SunPower Corporation (NASDAQ:SPWR)
May 15, 2013 10:00 am ET
Robert Okunski - Senior Director of Investor Relations
Thomas H. Werner - Chairman, Chief Executive Officer and President
Jack Peurach - Executive Vice President of Products
Howard J. Wenger - President of Regions
Charles D. Boynton - Chief Financial Officer and Executive Vice President
Vishal Shah - Deutsche Bank AG, Research Division
Colin W. Rusch - Northland Capital Markets, Research Division
Sanjay Shrestha - Lazard Capital Markets LLC, Research Division
Robert W. Stone - Cowen and Company, LLC, Research Division
Brian K. Lee - Goldman Sachs Group Inc., Research Division
Scott Reynolds - Jefferies & Company, Inc., Research Division
Good morning, everyone. I'd like to welcome everybody to SunPower's 2013 Analyst Day. It's been a couple of years since we hosted one, a lot of changes over the last couple of years. Thanks for taking the time out of your busy day to come here in person. I'd also like to welcome everybody that's listening on the web. At the end of the day, we're very hopeful that you'll have a much better understanding of who SunPower is and the value that we are creating based on our model, and why we believe we'll be a long-term winner in this space.
Before we get started, a few housekeeping items. Can you please make sure that you turn the ringers off on your cell phones, please? I know I can't convince you to turn them off, but if you could just turn down the ringers to vibrate, that'd be great.
Questions will be held in a formal Q&A session. We're going to present the formal presentation. We'll take about a 15-, 20-minute break. Lunch will be available in the room next door, and then we'll reconvene with the executive team for Q&A event. Remarks will be about 3 hours long today. Let me touch a little bit on the schedule here. Okay, here we go.
So presenters today, Tom Werner, obviously, our CEO, since he spent some time on our long-term strategy, as well as our competitive position. He'll be followed by Jack Peurach, who's our EVP of Products, who will talk about our technology advantage, especially in relation to a levelized cost of energy. Howard will then come on stage, he's the President of Regions, who will talk about our downstream strategy by region and segment, also provide probably a much-anticipated pipeline update, as well as what we're doing with the partnership with Total. Then Chuck Boynton, our CFO, will spend some time on our financial overview, as well as doing a deep dive on residential leasing. And we'll also provide the 2013 guidance color based on the release that we've put out this morning before we opened. Tom will then come out with closing remarks, and then we'll do lunch and Q&A.
Obviously, Slide 3 is our Safe Harbor statement. Obviously, we will be making forward-looking statements today, subject to various risks and uncertainties. These risks may affect some of these forward-looking guidance. The risks are available in our 2012 10-K, as well as our 10-Qs. Please see those documents for those risk factors.
We've also posted a set of slides today in PDF form on our Investor Relations website. Feel free to download those. And we've also updated the Q1 2013 metric sheet that we typically post to reflect today's new guidance.
And with that, I'd like to turn the call over to Tom Werner to get us started. Thank you.
Thomas H. Werner
Good morning. As Bob said, thank you very much for taking the time to meet with us today. The SunPower team is thrilled to spend some time with you. We're not going to kill you with PowerPoint. We will have time for lots of your questions.
So given that this is practically my 10-year anniversary with SunPower, I thought I would have the liberty to sort of talk big picture to begin things with. So we thought that Geoffrey Moore's crossing the chasm. His figures, you could place are -- and just to reflect a little bit, it's about where we're at. And if you think about where solar energy's at today, it is really out of fundamental transition and for that matter, the electricity market is in fundamental transition.
And if we look at the initial adopter period, and we go back 25 years, if you think about that, it's when the off-grid market really drove the business. It really drove growth. So around 15 years ago, we incurred, incentivized on this really accelerated growth. So we had this period when I started taking [indiscernible], wow, this is awesome. It's a $2 trillion market. And now we see that as [indiscernible] on where we're at today, crossing that chasm is really just at the beginning. Now recently, we have a huge market opportunity. There's fundamental difference on what it takes to win, a fundamental difference as we move into this mainstream non-incentivized market, which is way, way bigger than the initial early-adopter market.
When you think about SunPower, we had -- we're fundamentally [indiscernible] better [indiscernible] it was clear to us that we'll capitalize on the world market [indiscernible] differentiated product that had a strong balance sheet and then most importantly, had very deep channels to market, we vertically integrated towards the market. I see the familiar faces in the room. Remember when [indiscernible] we're fundamentally different in composition. We look different. And that is very, very much on purpose.
So just going to go [ph] these slides of each of our presentation. Jack, Howard and Chuck will use the same slides. It's a really good depiction of our company.
Think of SunPower today as a vertically integrated solar energy company, a solar solutions company. And that evolution has been very [indiscernible]. Built on the [indiscernible] back in 1995, when this [indiscernible] in such a way that we have a cost advantage on a levelized cost of energy basis, and Jack's going to give you a much better picture of that.
So that forms the foundation for the balance of our company. And you recall in 2005, we introduced the idea of an independent dealer network, so within that, the independent dealer network for Residential for 8 years. And we have that now [indiscernible] across the international markets. In 2007, we made the strategic move to acquire PowerLight. PowerLight brought with it experience in Commercial scale systems, that all the way back to 1995. And in 2004, you may recall, PowerLight built the first power plant, a 10-megawatt power plant in Bavaria. And so by virtue of the investment in Residential channels and the acquisition of PowerLight, we've got between 10 and 20 years experience with the distributed generation channel and the power plant channel, and Howard's going to give you your picture of how we are differentiated in each of those 2 go-to-market channels.
Now it's evolved for the last 2 years is that our go-to-market is increasingly in the form of a finance product, which clearly takes us to mainstream energy market. And I'll give you some statistics on this in a few minutes, but what that does is either we have a lease of PPA, and in both cases, we guarantee the energy output, and then we go look like an energy solutions company and in fact, are making the transition as we speak to an energy solutions company, which has completely different set of attributes to win.
And as we go through each of the presentations, we're going to give you a sense of why we have those attributes that best position us to win in this new market.
So I'm going to go to 4 more slides. I'm going to talk about our technology, DG power plants and energy solutions. We're going to use the format of 2012 to 2015, and you'll see that throughout our presentations because we think there's fundamental change during that period of time. Our technology is the first thing I'll talk about. Remember, back-junction, back-contact technology, we think it is the only technology that is really at the early stages of its development. And what does that mean? Then these are fundamental upside with our technology.
So what we're showing here is what we project, what we plan to deliver over the next few years that will be the fundamental bases of how we'll be the best energy solutions company. So what is that? We'll have a 10% more efficient module that's building off of the world record efficiency that we already have today. We're the clear winner on this metric. We'll improve that by 10%. Simultaneously, we'll reduce costs by 35%, clearly putting us in a position to be on the offense on a levelized cost of energy basis. And Jack's going to give us -- and expand on this in just a few minutes.
So that's the foundation, that's technology. Now let's flip to channels. First, let me talk about our distributed generation business on 3 different attributes. Today, we have over 1,800 dealers around the world. As we look forward, our thought on how we're going to go to market is we're going to focus on 5 to 7 different markets, where we intend to have at least a top 3 share. And the way you should interpret this is this is the way we will invest heavily. It doesn't mean we won't participate in the other markets, it means that we'll choose to participate in 5 to 7 markets in a very resource-intensive way. Howard will show you what those markets are.
Secondly, we'll increasingly sell energy. Today, you can see that 12% of what we sell is in the form of a lease or a PPA. We'll double that by 2015. Chuck's going to give you more statistics around our recent PPA business.
Lastly, over my 10 years -- tenure with SunPower, we've moved from selling solar cells to selling modules to selling systems to now, we sell energy. This is a fundamental change in the way solar companies compete. And when we go out to 2015 selling energy, we believe, will include more comprehensive solutions. And in our view, that will include storage and energy management solutions for the DG market.
So let's take the same 2 timeframes for the power plant business on 3 different attributes. So for us, we've had a product we call Oasis. Jack will tell you more about this, and he'll give you a sense of our cost reduction. This is a standardized power plant block that allows us to do very large-scale systems. As we look forward, we see C7, which of those of you in the room can see the receiver forward in the back corner of the room. C7 will be coming an increasingly important part of how we go to market with power plants. Jack's going to give you a very good sense of why that is.
