Sky Yim CEO of REC Systems Korea

Question: Can you tell us a little bit about your company?

Answer: RE C is one of the world’s largest producers of polysilicon and wafers, which is the base raw material for making solar cells. We are based in Oslo, Norway and are listed on the Norwegian stock exchange. Our market cap is over US$2 billion right now, putting us among the top three largest pure-play fully integrated solar companies in the world. Recently we invested $2 billion dollars into a fully-integrated solar module manufacturing plant in Singapore in 2007. We also invested an additional $2 billion for the expansion of our polysilicon and saline gas plants in the United States. Saline gas is used in the production of polysilicon and the semiconductor industry, because silicon wafers are used for both semiconductors and solar cells. The purity for solar cells is a little bit less important than for semiconductors though. So the high-grade stuff goes to the semiconductor industry and the lower-grade stuff goes to the solar cell industry. By the end of this year, when we’re up at full capacity, our total production will be over 1 gigawatt.

Q: Do other companies produce this much?

A: I believe Suntech Power in China produces about 750 to 800 megawatts, but companies are always expanding capacity. Many major companies are constantly expanding capacity, so it’s hard to say how much capacity each company will produce by the end of the year, as there are so many players in the market now. But our company is fully integrated – we produce everything starting from polysilicon. Most other companies buy wafers or cells and assemble them into modules. They have a factory to just assemble the final product, which is not that hard to do. You basically put the cells in a frame and weld the joints together. A large number of companies just do assembling or OEM work.

Apart from our production capacity, RE C has proprietary technology for polysilicon and wafer production. That’s where the difference in quality comes in, starting from the polysilicon production, depending on its purity. RE C also employs fluidized bed reactor (FBR) technology for its polysilicon production, while most others use the Siemens method. This reduces energy usage for production by 50 percent, which makes our products highly competitive while being top quality. In addition, we use the 3-busbar production method, as well as having developed a new coating process. All these technology advances have led to our wafers recently having set a new record for high efficiency. Along with ECN (Energy Research Center of the Netherlands) we have together made the world’s first multicrystalline solar panels with 17.0 percent efficiency. The performance measurement result was recently officially confirmed by European Solar Test Installation (ESTI ).

Q: Do you have customers now?

A: No. And here’s why. This is the structure of our project. We establish an SPC, a special purpose company. It’s a project company, because it doesn’t have manufacturing, nor is it a plant, just an incorporated legal entity. All you need is an address and starting capital. Then what we do is find a piece of land. This land, we’ll buy it or lease it through the SPC, and we get the permits as well. Now you’re ready to build a solar farm. But before you can do that you need to have money, like the investors we’re talking about. So we source an equity investor and also arrange for debt financing, since we’re doing Greenfield development internally. Based on the total project investment costs (TPIC), we calculate the optimal debt and equity mix. Once we have secured the land and all the permits, and have lined up the financing, we source a construction company that can undertake the structural installation. We give RFPs to different companies to see who can give us the best quality at the best price. There are a number of turnkey EPC companies that provide the engineering, procurement and construction. However, we also have internal engineering capabilities and our own module supply, so we cover every phase of project development from site feasibility to financing and engineering. That’s why in many cases pure play EPC companies end up downsizing because of a lack of work. After a few years the local guys figure out that building a power plant isn’t rocket science, and they have better local infrastructure. But you need to know how to put it all together for the most efficient layout. A good location with high irradiation, the optimal array configuration of the system, the angle and layout of the solar panels, etc., all those kinds of factors affect energy production. So you have to take those things into consideration. Pure play EPC companies don’t do their own development, so they wait and sit around until they get a request from a developer. But since we also do those things ourselves, we just outsource the construction part. We take care of everything else.

