roofs generating 200 kWh, instead of the previous 100 kWh. The move created market volatility, but the regulation has since expired, and prices reverted to NIS 0.42 for a facility generating 100 kWh and NIS 0.33 for 200 kWh. Thus, it was claimed in the application submitted to the court by Tahlit Solar, the change in price rate made rooftop installation not worthwhile, and led to an absurd situation wherein most of the solar roofs entrepreneurs wanted to install were small roofs, since the larger the area, the lower the rate.
About three months ago, to make things easier for those small and medium-sized players, the Electricity Authority published a new regulation intended to include them in the solar energy storage bonanza. The regulation stipulated that the Authority would allow the construction or expansion of existing facilities up to a capacity of 630 kilowatts, subject to the condition that the facility would include storage, and feed into the grid during peak demand hours when there is no solar production.
However, installation of small storage facilities still requires obtaining construction and fire safety permits, which take time. Therefore, at present it seems doubtful whether this will rescue the small companies from the crisis.
The Electricity Authority had already recognized the many challenges faced by "low voltage" solar production entrepreneurs, and this week Electricity Authority Chairman Amir Shavit, and Ministry of National Infrastructures, Energy and Water Resouirces director general Yaakov Blitstein met with 70 entrepreneurs from the sector.
During the meeting, the participants discussed the latest regulations, short- and medium-term solutions, as well as issues and barriers affecting entrepreneurship in various aspects, including licensing, taxation, and property.
"The small companies must survive the current period of challenging interest rates, and hope that reduced equipment prices will be reflected more through a less volatile dollar exchange rate," a senior industry official tells "Globes."
"It is also important to solve the grid problem and particularly within the cities, but crises like the current one will pass. If the companies manage to survive, then they will also benefit from returned demand. In a few months, during a better macro period, they will be able to grow."
A substantial decrease in solar panel costs
Despite all of this, IBI Investment House's semi-annual review of the sector stated that 2022 was a record year for added renewable electricity capacity. Israeli public companies, in Israel and worldwide added 107 gigawatts of electricity generation, with an estimated 440 gigawatts in total installed capacity that is expected to continue to grow at a rapid pace.
Looking ahead to the rest of the year there is more good news, the investment house noted. "Unlike 2022, when prices of solar panels rose for the first time since 2010, there was a substantial decrease in costs due to a sharp drop in the price of polysilicon (the material from which the panels are made). Similarly, there was a drop in shipping prices.
"Our estimates anticipated that polysilicon prices would decrease by 15%-25% during 2023, but it turns out that the decrease is much sharper than our preliminary expectations, and since the beginning of the year, polysilicon prices have decreased by about 50%, while shipping prices have decreased by 40%."
"That was a lucky break for companies in the sector," a senior executive in the Israeli renewable energies industry tells "Globes." However, even that luck is limited given the depreciation of the shekel relative to the dollar, which has strengthened since the beginning of this year and eroded the improvement in profitability, along with the interest rate hikes that have been a burden for companies in the sector.
"Despite declines in share prices, they're still expensive "
The current situation in the solar energy industry highlights the difference between the small companies and the publicly traded giants that, in recent years, have focused on establishing mega-projects abroad. And yet, the rise in interest rates, which is not only Israel's problem, is bad news for these industry leaders which are working on highly financed projects, mainly solar energy installations in Israel, Europe and the US.
For example, Doral Energy's shares have plunged by 43% in the past year, while shares of Ellomay Capital, which has operations in Europe and holdings in the "traditional" Dorad power plant in Ashkelon, have fallen by 29%. Nofar Energy's shares fell in the past year by a more moderate rate of about 9%, while Enlight Energy's shares, the sector's largest company in terms of market cap, fell by 10%. The Tel Aviv Cleantech index, which includes renewable energy producers as well as companies that develop new technologies, fell by about 26% during the past year.
"The industry is less attractive today for investment. Despite the drop in share prices, these companies are still a bit expensive," says a senior institutional executive. "The reason is simple; in the end, why should I invest in a project that gives a 5% return, when that's what I get for a US government bond? The perception two years ago was that these companies would grow aggressively in electricity generation capacity. But you have to remember that building a megawatt costs about a million dollars. So, if a company wants to build a gigawatt (1,000 megawatts), it needs a billion dollars. Where will the money come from? Either through capital raising, which means diluting the shareholders, or through debt raising in an era of rising interest rates."
He adds that generally, "operating companies in other fields grow through EBITDA. But the large renewable energy companies don't have enough cash flow to generate the growth they wanted for production, so they must raise financing.
"This means as an investor, I am becoming more and more diluted. In the not so distant past, they took into account only the aspect of growth in the amount of electricity that the companies want to produce. They forgot about the financing they would need to get for this. If two years ago, these companies traded at a multiple of 3x and sometimes 4x the capital, today they trade below a multiple of 1.5-2, which is still not attractive enough for me."
Published by Globes, Israel business news - en.globes.co.il - on July 17, 2023.
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