Secondly, as you're very familiar, we're building a very large scale, in fact, the largest scale power plant in the world in California. So we're very California-centric. I think we're all familiar with the concept that as we go forward, this is going to be an increasingly international business. And it's going to be an International business, it's not going to be hundreds of megawatts in scale for each power plant. But smaller in scale, so diversified, but you have to be very good at building what we would now call a smaller scale. Remember, 3 or 4 years ago, those were massive solar power plants. But today, a 50-megawatt power plant is smaller scale.
And both Jack and Howard are going to give you a sense of how we do that most effectively. And then lastly, and importantly, of course, today, our agreements are primarily PPAs, where we guarantee power output. Over the next 3 years, we said it's -- see that evolving and expanding to increasing, including energy solutions and hybrid solutions, perhaps even including getting paid for capacity as part of our solution.
And then lastly, energy solutions. Energy solutions is enabled by the increasing financing of our solutions. And just a few attributes about energy solutions. Recall that we started our lease offering [indiscernible] over that time period, we've already put to use $500 million [indiscernible] We have $600 million in contracted cash flows by the end of last year. That will be over 3x as much by the year 2015.
And then importantly, the number of customers that we have a direct relationship will go from 150,000 to twice that amount, which as Chuck's going to describe is a critical attribute because it allows us to keep a relationship with the customers so that we can add additional services, and then expand the PPA or the lease that we have for that customer, extend it in a way that the economics are very favorable with -- to both the customer and us. And Chuck is going to model that for you.
So that's an overview of what you're going to hear today. These are meant to be thought-provocative. The team is going to go into a much greater detail. And after the team is done, we'll take questions. We're going to start with Jack Peurach. He's the EVP of Products. Jack is -- what does that mean? That means that Jack's team does the product and solution roadmapping for the company, and then designs and implements those solutions for the company. Jack came to us as part of PowerLight. He has a decade of experience, and he's worked together with me for the 6.5-plus years since PowerLight. Jack, they're all yours.
Thank you, Tom. Thank you, everybody. It's great to be here today. My name is Jack Peurach, as Tom mentioned. So I'm going to talk about our distributed generation and power plant offerings, our solutions. And before I get to those, I want to spend a lot of time talking about the core module technology that we've got, and how that core module technology really supports and allows us to create very differentiated and leading solutions in these 2 segments.
Okay, we've had the product strategy and the company's strategy to move downstream for a number of years. As everyone knows, you've gone from selling components to selling systems to selling complete solutions and selling, in many cases, energy. Today, we sell energy in the form of PPAs on Commercial Systems and Residential systems. We sell leases. The Lease is a large majority of our North American business is Lease business. That's very close to a proxy to energy sales. And all of our utility business, the value of those systems is really connected directly to the levelized cost of electricity produced by those systems.
So we've really been thinking like an energy company for a long time. And as we have thought through that and think about the solution, the conclusion we have is that product is really important. The specifics of the product and the technology that goes into those solutions is a critical part of making those solutions competitive and leading in the industry. We have a very, very specific product strategy going forward. It's got 4 basic elements to it: number one, drive standards solutions, I'm going to talk a little bit about how we've been able to leverage tender solutions in our Oasis platform and integrated solutions, leverage the capability of SunPower's core technology. Our high-efficiency modules here, you'll see some incredible benefits that directly relate to lower levelized cost of electricity for our customers.
And all of our solutions are optimized around the levelized cost of electricity. That is our metric that we're shooting for. Lastly, as adjacent solutions become viable or become attractive to our customers in our segments, integrate those into our solution. That's our product strategy.
Okay, I'm going to spend some time now talking about a core module technology. First thing to understand is that SunPower modules are different. They're different than other modules on the market. First of all, they're much more efficient. You can see, this is our X-Series module on the left. This is our X-Series module right over here, 345 watts, 21.5% efficient. That's the leading -- the world's leading efficiency module by a long shot.
This is a commodity module on the left, your panel. That's a 240 watt module. The SunPower modules, over 40% more efficient than that commodity module. That's made possible by our cell technology. You can see ourselves broken out on the right of the module. On the front of our cell, there's no metal, no metal on the front. That allows that cell to operate very efficiently. It doesn't block in the light from hitting the cell. And on the back of that cell, there's a thick metal copper metallization that provides a lot of structure, and we're going to talk about that and why that's important.
Now these advantages, these -- typically, people think of this from an efficiency advantage, but this fundamentally different product has got a lot of advantages that play directly into our customer's benefit. And I'm going to break those down and talk about those in detail. So first, it directly drives system reliability and module reliability. That's -- how does the system perform over the life of this solution, not on day one, but over the life of that solution? Second one is energy performance. Energy performance is how much electricity does that module produce. It's not how much power that it produced when we flash it in the chamber, it's how much energies that produce in real-world conditions over the life of that system. And the last is efficiency. Efficiency brings a lot of advantages from an LCOE perspective, and I will talk about that as well.
Now all these things when we aggregate them drive low levelized cost of electricity. And this core technology is responsible for driving the lowest levelized cost of electricity in the market. Okay, the first thing I'm going to talk about is reliability.
So in 2008, there was a study that was done to really understand why PV panels degrade, what causes reliably problems over time? And there were 2 major contributing factors: the first is cell breakage and interconnect failure, I'll talk about that a little bit more; and corrosion. Now module's really a piece of glass on top of some cells, encapsulated in some plastic with a backseat on it. So it may not seem obvious, but humidity can penetrate into that system and actually cause corrosion of elements within that system that cause the module to perform -- performance drop over time. That turns out to be the leading problem over time for modules. When you add those 2 up, it's over 85% of degradation is related to those 2 causes.
So it's a significant issue. Now SunPower has actually eliminated these failure modes from our product design. They don't exist. So we're not trying to manage them better, they're just not there. And I'm going to demonstrate that for you right now.
Okay, if you could pass around some cells. Some cells are going to be distributed around. I've got a SunPower cell and a commodity cell. Just put -- leave them on the table, I want to point out a few features of these as we talk. So there are 2 elements I want you to focus on. The first is the metallization. Metallization in the front of our cells, there is no metal. On the back of the cell, you'll see a very thick copper foundation. It looks great, it's coated with tin. This is copper, the tin on the back. That provides structural support and structural support for the cell.
If you compare that to a commodity cell, on the front of the cell, there's metal. And metal's screen-printed under the cell, it's very, very thin because you do not want to block the sun from hitting the cells. So that metal's very, very thin. It's very delicate. If that metal breaks, obviously, current doesn't conduct across that metal.
The second thing I want to talk about is the way these cells are connected to each other. The SunPower cell's connected on 3 pads. You can see the spots on the back of the cell with an interconnect. That interconnect is highly engineered to provide -- to manage thermal stresses that accumulate in the module, as this module cycle over extreme temperatures throughout their life. So as these modules experience these extreme temperatures, the loads gets applied to these cells and can cause, in many cases, it also breaks. So if you look at the commodity cell, the way interconnects are managed on that cell, there's a rib in it that connects the top of the cell and that's wired across the entire length of the cell to the entire length of the adjacent cell, and that transfers loads from the external stresses across the entire cell, which is a very, very difficult thing to manage. So those are the 2 primary differences I want to talk about.
Now without a little demonstration, you'll get a chance to do this yourself in just a second. I've got a conventional modular commodity cell right here. And I'm going to just show you how durable this is and how robust it is, so I'm going just going to break it here. And you can see that this cell pretty much just falls apart when you break it. Now if you guys could just hold off for a second, the participation part will come in just a second. But if you could now -- if I can get your attention up here. I didn't realize how much you guys like to break stuff. So if I can get you to look now at the SunPower cell and hold the cell like this, and you guys can do this yourself, hold it just like I am. Break it in half, you can see the cell breaks, but it stays together. It stays together. So even though the cell is broken, it's still completely functional. And all the current's carried through these metal conductors on the back.
So significant difference between these 2 cell designs. You can tell that the robustness of the cell under the extreme conditions of these cells experience in real-world conditions makes this product significantly more reliable.
