By now, everyone knows that General Electric is in big trouble. However, the market still believes that they’ll somehow manage to get out of the hole they’ve dug for themselves. They won’t, because of what has happened with solar over the last couple of months.
General Electric is between a rock (declining revenues), and a hard place (off - balance sheet liabilities)
By now, everyone knows the troubles that have been brewing inside General Electric for the last couple of years, thanks in part to the excellent investigative piece by Thomas Gryta and Ted Mann form the Wall Street Journal. If you still haven’t read “GE Powered the American Century—Then It Burned Out“, do it now. It’s a tour de force in investigative journalism.
Long story short, General Electric’s managers have always been under pressure to deliver strong results for their respective divisions - basically growth in revenue, market share, and profits. Unfortunately, their two big profit centers - GE Finance and GE Power - got so big that they could no longer grow faster than their respective markets.
However, in such a highly hierarchical conglomerate, bad news tend to go down, not up the command chain - and so division managers got stuck with unrealistic targets. So, they resorted to paper shuffling, creating profits and revenue today, at the cost of off - balance sheet liabilities for years to come. For exemple, GE Power management pushed their sales teams to amend contracts for turbine maintenance, extending the warranty period and lowering monthly fees, in exchange of an up-front payment from customers. In another instance, GE Finance had spun off most of its insurance unit into Genworth Financial back in 2004, however, a big chunk of long-term insurance policies included in the package rieked so much of underpricing at the time that GE had been corenered into assuming all future liabilities, should they arise. And the chickens came home to roost at the beginning of 2018, when GE had to warn its investors about the upcoming charge to its results.
To put it into a nutshell, GE’s core businesses have been lingering for some time now, while unexpected off - balance sheet liabilities keep materialising right and left. An unenviable situation to be in.
General Electric’s lifeline: renewable energy
Of course, GE’s top management isn’t oblivious. John Flannery, the company’s CEO, has a plan for restructuring its business - getting rid of GE Capital (if ever that’s indeed possible without assuming a big chunck of its off-balance sheet liabilities), and bet big on renewable energies and aviation, while trying to safeguard its Power business. Las year, these three divisions brought in respectively $9 billion, $27 billion, and $35 billion (you can see it all here, on GE’s own website). Renewables in particular, is presented like the company’s lifeline - a big foothold in a high-growth sector, that should be able to grow fast enough over the upcoming years to paper over all the troubles inherited from past mistakes. GE’s power capacity additions last year came from renewable sources. The company expects the sector to account for 70 percent of annual capacity additions through 2021.
There’s only one teenie tiny problem with that plan. Virtually all of GE’s renewables effort is in wind-power generation. It’s only fitting, knowing that the core of General Electric’s power business is built on turbines. This is where its engineers are good at - the cream of the crop, really.
As it turns out, wind power has a lot of issues. You might remember Danish Naturgas near-death experience back in 2014, when Dong Energy (that was their real name, I kid you not, before they changed in to Ørsted A/S) realised that their prided wind farms had a much shorter life expectancy than projected. The wind mills’ blades were prone to new, never-encountered-before kinds of stress, and were extremely costly to repair. The cost of that “discovery” was a record-setting deficit of 12 billion DKK, the largest of any Danish company ever, that Dong Energy registered in 2015.
Dong Energy only avoided bankruptcy thanks to the state stepping in and signing one huge check. It made sense at the time, for the Danish government, to think strategically - if they could save the company and give it a few more years to perfect their technology, they would come out as huge winners. Back in 2014, wind power generation looked as the best bet for the future for Denmark. Or General Electric, for that matter.
How solar overtook wind
Wind power’s issues didn’t really matter for a long time, because there was no alternative. Not cheap enough, at least, to counter wind. Solar, for instance, was notoriously expensive, and only managed to survive thanks to huge subsidies from the state, where electricity produced thanks to solar would be bought at above-market prices. People and business alike would take advantage of governmental contracts, install solar panels, and sell back the electricity they produced back to the grid. In Europe, the Spanish government had been especially aggressive in its efforts to subsidise solar energy, resulting in a huge hole in the budget. When the government announced they would cut subsidies back in February 2013, because these had resulted in a $37.4 billion tariff deficit in the electricity system, international funds who had together invested over $17 billion in the scheme threatened to sue.
These unrelenting efforts to throw money down the solar hole did create a demand for solar panels, and manufacturers kept innovating, bringing down production costs and lenghtening the lifespan of their products. The Bank of International Reconstruction and Development, for instance, would finance solar panel farms all around the world, at attractive interest rates, creating a virtuous circle of cheap financing and state-guaranteed future cash-flow for solar projects. These “green bonds” really took off in late 2013, and became a go-to solution for financing ever larger projects. For instance, Lietuvos Energija, the state-owned Lithuanian energy company, announced a plan to raise €6 billion to finance its renewables effort, back in 2017. That’s 12% of the whole county’s GDP!
Finally, in the last few months of 2018, the solar panel market gave in under the unrelenting flow of these massive investments, and the price for panels collapsed. It plunged 40% over a couple of months, making solar electricity - hold on to your seats - the cheapest electricity out there, WITHOUT state subsidies. One megawatt of capacity now costs less than $1 million, and can go for as low as $600 000 for large projects, with a projected lifespan of 25 years. And I’m talking European sourced infrastructure, not Chinese dumping! Only nuclear could compete, cheaper for a fraction of a cent, but who would rather build a nuclear power plant instead of a solar panel farm to shave half a cent cent off one kW/h?
General Electric bet on the wrong horse - for one last time
And this is where General Electric is screwed. They have no virtually no presence in solar, the place where they should be, as their main hope of survival is renewable energy. Just as with gas-fired turbines, they’ll end up with a huge pile of worthless wind power turbines, once again out of sync with the technology cycle.
Does this mean that wind power is dead? No, of course. We will need wind power to counter-balance the volatility of solar power generation - a wind/solar mix was always the long-term plan for renewables. However, what just happened over the last few months changed the wind/solar mix from 80%/20% to 20%/80%. And General Electric just found itself fighting for 20% of the market share, when they thought it’d be 80%. All of a sudden, their main driver of growth, supposed to compensate for past mistakes and avoid bankruptcy, is gone. Nothing stands between GE and the mountain of off - balance sheet liabilities that are coming due.
You’ve read it here first.