Though we look for an equity investor, in the beginning we put our own equity into the project as bridge financing. Once we have built the power plant, we sell it to an equity investor and pull our cash back out so we can do other projects. The revenues from the electricity sales are guaranteed by the government. Thus, these projects provide stable, long-term returns. Even if the credit or equity markets crash, the return remains stable for the project owner. Because of that stability, pension funds, insurance companies and long-term asset management funds invest in this kind of project. Solar projects are very steady in return on investment. They drop in efficiency about 0.1 percent annually, but do not drop much further than that. So they are very stable and attractive investments. So in essence, you could say that our customers are the ultimate project owners, the financial investors who want to own these assets as a long-term investment.

Q: What operations do you have in Asia?

A: We currently have our APEC headquarters in Singapore, managed by Andreas Balzer. He’s in charge of all of Southeast Asia including Australia and India. And this is the systems business unit – RE C Systems. RE C also has sales offices throughout other countries. They have sales representatives in every country that has solar projects. RE C Systems’ business unit headquarters is in Munich, Germany. That’s where we have our central engineering headquarters. It’s located there because they have the most experience and knowhow in Germany.

Q: What about your operations in Korea?

A: We currently do greenfield project development. What that means is we develop a project from scratch – from sourcing the land to arranging financing. RE C was established in Korea in March of 2009. We set up a project development team to cover the full scope of project development. We also set up an internal engineering team, which is very important because it tells people that we are not just a broker, we have our own engineering capabilities. Currently we have concluded MO Us with two local governments in Daejeon and Busan. Those two areas are very keen on increasing the use of renewable energies in their respective areas.

Previously our whole team was part of the CONERGY group. Our group completed the most projects in Korea for a foreign company. We completed close to 50 megawatts of projects in Korea before we switched to RE C, which is the most of any foreign company in Korea.

Q: Do you have difficulties as a foreign company in Korea?

A: Up until 2009 both foreign and domestic alternative energy companies were pretty even. But starting in 2009, government regulations changed, which make it very difficult to realize projects in Korea. The government, first of all, drastically reduced the feed-in-tariff, which is how much they buy the electricity for. Second, they put yearly caps on how many megawatts of projects can be done in total for the market. So if your project isn’t built within the first 50 megawatts, then you can’t do any more for that year. And lastly, they instituted a 3-month construction requirement. That means from the day your project gets approval you have 3 months to complete the construction. For foreign companies it’s very difficult to do that, but for local companies it’s much easier because they already have local infrastructure in place. But for foreign companies this presents a very risky barrier.

Q: Is this discriminatory or does it have some business logic?

A: It does have some business logic, because it weeds out projects that are just sitting around and cannot be realized. But it is a little discriminatory in disguise, because for foreign companies it takes at least a month just to ship the main products, such as modules and inverters, and securing the financing takes a while too. For foreign companies to successfully and safely build a 1MW project, it would take at least six months. Previously, there were no time restraints, and if it took a year to build a plant it took a year.

Another reason is that the government wants to limit the size of projects. They prefer smaller projects carried out by local installation companies and want to limit how many large projects foreign companies do. Or at least it seems that way. They want to decentralize the distribution of electricity, which has become part of their roadmap on the dissemination of renewable energy. But it is difficult for our company to work under these constraints, because a company like RE C cannot operate on small 3-to-100 kilowatt projects, since economies of scale aren’t there.

Q: What do you think about the future of solar energy in Asia?

A: I would say it’s good, there’s a lot of potential. Why? Because in developing countries and regions, they have a lack of electricity transmission infrastructure. So solar power can be used as a stand-alone power source. For instance, a lot of mining companies use solar because they’re way out in the middle of nowhere. So they are starting to use solar power to provide power sources off-grid.

Also in places like the Philippines, the infrastructure is very poor. They have a lot of islands, which makes it difficult to provide energy from a central location like a traditional fossil-fuel power plant. For places like schools, government offices and hospitals, it’s easy to provide electricity with solar power. That’s the good thing about solar power. Wind power is also good, but you can’t stick a wind turbine on a roof, or in the middle of a school playground.

Q: How long do you think it will take to bring the cost of solar power down so that a common household can use it?