Okay, there are some ways that we look for this in testing, both in lab testing and an appeal testing, I've got some results that I want to share with you. So the first test that we do is a thermal cycling test. This is an industry standard test. You put a module into a thermal chamber and you let it cycle between extreme temperatures continuously. That puts a very large mechanical stress onto the cell as different materials expand and contract at different rates. Now the orange line on this chart is the SunPower cell. You can see that over 2,000 temperature cycles, and that cell has not budged. And it's barely dropped at all. What you're seeing on this graph, let me explain this graph, on the left is the power degradation. So how does that -- what's the rating of that module? And on the x-axis is how many cycles or the duration of the test it has undergone?
The standard for this test, the certification standard is 200 cycles. That's for certification. That's basically the POSCO so you can sell your product on the market as not a reliably test, it's basically a safety test.
We test our modules far beyond the certification standards, in this case, far beyond 2,000 temperature cycles. And you can see our module is not affected by this test.
The gray lines that you see on this are commodity modules or conventional panels. And you can see that, well, they passed the certification standard. Very quickly after that, the majority of them start to fall off, and power degrades likely due to a number of issues.
So these are some photographs of modules from the field. These are electroluminescence photographs. The way to interpret these photographs is that any cell that's bright is actually producing energy. Any cell that's black or any area that's black is a dead part of the module.
So first, let's look at the SunPower module on the left. You'll see it's producing 100%. You can also see in the lower left, right over here, you can see a crack in that cell. So that cell's cracked, much like the cells that you have on your table, but still producing 100% power, and it will continue to do so for its entire life.
Let's look at the commodity panels on the right. These are just 2 examples. The first one appears to have some damage possibly caused by installation, where the cell's cracked. I remember, when that cell cracks, it breaks those very fine metal lines, and they don't carry current. So those metal lines are broken, and part of those cells are dead, this black area right in here. And you can see on the one next to it, this is after a long-term exposure, likely the temperature cycling, it's really had a bad go of it. And you can see a lot of areas of that module are not performing.
So this, you can see, I hope this helps to demonstrate how this really plays out in the field over time. This is not an academic experiment. This is a real-world situation that plays out. And we fundamentally eliminated this issue from our product.
Okay, now I want to talk about corrosion. There's a standard test that we do, I call it the DNV [ph] Test. DNV [ph] test, you put a panel into a chamber, it's under very high humidity, very high temperature just try to drive the corrosion, see what happens to this module under these conditions. Again, the certification standard is 1,000 hours for this test. Most people think that this relates to in hot and damp environments, about 2,000 to 3,700 hours. So in this range here, 2,000 to 3,700 hours of exposure relate to hot, damp environment.
Now the orange line is SunPower's module. We've had modules in these DNV [ph] chambers for close to 8,000 hours. It's a long time. And you can see that the SunPower module is not degrading at all, not degrading at all. That's because of the thick metal plating on the back of our the module, the robust interconnects and the tin plating on the back of the module that resist corrosion.
The commodity panels in gray, you can see that those panels, first of all, they all pass the certification standard. But you can see a rapid decline as they get further out in exposure. And what was happening is that the water is getting into that module through the plastic encapsulants, and getting an access in attacking the metals in that system that are -- that can corrode.
So let's take a look at what these modules look like in the real world. This is again, an electroluminescence photograph. The bright areas are active and the dark areas are not active. On the left, this is the SunPower panel. The first picture is after 1,000 hours. That's that certification standard we talked about. And then the second picture for SunPower is after 7,750 hours in that chamber. That's at the end of that orange line on the previous graph. You can see there, no noticeable difference.
On the right, you'll see what happens to a more conventional or commodity panel. Again, the first picture is after 1,000 hours. It looks pretty good, very bright. But after only 3,000 hours, so not significantly longer, you can start to see where that water is cut around those cells is attacking those very thin metal front lines on the front surface of the cells and causing corrosion and lack of -- lower performance. So this module over here is actually down about 28% or 28% down.
Okay, we've taken reliability of our products very seriously for a long time. We've had a team of people that my organization are working on. On a number of fronts, one is understanding at a very, very basic level why these modules fail and what we could do to prevent that. So we developed a very sophisticated physics-based model that helps describe how a PV cell in the system degrades over time. And we've modeled all the primary degradation mechanisms and then simulated that over a 25-year period. When we do that, you get this orange line. This is what we predict our SunPower modules, how we predict our SunPower modules will degrade over time. That's at roughly negative 0.11% degradation per year.
Now the second thing that we can do is look at how our modules perform in the field. Remember, SunPower acquired PowerLight. PowerLight has installed and manages a number of projects that use third-party modules. So we have access to an awful lot of third-party modules data in addition to SunPower data. We undertook a very, very comprehensive study of how these modules were performing in the field versus SunPower modules and the third-party modules. We looked at 144 different sites, had 8 -- more than 80 megawatts of SunPower modules with between 2 and 5.5 years of field exposure and over 40 megawatts of third-party systems that add up to 10 or 11 years of field exposure. So very, very, very significant field analysis, had over 3 million panel years of module data that we collected, 3 million panel years of data.
Now we did that for SunPower. You can see the SunPower performance is very, very close to what we've simulated. And because of that, we're very, very comfortable to say that we believe our modules will be no greater than 0.25% per year. In fact, we think that's a very conservative estimate for us.
We look at the third-party modules, now this is SunPower's third-party fleet, they're degraded at a much higher rate, degrading at roughly 1.3% per year. We had all of this data evaluated by Black & Veatch. Black & Veatch is an internationally recognized independent engineering firm, evaluated our analysis and confirms our analysis was sound. So this is -- it was very, very compelling for us, and this has a significant impact on how systems perform over time and the value of those systems over time.
Okay, these are some more results of some other independent studies. This study on the left, you can see the SunPower module in orange. This is a test being done at NREL. In 2007, NREL put SunPower modules onto a system. They have a very, very sophisticated way to measure the performance of this system over time. And you can imagine it's very difficult to measure very small numbers like this. But NREL is doing it. They've measured this system continuously. And currently, the system has been degrading at 0.1% per year since 2007. 0.1% per year, very, very low.
The other 5 studies you see, are very large studies that have been in on the industry, each one of them for a variety of modules have been aggregated. And then collectively, in aggregate, the degradation of those modules is measured over time. And you can see that the rate that has been determined in each of these studies is somewhere between 0.75% and 1.5% annual degradation. So very, very consistent with the results that we're seeing with the fleet of third-party panels that we're managing today.
Okay, here's another third-party test that was done. This is a really interesting test. Fraunhofer is a world-recognized institution in Europe, specializing in the PV industry. Fraunhofer bought off the market. They took 5 of the top 8 module manufacturers, and they bought 20 modules off the market. So these aren't cherry-picked modules. And they ran through a very, very severe series of tests that they've developed they feel will exploit reliability problems in modules.
This is a 1-year test protocol so -- and it's a chamber testing, all kinds of lab testing with these 20 modules. The SunPower modules had an average power drop of 1.3% after this series of very rigorous testing, and worst-case degradation of 2.3%. If you compare to the average of the other modules, add an average degradation rate of 5.3% and had a maximum degradation of 92%. 92% means the same, it's barely producing anything. So not only was the average a lot lower, but the extremes were a lot lower as well, which means they're getting very close to the edge of their reliability capability. So it's again, another significant independent test, validating the reliability of SunPower's module technology.
Okay, this is a third-party reliability test. A number of companies have been developing -- trying to develop very clear ways to measure product reliability. Atlas is one of them. Atlas is a widely recognized material test company, who's developing significant testing capability for the PV industry. It developed again another very rigorous set of testing protocols to evaluate how PV modules perform over time. SunPower modules were put through that test. We earned the toughest certificate. And throughout their entire fleet of test, our SunPower modules had a 0% degradation. Now this test wasn't done -- this test was done with other modules. Those results have not been public, but SunPower's modules has 0 degradation.
So again, just giving us very, very much a lot of confidence in the performance of our modules over time, and allow us to stand behind our systems in the value that it delivers.
Okay, so that's the reliability side of this. There's a lot more that's important about module than just reliability. In fact, the most important thing is how much energy it produces. Now when you get a module and you rate it, most people think about how many watts -- what's the watt rating of that module. What's really important is how much energy does that module produce. That's what's really important. And because when you rate a module, you rate under a very controlled situation. The light's coming straight to the module. The module's at 25 degrees C. It's just a way to compare module 1 to 2 to 3 under this certain situation. However, in the real world, that situation never exists. Temperatures are always different. Light never comes straight on it at the module. So the real-world performance is much different than a linear relationship to the rate of watts.
This is a performance comparison between a commodity system, which will be at the baseline, SunPower E-Series module and SunPower's X-Series module. The E-Series module performs roughly 8% -- produces roughly 8% more energy than a commodity module in a typical application. And the X-Series module produces roughly 9% more energy. And that's attributable to 5 reasons really. First of all, we have a very high performing air glass on the front surface of our module. We can do that because our module produces a lot of energy, and the more energy we produce, the more of that -- the higher the budget is for that air coating. The second thing is that we've been doing AR coating since 2007 on our modules. We've got a lot of experience in-house in developing very robust high-performing air AR coatings.
The second thing is our cell just performs better. It performs better straight out. It also performs better at off angles of light that may have different spectral responses. Third is that we have a very simplified set of SKUs that we go to market with. And with a positive telling. We guarantee our modules will never be lower than the rating on those modules. Because of this, we actually overdeliver on rate of power, the relative small amount in the stack, but it contributes.
Next thing is that we us anti-polysilicon. Anti-polysilicon is not susceptible to light-induced degradation. Commodity modules may with P-type silicon have -- do degrade, have light-induced degradation. That can contribute anywhere from 1% to 2% degradation over time.
And lastly, our modules perform much better at higher temperatures. So when a PV module is on a roof or on a tracker, it operates at a much higher temperature than the 25 degrees C it was rated at. And as it increases temperature, the performance decreases. SunPower modules decrease much less than conventional commodity modules. It makes up the large difference at the end.
So we had this entire analysis reviewed by BEW. BEW is an independent engineering firm widely recognized in the PV industry, is having expertise and understanding of how PV systems perform. They've agreed with these results. It's really compelling.
This is an independent test done by Photon. I believe there are some copies of this test right over here. Photon puts modules into the field, and they measure the performance of those modules, meaning the amount of energies that those modules produce over the course of the year. So they get wintertime, summertime, different conditions, cloudy conditions, sunny conditions. SunPower had 3 modules in that evaluation. This year, they evaluated 151 modules. SunPower took, with those 3 modules, took first, second and third in that study.
You then pull out the other top commodity modules, the performance benefited -- the performance difference was roughly 8% above the top commodity or conventional panels that were in that study, confirming the data that we -- further confirming the data I showed you earlier. Those performance benefit is a real factor that contributes to system performance.
Now I'm going to talk about efficiency and how that benefits our system economics. First of all, we're -- introduced our X-Series panel in April. X-Series is a 21.5% efficient module. That's remarkable, 21.5% efficient, I think we get used to saying that at SunPower, but it's a phenomenal module. It's got unrivaled performance. It showed you 9% more energy output than a commodity panel. It's got great aesthetics. In order to get a very high efficiency module, you have to have a very, very good front surface on that cell, which makes the aesthetics very, very consistent. It comes in a pure black version, which you see over here, which is favored by many residential customers who are very, very interested in aesthetics of their systems.
So this product today, we have 100 megawatts of capacity in place, and we're targeting our residential customers for this. This initially is this is where it's got the most value and the most benefit to our customers. If we look at our efficiency roadmap, the X-Series platform also gives us a very, very aggressive forward efficiency roadmap. You can see today, we're at 21.5% efficiency. We have a roadmap to get to 23% efficient modules with the same platform by 2015. It's remarkable, 23% efficient modules.
The technology is also convertible. So our E-Series capacity can be easily converted to X-Series when we need to do that. And as we develop this higher efficiency platform, we'll continue to reduce the step count of that product. So when we do expansion the cost of both to build that new capacity and to convert away for induced cell is greatly reduced.
But now I want look at an example. In North America, our average system size for leases is roughly 8.5 kilowatts. That's a really big system, 8.5 kilowatts. These systems are mostly constrained. That means that you're putting as much PV under your roof that you can. You're doing that because it's the lowest electricity you can get, and you want as much of it as you can. So unless you can see a typical house, this has got 20 SunPower modules on it. It will -- it's roughly 6.9 kilowatts in size. If we take that same house and try to put the same 6.9 kilowatts on it using commodity modules, you can see you can't do that. So typically, what will happen is that you have to reduce the size of that system, and you end up with a system, in this case, a 4.8 kilowatt system. So a much smaller system. Now with that higher efficiency, you get some benefits in the balance of system costs. You can see the balance of system costs are going to be roughly the same, right? It's the same balance of system, that's slightly larger and better. So you get those balance of system savings. You also get, in the case that you want to expand your system later or maybe you get an electric car or you want to add source to your system and then increase the amount of PV electricity you generate, you have optionality and the ability to expand that system over time. So this is a really big advantage for us. And most of our systems in North America are constrained.
Okay, so let's see how that drives levelized cost of electricity. This is -- first of all, when I look at the lifetime energy that a PV system produces, so this is not based on year 1, it's based on the life of that system, the 25-year period of use for that system. So this is that 4.8 kilowatt system I showed before. Let me -- this 4.8-kilowatt system I showed before starts at a 100%, for reference, it degrades at 1% per year. We talked about that in the reliability part of it, ends up at roughly 75% of where it started at year 25. Now if I look at the SunPower system, SunPower system will start at close to 60% more energy per year, roughly 55% more energy. That's made up, number one, it's a larger system. It's a 6.9 kilowatt system instead of a 4.8-kilowatt system. And it performs about 9% better than the commodity system. So when you add those 2 together, you end up with roughly 55% more energy production. Now over time, and this is important, if you're -- if you've got a lease or a PPA over time, that system is going to maintain that production level, and that gap between the SunPower and the commodity system will increase. And by the year 25, the SunPower system will be producing roughly 100% more energy than the commodity system on the same area in on your roof, twice as much energy.
So a significant advantage. So over that entire 25-year period, the SunPower system will produce 75% more energy than the same system built with commodity panels.
A huge advantage to our customers, and it's all driven by the module, all driven by the cell and module performance. So what that allows us to do, when we look at economics for our customers, allows us to press for modules that are premium. This is a cost step from a cost-per-watt perspective and an LCOE perspective. The SunPower modules are priced at a premium because they bring so much value to the system. You can see from this the balance of system costs are lower on the SunPower system. That's driven largely by the efficiency of the system, and the profit to the channel remains the same.
However, the overall system costs, even though it's higher for the SunPower system, that system delivers a lower LCOE than the commodity system. So it's a significant advantage that our module brings, both in economics to our customer and ultimately, profitability to SunPower.
Okay, now I'm going to switch gears and talk a little bit about our downstream solutions. Our distributed generation segment, we've been involved in delivering commercial systems since 1995 with PowerLight. And those systems, we delivered complete systems, PV modules, inverters, mounting systems, innovative mounting systems and monitoring systems. In many cases, PPAs were attached to those commercial systems. We had to develop a monitoring system that could really correct the data, process that data, understand what kind of O&M services were required to manage that system and keep that system operating over time?
In 2005, SunPower began residential channel. Additionally, we started with the components, selling modules into that channel and modules and inverters, more complement and ultimately, the systems modules, inverters, mounting systems, monitoring systems. So with the introduction of leasing, that monitoring system becomes a vital part of the overall solution. We've been able to leverage the systems that we've developed through our Commercial and Utility business for our Residential business to allow the -- provide the integrity of the robustness and the scalability to serve all of our Lease business with this platform.
Okay, so looking forward in our distributed generation business, there are some things that are changing. In a lot of markets, outside of North America, the value of PV electricity that's generated is worth more when you consume it than when you export it onto the grid. That means that the value of the PV is connected to the use of the customer. It becomes much more difficult to manage the value of the system and manage the value of the system with your customer. So we're expanding our capability in this area to include more advanced energy management systems, building on top of our current monitoring platform, more advanced energy management systems to help our customers reduce their cost of electricity, become more aware of their consumption patterns and be more in control of their energy use. We're doing that through information and through active control.
The second part of this is this is the introduction of storage. Storage will be economical in the reasonably near future. When storage becomes economical, becomes a vital part of the value proposition of a PV system. It allows a customer to more actively manage their self-consumption behavior. Storage systems will easily integrate into our overall energy management platform, and allow us to provide a seamless and integrated solution to our customers. It also allows us to identify customers who benefit the most from storage, and introduce them to storage as it becomes economical.