A: In countries like the United States and Europe, solar power is almost at grid parity. It’s almost equal to the cost of conventional sources of electricity production. In tier IV areas in California, where the electricity price is really high, solar power has reached grid parity, which means the cost of electricity generation is at par with traditional power plants. But for developing countries, which rely on coal-fired power plants, we still have a ways to go. Coal power is the most polluting type of power generation and it produces a lot of harmful gases, but the cost of solar hasn’t come down enough to make it a viable alternative for developing countries.

Also, the spread of renewable energies is heavily reliant on how much the government will support it – number one in terms of economic support, and number two in terms of social awareness. This is because the government has to take the lead to educate people on why renewable energy is clean energy, because of carbon emissions, greenhouse effects, global warming issues. It’s up to the government to support renewable energy with regulatory guidelines and frameworks to make the projects possible. If there’s a balance between local and foreign industries, they can make a win-win situation between the two. There’s a learning curve for renewable energy, so outside experts are often necessary to get things off the ground. But to make it attractive for experts and technology to come, there has to be an incentive.

Q: What sets your company apart from other solar energy companies like U.S.-based SunPower?

A: We are fully integrated, covering the full value chain of production through to greenfield project development and realization. Not only do we produce the polysilicon and the base raw materials, we also produce solar modules, and we have our systems unit which does project development. Most pure EPC companies do not have the expertise for securing and structuring financing, so they do not undertake project development. Also, Greenfield project development entails development risks, which have to be very carefully mitigated in order to prevent cost overruns and to avoid regulatory barriers. In addition, we also provide turnkey EPC services to other companies as well.

Q: Why aren’t other companies doing this?

A: Well, they are now. Manufacturers traditionally have only been manufacturers, like automobile companies. They make cars, but they don’t want to deal with distribution, so they sell the cars to dealers. Manufacturers have always traditionally stuck to manufacturing products. But now, since there’s been so much fluctuation in the industry, manufacturers are trying to smooth out the fluctuations themselves. For instance, in 2007 and 2008 there was a shortage of modules because there was, 1) a shortage of polysilicon, and 2) the Spanish government announced a drastic reduction in the feed-in-tariff, so all the developers there rushed to quickly finish up projects and took a lot of volume. This year, Germany has done the same thing, so the first half of this year, much of the volume of modules is going to Germany. There’s also always an unstable demand for modules for the same reason. Just as an example, a project developer in Spain in 2008 might have ordered 50 megawatts of modules for the year, but over time the regulatory environment changed, so they weren’t able to complete the 50 megawatts, and so the manufacturer is stuck with 30 megawatts of unused modules. Other developers might have an order for 10 megawatts but only use two. Of course, if the manufacturers are stuck with extra modules and there is an oversupply, the prices nosedive. The manufacturers increase their production to meet demand, but then the demand can drop unexpectedly. So now they have to drop their prices to get rid of excess inventory. The prices of modules then fluctuate a lot, depending on what country’s government does what with their regulations each year. One country can be flying high but with one change of regulations, the market can pretty much go flat.

Q: What role can your company play in a market like India, and what projects are you looking for?

A: I’m not an expert in the Indian market right now, but what we can do is we can work with a local partner who has the requisite knowledge, which means knowledge of the business market in India. To work with a partner like that, we can provide technical knowhow, in terms of the feasibility, engineering, technical resources and the financing knowhow. It’s not rocket science, but it takes solid knowledge and experience to successfully execute a project through to completion while avoiding costly development risks. Also, there are certain guarantees that a project developer must provide in order to secure financing, and as such, we have the financial strength to secure the financing. We’d have to know specific details of the regulatory market before we can undertake a project, though. My understanding is in India they also have a feed-in-tariff, but at the state level. And I have heard that support of the feed-intariff has not been established in many states yet, only two or three. I’ve also heard that some states, like Gujarat, have already closed all the bids for solar energy projects this year, already having received applications for 500MW of projects. However, in most state governments they haven’t announced the feed-in-tariffs yet, so it’s hard to say for sure when we will set up shop in India.