And now I want to talk about our Power Plant business. PowerLight was a leader in power plant development. In 2004, we built the first 10-megawatt system in the world and then, since then have been building very large power plants throughout the world. Those systems initially were very customed systems. Each one of them required a lot of very, very individual engineering effort, and that made those systems difficult to predict from a cost perspective, time-consuming from a research perspective, difficult to scale.
In 2010, we undertook a very large effort at SunPower to develop a standard, integrated, complete solution for power plants. We call that our Oasis system, so based on a 1.5-megawatt power block that you see outlined in orange in the drawing. All of our systems today are built using Oasis, using the exact same power block repeated over and over and over again. This Oasis system has allowed us to do a number of things. First of all, it's allowed us to provide a much higher quality system in the field. Everything is pre-engineered, everything is covered, there's no more individual engineering or custom work done on site, which often leads to quality problems.
Second is it's allowed us to become much quicker in our installations, much more predictable and much more continuous learning. So we can install systems much more quickly than we could before, and continue to innovate in that area.
The last thing it does is allow us to invest in advanced capability, so advanced grid integration capability and an advanced control capability that we comply to all of our projects. It's not a custom engineering project, it's the standard part of our offering. And the last thing this has done is allowed us to put together a very systematic, very predictable cost reduction program, which I'm going to show you next.
In 2011, we set some very, very aggressive targets for ourselves on the balance of system cost reduction. We assembled a team from -- throughout the company, and my organization, and Howard's organization in the EPC side to drive out every aspect of the cost of the PV system and the cost of the components to the cost of the installation, logistics, site mobilization, site work, et cetera.
This has been a very, very successful program, largely based on the standardized efforts that we've put into Oasis. You can see that we are ahead of plan on that cost reduction program. One of the things that's enabled us to get so -- make so much progress in such little time is the very fast cycles of learning we've got as we build a lot of capacity. So you can see that we're going to be building more and more Oasis capacity over time.
This trend, this cost reduction trend will continue. So now we've got this great Oasis product. It's completely standardized, very bankable and now, we're globalizing this product. It's a perfect product for a global market. It's very flexible, so we can apply to different site conditions, different wind conditions, different low conditions. It's very bankable so we can go in the region and have a very, very successful time establishing bankability very, very quickly. And it supports the localization of the many new customers and new segments, new markets require around local content, regionalization and manufacturing. So our current trust on Oasis beyond the North American channel is to globalize this aggressively, and we have the best product in the world to do that. The last thing I want to talk about is our C7 product. The C7 product, most of you are familiar with, is a near-base concentrated product that is 7x concentrated, that uses a cell, high-efficiency SunPower cell, which performed extremely well under concentration. The system provides the customer with a couple of very, very meaningful value propositions. First of all, it is the lowest LCOE with -- will produce the lowest LCOE in high DNI locations.
Second, it is -- it can bring a large portion of its costs in region. 80% of the cost of the system can be produced in region with a very small CapEx investment.
It's very, very important for customers interested in building a lot of large-scale power plants.
It also has a lot of benefits to SunPower. First of all, it expands our manufacturing capacity. Our 100-megawatt line -- cell line can produce a 600-megawatt equivalent to C7 system.
So we basically can multiply our capacity by 6x as a significant advantage for us.
The second thing it does is it greatly reduces our CapEx investment going forward as we build more and more power plant systems for the same reason, the manufacturing leverage.
We're currently working with some great partners in China, 3 great partners to develop projects in China. We have manufacturing -- initial manufacturing in place. We're working on our initial projects. This picture you see on the left is a picture of our 500-megawatt manufacturing plant that we'll be starting to build this year and will be complete next year.
So this brings me to the end of my presentation. I hope in this, you take away a few things. Number one, the SunPower module is fundamentally different and is fundamentally different in ways that provide a lot of value to our customers, higher reliability, higher performance, more efficiency. And those advantages directly support leading products and solutions and downstream segments, including distribution generation segment and our Power Plant business. Thanks very much.
Thomas H. Werner
Okay. Thank you, Jack. I think it's significant to note that Jack and our next speaker came from PowerLight, and we acquired PowerLight in January of 2007. So 6.5 years working with us and they have very much a downstream systems orientation, you can see that in the presentation. And that benefits and of the reliability to the energy performance and the higher efficiency that Jack talked about as they're embedded in our lease in a PPA. This is fundamentally as the energy market, the solar energy market is converted to a finance solution, it's made our job a lot easier because the advantages of our product are embedded into the solution. So as we evolve to an energy solutions company, it's exactly allowing us to leverage on our core technology. And essentially, you can get the same or better economics in the world's best product. It's as simple as that.
So now we're going to transition to -- from the foundation to go to market. And as I mentioned, Howard Wenger comes to our company from PowerLight, where he started in 2003. So he has 6.5 years experience with SunPower and several years prior to that with PowerLight. He's also got 2.5 decades in the energy industry, including working at a utility. So he's got a unique perspective. Howard?
Howard J. Wenger
Thank you, Tom. Good morning. I'm going to be speaking about the downstream part of the business that Tom mentioned, focused on our go-to-market channels and how we're migrating more and more to energy solutions.
The way you can think about the company very simply is 22 matrix, okay? Distributed generation and power plants, so there are 2 go-to-market approaches. The other dimension is geography. For domestic, international. 2 by 2. Really simple way to think about the company, how we go to market and how to model the company
So SunPower is somewhat unique in the solar power field, with its dual global platform and distributed generation and power plants. We have a very strong position in distributed generation, as Tom mentioned, particularly in the U.S., where we have leading market share. I'll be speaking about that in a moment. We have a low-cost scalable way to go to market in distributed generation with our 1,800 dealers worldwide and we're transitioning more and more to energy solutions with respect to DG. And again, as Tom mentioned, that means having -- selling energy to customers that are financed typically through a PPA release and then we have that relationship with the customer for life.
So we're able to provide energy and strength to those customers for their systems and the solar energy that they're purchasing. We're able to have that relationship where we have additional opportunities over the life of our engagement with them to sell more products and more services.
On the power plant side, which is really -- requires a mind shift from DG to power plants. These are typically systems that are 10 to 100 megawatts in size, where we're the turnkey supplier of these systems typically. And so we'll be talking a lot about that. We have a great book of business, 2 gigawatts of systems that are contracted and/or under construction. We have one of those projects, the Antelope Valley project, largest power plant in the world, over $2 billion transaction with MidAmerican and we are increasingly going International with our relationship with hotel and power plants. So this will be the format for the presentation. I'm going to first -- well, I'll be speaking about distributed generation and power plants and then by geography.
So big picture, as Tom mentioned, we're addressing an over $2 trillion industry. More and more, we're migrating downstream with a customer vertically integrated. We're selling electricity. The total addressable electricity market worldwide is measured in terawatt hours, 23,000 terawatt hours.
So if you just focus on the left side, the distributed generation side, we are addressing in the markets that we're serving about 1/4 of the worldwide electricity business or 750 million buildings that are consuming electricity. So on distribution generation, that's homes and businesses, residential and commercial.
Our current share of the market is about 150,000 buildings. We have not 1%, not 0.1%, 0.01% is our current share of this market, extremely small.
So if we were to increase our share by 10x or 1 million buildings, we have a lot of headroom. We would still be only 0.13% of the addressable market.
So we're really at the beginning of this market and at the beginning of offering energy solutions to our customers. And you can go through the same map on power plants. It's a vast addressable market. And as somebody that's been in this field for more than 2 decades, it's a really exciting time because we're approaching great parity. In many cases, we've achieved great parity through offering electricity below the price of conventional electricity and addressing this very market with our solution.
So now I'm going to talk about distributed generation for the next 5 or 6 slides, okay? SunPower is measured by Greentech Media in 2012. We have the leading share in the solar power industry in residential and commercial. So we are the leading market share company for PV in distributed generation.
So one of the key things, like how did you guys achieve this? In the next slide, I'm going to illustrate and give you a support of how we achieve that and how we propose to continue a leading position in DG.
One of the keys for us has been the lease product. We started 2 years ago, as Tom mentioned. It's been a learning experience for the company and I would say it's Part A and Part B. Part A, when the first year, there was a bit -- we ramped up extremely fast. We didn't have a robust platform to deliver the lease to our customers in an efficient way. Part B now, in the last year, we've fixed that. And now we are a leading company in terms of how we're delivering lease to customers and financing to residential, commercial and that's really helped us maintain those market share position.
So if you look at our footprint, and this footprint is a really important part of gaining market share.
As Tom mentioned, we're going to increasingly focus our efforts in distributed generation and solutions and we're focused in the highest -- the best markets globally. There are 7 markets that we're focused on, 6 outside of the U.S. The's bar on the upper right represents the electricity consumption domestically for DG, split by residential on top, and commercial on the bottom is about 50-50. And internationally, if you stack the 6 markets that we're addressing, it's about the same size as our U.S. addressable market. So these are very big vast markets, but we're being very focused because we want to get closer to our customers, we're going to be migrating our U.S. platform for lease to these international markets. The first part that we're going to is France. So that's really a new thing for the company, is to take our platform that's working really well in the U.S. and exporting it and leveraging it to international and we're going to go to France first this year.
So as part of this approaching the market, we worked through a dealer network, an independent dealer work. Tom mentioned we have 1,800 dealers. 400 in the U.S. and 1,400 in Europe across these market I'm showing on the screen here and 100 dealers and channel partners in Asia Pacific, principally in Japan and Australia.
So this dealer network is a key for SunPower. If you take these 1,800 dealers and multiply it by 5, to say each dealer has roughly 5 customer-facing sales producing people, we have an army of 9000 customer-facing salespeople through this dealer network.
It's really been a key to our expansion. And, of course, we have a great relationship in Japan with Toshiba. They're our premier partner there. We have managed to triple our market share and our growth in Japan through our partnership with Toshiba. And we're also working with Sharp, and we're doing more and more in commercial. So the DG part of the business in Japan has really taken off, where we're more than 10% of the Japanese residential market share, SunPower House in Japan, so a really a great position there as well. Footprint, really important to winning.
Another important piece of -- is how we execute on this footprint. How do we face the customer. So what we want to do is equip our dealers with everything that they need to win in the marketplace. So they're the booths, they're the trucks, they're the salespeople on the ground, it's a low-cost model for us, much lower cost model. It enable us to scale very vast, enable us to have a lot of flexibility to move from market to market as things change, policies change, markets change, we're able to go very quickly in the market. In fact, we're in 45 states now in the U.S. with our dealer model.
And then we're providing a lot of support to them. We're generating lease, design tools, we're marketing, we're branding, we're training them on how to sell, how to install and we think this is the best model. We look at a lot of models. We look at DirecTV, Dish Network, we look at security companies, home security companies. We look at HVAC companies and how were they going to the marketplace. And what we do is we adopted what we felt was the best hybrid model in the center. We're not the manufacturer, we're not an arms link supplier panels, and we're not a sales company that's relying on different products in the market and bundling them together and just selling and installing. We are in charge of the entire solution. As Jack noted, we have a very superior solution to the competition in terms on the product side and we're focused on providing a platform for our dealers to sell effectively in the market. We think that's the best combination and it's proving out, leading market share in the U.S. last year.
Another part of winning has to do with the fulfillment platform. So we have diligently -- and so when you think about SunPower, yes, we're a technology company, but we're also a -- as Tom noted, that's the foundation of the company, we're a downstream company, we're a solution company. So we have created a very robust capability to fill systems worldwide. The customer is extremely important, the end customer and our dealers, of course, but the end customer is very important and we have to ensure they have a great customer experience.
So we're supplying leads, branding, all the way through customer care for our fulfillment partners, we've created this ecosystem, which is close
loop for marketing sales ordering through service. And an important part is we have a very strong proprietary cloud-based platform at the bottom here.
This is really -- this makes everything work, this platform. It's tied to our ERP system. It ensures case management. It provides proposal tool to our dealers. So our dealers can go into a home if they're going to sell a home power system to a customer or lease. They have their laptop or their iPad. In a cloud-based system, they can provide a quotation to a customer and in real time, have an executable contract that can then be automatically uploaded to SunPower and do the credit check and that same document is then electronically reported to our finance partners for approval and processing. We can do that at the kitchen table. That's just one of the proprietary system advantages that we have.
Now we didn't have that 2 years ago and we actually had some amount of concern and criticism with our finance partners in that first period. We've turned that around to that being an asset. We're being told by our finance partners. They were actually leading the way in terms of automation, efficiency, software, systems, processing, tranching, case management, performance management, a fully integrated cloud-based system infrastructure to deliver to our customers.
The final piece is having an ecosystem. This is the final piece to winning in distributed generation. We have a very robust ecosystem of partners. We're working with 30% of the Fortune 100. We're working with leading homebuilders to make solar standard feature. We're working with financiers. They have over 1 billion, already financed and transactions in DG and we have a robust pipeline and we're good consumer partners on lead generation such as Nissan and Ford.
Let me speak about the first column here. What's great about working with the Fortune 100 and other entities, including the public sector is these companies, such as Verizon, we just made announcements recently where we're going to do more than 5 megawatts of systems over multiple sites, over 7 states. They need power at their data centers, at their facilities to offset their demand and we can deliver at below the cost of utility power. So that's really excellent. That's a good feature of working with these companies.
The other thing is these companies have -- entities have employees. And so these employees also want solar for their homes. So we're actually tailoring programs with our partners to deliver solar to the employees on a case-by-case basis. We have such a program with Macy's, FedEx, Johnson & Johnson, HP, and so those employees, as they get solar, they become advocates for us and their neighbors then want solar. So it's really a great word-of-mouth ecosystem that's developed with our partners.
On homebuilding, in the second column, we're working with 7 out of 10 problem top home builders in California. We just installed our 10,000th system for new home construction, fully delivered by the company, end-to-end solution. We have tremendous satisfaction ratings with our home builders. We have more than 50% market share in this segment. What we're seeing are cities that are beginning to make solar standard feature and the requirement for new home construction.
So City of Lancaster, there's a city in Sonoma County in California. There is a regulation in California that's states by the year 2020, homes have to meet a certain level of energy efficiency. The only way they're going to meet that level energy of efficiency is to have PV. So what we see happening is that solar will become a standard feature in new home construction, much like dual-pane windows did in the past.
So this partnership ecosystem is really helping us grow the business. When you put all of these together, we currently have 100,000 -- more than 150,000 customers in distributed generation worldwide, okay? The platform for delivering, the ecosystem, our dealer network, all these things working together provides a lot of confidence in our projections to double the size of our customer base in distributed generation in the next 3 years. And what's going to enable that is $3 billion of additional finance capacity as we migrate more and more to energy solutions. Not every one of these additional customers will have financing and energy solution, but more and more, a higher percentage will. I'll speak to that in a moment and so will Chuck in his presentation.
Okay. We're going to do a mind shift from distributed generation, a lot of systems on homes and businesses, all over the world to power plants. So that's the second platform for the company.
When PowerLight -- when I was there in 2003, I joined and we sold the company to SunPower in 2007, we were the largest buyer of solar panels in North America for 5 years consecutively. So we had experience with a lot of the competition and SunPower -- we were one of SunPower's biggest customers, not the biggest customer. And we knew back then,when we were making a decision to sell the company or go public, we decided to consciously -- to sell the company to SunPower because we wanted to marry our superior system integration capability and balance the system. We had trackers, we had roof mounting systems with SunPower's superior panel technology to deliver the best performing, highest reliability, lowest-cost system in the world. And 6 years later, that's playing out for us. So it's really been a great combination. And what we do is we deliver end-to-end solution for power plants. These are typically, again, some 10 to 100 megawatts in size. We've got the great SunPower solar cell and panels as part of it, and that's core to what we deliver. We have the PowerLight legacy tracker, which has been migrated into a standardized, improved platform of Oasis Power Block technology, where we're installing the entire system in standardized kits over and over again. We have a great team where we or internally develop projects ourself, as well as partnering with others such as Total. We arrange project finance and we're the single point accountable for all of these elements, all of the hardware, the delivery of the system, the EPC and then we signed O&M contracts for 20 years-plus to make sure that the systems operate to customers' specifications and that we deliver on the financial performance of the system. What this -- when we -- okay, so Antelope Valley, right, more than $2 billion transaction with MidAmerican, a Warren Buffet, Berkshire Hathaway company. Their due diligence was extreme, okay, investment of that size, you can imagine, they're a careful investor. We stood up to the test, clearly, and the reason why is because we have this long history of bankable technology, validated by third parties, as Jack mentioned. We've got a strong balance sheet, we have Total behind us and as our primary shareholder and we have proven through experience and delivery that we can scale such as we do in the California Valley Solar Ranch project and deliver on time, on budget and be the single point of accountability. That's why we won that project and that contract with MidAmerican.
One of the things that is close with learning, Jack touched on this. So in Antelope Valley, we're going to be installing more than 400 oasis power blocks, okay? So the opportunity to learn -- and it's going to be installed over a 3-year period. The opportunity to learn and put those power blocks in and have that close loop, where we're learning in the field and bringing design improvements back into our core design of that product is really a fundamental advantage for the company, where we're responsible for the design, engineering, construction and delivery and that's really helped us reduce cost much faster than we anticipated.
This whole end-to-end solution gives us a lot of visibility. Just a quick point on that. 4 years ago, we began to develop the Antelope Valley project, $2 billion project. If you can imagine, this project covers over 5 square miles of land, for solar rays. So it's a very big project. We -- to win that project, we had to forward price and forward cost and because we own the entire roadmap, cost roadmap, it enables us to do that and that's worked out really well for us. We proved that in Antelope Valley, we proved that in California Valley Solar Rance and all the other projects that we built in power plant sector. The reason why I'm bringing that now, as you look forward, as we develop more and more projects internationally, we have visibility in the cost roadmap, it enables us to price and price in a way that has a lot of certainty to it, and it gives us an ability uniquely to win in the marketplace.
This illustrates our history of -- and we've come along way in power plant leadership. From 2001, we installed our first tracker to 2013, 12 years later, we have the largest development in the world. It's 748 megawatts, 579 megawatt AC, 748 megawatts DC. We've learned a lot along the way and this leadership is putting us a great position in pushing the boundaries of power plant development and securing big contracts.
We have a great stable of our power plant projects in the U.S. These 4 projects alone represent over $3.5 billion of revenue, more than $1 billion of margin over a 4-year period. That gives us tremendous visibility.
It's so much so that we're really -- our plate is full between 2013 and say, the second half of 2015. So our pipeline, as we develop it, we are going to be bringing on more projects and booking more business and delivering more projects in this time period, this intervening time period, but it puts us in a great position to bring on more pipeline to construct in the second half of 2015 and beyond so that as we scale as a company, we bring on more capacity, we're able to continue to grow our company in megawatts and in earnings.
We have a power plant ecosystem here as well. I showed you one for distributed generation, we have one for power plants. As I mentioned, we've got -- we work with off-takers, we call them, really, the purchasers of the power, utilities, they're our close partners. We work very well with them.
We have utility partners all over the world and 2 gigawatts installed are on their contract there. And we finance over $5 billion worth of transactions of power plants.
The middle piece is the piece I want to focus next with you, our pipeline. We have a 6-gigawatt-plus global power plant pipeline that we're developing. We're working with Total and others. We're self developing some of this pipeline. We're working with independent power producers and so I'm going now talk about the build of our power plant footprint and experience and give you more details on our pipeline.
So how are we expanding our pipeline? One of the key partners for us is Total, all right? So we have our International headquarters in Paris. It's walking distance from Total's international headquarters, in La Défense, in Paris. That's been extremely valuable for our International team, to collaborate and cooperate. In fact, Total has 40 people working on developing power plant projects for SunPower. So we are working -- it's taken us 2 years. Total made an investment 2 years ago in the company, it owns 66% of the company. It's taken 2 years for us to really get traction. We're hitting on all cylinders now in terms of development, which I'll show you in a moment.
We have offices in more than 15 countries. We have people that are responsible for the P&L in those countries, the results growing in the business there and they have P&L responsibility.
So increasingly, as Tom mentioned, more and more of our business is migrating on the power plant side internationally or expanding, I should say, internationally.
And we have great support from Total. They're a fantastic partner, so much so that they are now planning on investing in some of these power plants that we are developing together. We're really putting their stand for approval on it, not only helping us develop, but putting equity in some of these projects. They're really going to leverage their 130 country presence and 100,000 employees.
So let's talk about our footprint and how our pipeline is expanding in power plants. So these are the countries where we have existing power plants deployed and operating: 61 projects, 7 countries, 0.6 gigawatts installed capacity. So we already have a footprint and experience of putting power plants around the world and adhering to the standards, local standards for interconnection and operating these plants.
If you overlay, what we're doing -- what we've done in the last 6 quarters in terms of power plants deployed and under construction, we're adding to our geographic breadth as a company. We -- our investments internationally in establishing offices are paying off and we're doing more business globally.
So the gray is existing installation, the colored areas where we have new installations deployed and are under construction.
16 project, 8 countries, 1.2 gigawatts capacity. Now when you overlay new additional countries to fill out where our power plant pipeline is located, it's all of the colored countries that you see here. The gray, we have existing and installed projects and pipeline. The orange is additional pipeline where we do not have any projects constructed as a company today.
So the marriage of Total, what they're bringing is footprint outside of where SunPower has historically gone. You see, many countries in Africa, countries in the Middle East, in Latin America. So our pipeline has really grown fast in large part due to the collaboration with Total, 300 projects, 45 countries, 6-plus gigawatt capacity in this pipeline. You can see the breakout by region, 3,100 megawatts Americas, 830 Europe, 1,480 Middle East Africa and 1,020 in Asia Pacific.
So we expect at least 25% of this pipeline to be realized. So if you take 25% of 6 gigawatts, that's 1.5 gigawatts. We expect that at a minimum to be realized based on our historical conversion rates.
Of course, we're always adding to our pipeline over time and so we expect this pipeline as projects come off and get booked, we expect a replenishment and an expansion of our pipeline going forward.
Our relationship with Total has already paid off in terms of tangible bookings. We have a 33-megawatt project in South Africa that's under construction as an example. We have a 40-megawatt plus opportunity in France. So we expect more announcements this year and wins that are coming from our power plant pipeline.
So coming to -- I just have a few more slides. When you think about SunPower and our dual platform, distribute generation and power plants, we have a network, again, underpinning our global system deployment. We are monitoring over 50,000 solar power systems centrally, distributed generate -- these are homes, businesses and power plant's and we're using the same system, it's a very sophisticated system to monitor the performance, to dispatch maintenance people if required, unfortunately, not required very often, and it's also used for asset management. This is the underpinning of our energy solutions business. This gives us the ability to deliver energy solutions to our customers, both on distributed generation and power plants.
So let's take a moment for the last couple of slides to look at the mix of where these megawatts are going.
So it's roughly, 2012, 1 gigawatt deployed, 1/3 power plants, 2/3 distributed generation. You can see a lot of the distributed generation is international in 2012.
As we look out to 2015, we expect 50% growth in megawatts and deployments. So the pie is getting much bigger and the mix is shifting to these International power plants as we build this pipeline and execute on the pipeline.
We're also doing a very robust business in distributed generation globally.
Cutting the data differently, this is the same 1 gigawatt and 1.5 gigawatts. And I know this many years scribbling, we can take additional Q&A in a little bit, if you have additional questions. Cutting the data, the same data a little bit differently, 1 gigawatt in 2012, 1.5 gigawatts, we're accelerating growth of our DG Energy Solutions business. This is, again, where we're providing energy at/or below utility rates, little or no money down, a for-life relationship with customers. We're doubling that part of the business from 12%, to 20%, to 25%. Chuck is going to spend a lot of time on what are the economics of this portion of the pie, how should we value it, why do we win. So keep that in mind and he'll be expanding that in just a moment.
So in summary, SunPower. Dual, global platform, okay, 2x2, distributed generation power plants, domestic and international, we're going to be going deep internationally in distributed generation, where we expect to gain leading market share. We are the U.S. market share leader today. We've got this 1,800 dealer network worldwide. It's a low-cost scalable, repeatable model, gives us a lot of flexibility. We're able to respond quickly to the market and we're transitioning more and more to energy solutions on distributed generation
Power plants, great platform of business, 2 gigawatts, built under a contract, a lot of visibility in this 2013, '14 and '15 time frame. We're building the world's largest power plant or development with MidAmerican. The project was kicked off 2 weeks ago. We've installed our first megawatt there and we have another 578 megawatts AC to go. So we have a lot in front of us. The project is growing extremely well. We're going to deliver that on time and on budget. And increasingly, as we look out to 2015 and beyond, this stable platform of -- in book of business enables us to grow our revenue base in a smooth way as we transition and get more supply and capacity in the 2015 beyond timeframe working with Total in this international markets.
So with that, I'm going to turn it back to Tom. Thank you.
Thomas H. Werner
Thank you, Howard. And those of you who keep in track, we're very, very much on schedule. We have one more speaker, and then we're going to take a small break to grab lunch and then we're going to do Q&A, which we'll have ample time for. We might even be able to give you a little bit of time back.
I want to emphasize, similar to what Howard said. So 6 gigawatt pipeline and he said that we expect to monetize at least 25% of that, that's been our experience. Also that we expect to see international bookings over the next few quarters. Those are some really material data points.
One of the advantages my job is I get to partner with Howard and get to visit some of these regions. So 3 weeks ago, I was in Saudi Arabia, in Abu Dhabi. And it really brings to light the advantage of partnering with Total, who has 90 years experience in those countries and all throughout that region of the world. When we met in Saudi Arabia, we talked about their experience building the $10 billion refinery as we speak. You can imagine it makes account conversations far more tangible and we went to Abu Dhabi and talked about $1 billion pipeline that they were building and the nature of how that was restructured. So we are leveraging that partnership. We're very much driving those developments that we are very much partnered with Total.
I've been the beneficiary of going to Inner Mongolia twice in the last 6 months. It's cold in Inner Mongolia in December. There -- I wanted to give you a little bit more color about the progress that we're making in China and certainly, during the Q&A, we can talk more about this.
We have 3 partners in Inner Mongolia. It really makes it a unique structure. One of those partners is somebody that we already do business with. It's a state-owned enterprise and it's the TZ group. And it's somebody we do a considerable amount of business with already. With that foundation, the other 2 partners are the city of Hohhot, which you can imagine is one of the biggest cities in the world and the Power Co. And think of what Howard talks about in terms of off take agreements, and partnering with the utilities that you saw listed. This is really a fundamental strategic advantage.
What I would tell you in terms of milestones, too, is we've already built the capability in the existing plant with TZ group to manufacture a receiver, a downstream [ph] system for C7. We will break ground soon on a facility. We'll have to show up by the end of this year for a large deal manufacturing and we're -- via these 3 partners, we have a significant power plant development, which we expect to bear fruit by the end of this year and probably, by the end of this year, early next year, we'll be putting steel in ground and we'll probably do it before it gets freezing. But we will be building projects in China in the foreseeable future. So certainly, more on that when we get to the Q&A.
So now we've talked about the foundation of our company, which is technology, with Jack. Howard then talked about go-to-market, and I failed to mention that his team is also the one that executes the projects, so he covered both DG and our power plant business.
And so you can think of our business, as I introduce Chuck, has really 3 parts. And Chuck's going to illustrate the 3 parts and he will give you a transparent view and a forecast of each of those 3 businesses.
Now Chuck has been with us for 3 years. Chuck has a really excellent background for our company because prior to this, he was the CFO of a high-tech company, a very rapid growth company. He's also been part of a high-tech company that subsequently went public, and then he has a public accounting audit background. So uniquely well-suited for us and again, 3 years experience with us. And with that, I'll turn it to Chuck.
Charles D. Boynton
Thank you, Tom. It's good to see a lot of old faces and new faces. Tom did mention 3 years at SunPower. So Tom has 10 years, I feel like I'm still new with the company.
But I actually presented at Analyst Day 3 years ago, and it was really a great experience to talk about the SunPower business model, and reflecting on that and seeing how things have changed, it's really impressive and that the new paradigm today is very interesting.
So Howard and Jack both talked about the structure of the company, the foundation of our technology at the base and the go-to-market channels and strategy of how we approach both DG and power plant, and then finally, the customer-facing, the operations platform energy solutions.
I'm going to ask now, but you'd sort of think about that, this model of growing from 1 gigawatt to 1.5 gigawatts globally and then shift your mindset and pivot effectively to the cash flows and the business and how it looks to SunPower.
So again, as Tom mentioned, sources of value, we're going to give you the tools. At the end of the day, you'll be able to fairly model the company and look at it in terms of 3 key points.
So first, on distributed generation. What is that? You know that as residential and commercial. In the old paradigm, it was relatively straightforward. We did cash sales and you could value the company and look at the cash flows in the current period and say EBITDA or non-GAAP earnings makes perfect sense in terms of valuing the company.
For part of our business that's still true. DG does show up as cash sales. In fact, 12% of our volume in 2012 was the energy solution sale, but the majority of it was cash sales. Power plant, primarily, has been a cash sale.
However, both of those are evolving to energy solutions. And to think about what energy solutions are, I think of it -- have you parallel salesforce.com and how that model really shifted for an enterprise software or that I used to work in.
In the day SAP, Oracle, these companies that have very high license fees and upfront revenue recognition, Salesforce came out of market and really created the SaaS market, and you couldn't look at near-term cash flow, P&L revenue to value Salesforce and so I'm going to show you the tools today, and you'll be able to model our company based on NPV per watt for this energy solutions business.
And then finally, at the core of our company is we're a manufacturing R&D and intellectual property company. And I'm going to show you how to think about the business in terms of the hard asset value of our upstream business and the technology platform that really drives the downstream piece.
So the business model trends. So think about 1 gigawatt of business and 12% energy solutions.
In 2015, that will grow almost double, 20% to 25% will be DG energy solutions.
In addition, a sliver of the power plant business is likely to also go into this longer-term recurring value business.
Now today, we enjoy upside for a lot of our downstream power plant deals where we get paid for overproduction of energy.
In the future, we expect to be partial owners of these to improve shareholder value in the 2015 time horizon.
You'll note that the cash business is still a very important driver of value. DG cash, approximately 1/2 of the business in 2015. That's driven primarily by Japan and the international markets.
Power plants are still a really important driver of cash flow and our near-term profitability.
So now we're going to do a deeper dive and talk about our cash sales and I'll go through each sources of value and walk you through both of the -- all 3 of the models.
On the cash side, now use the cursor, so if you want to track on the screen, it will be a little easier to follow.
On the cash side, our megawatts recognized 2012 -- 863 megawatts recognized as recognized in the revenue, again, 100 megawatts is excluded that's in the energy solutions business. That drove $2.6 billion in revenue.
In 2013, we see megawatts recognized growing to 1 to 1.1 gigawatt and that's $2.5 to billion $2.6 billion in revenue -- non-GAAP revenue.
And we have a very strong backlog and great visibility for both 2013 and 2014. We do see a shift happening, as I mentioned, going to roughly 20% to 25% energy solutions. Even with that mix, we think we can sustain a top line growth of 5% to 10%. From a margin standpoint, in 2012, aggregate margins of 15.5% -- 15.4%. We see margins growing in 2013, range of 15% to 17% for the year. Margin improvement is driven by 3 key factors. First of all, Japan, you've seen our great success in Japan. Second is our power plant business. Our revenue recognition for CVSR and Antelope Valley and third is the improvements we're seeing in Europe.
As we entered last year, we saw Europe was difficult at a restructuring program. We're really proud of the improvements we've made and this past quarter, we saw a great margin improvement in Q1 and we expect to be net neutral and then positive margins in the back half of the year.
This profile will continue to improve and change in 2014 and beyond.
So we take our revenue, megawatts, margin and now EBTDA. We started disclosing EBITDA, our method this last quarter, to look at, again, the core business.
In 2012, we drove $195 million of EBITDA and now we're talking about adjusted EBITDA as well, and I want to explain the difference.
EBITDA, everyone understands, is a core metric. Adjusted EBITDA excludes the NCI impact to our residential lease business. Why? Because we're submitting that, that should be part of our NPV per watt, so we'll exclude that from adjusted EBITDA to make the modeling simpler.
EBITDA will grow from $195 million in 2012 to $250 million to $290 million in 2013. Adjusted EBITDA, $200 million to $240 million with the difference being the benefit from monetizing the taxes on lease, and I'll show you that in more detail here shortly.
We think we can sustain adjusted EBITDA growth in the neighborhood of 15% in the forthcoming years.
Now our booked projects, CVSR and Antelope Valley, are really impressive. At the beginning of 2013, we said that we have $3.5 billion in revenue and $1 billion in profits deferred for CVSR, Antelope Valley, Henrietta and Quinto, again, on a non-GAAP basis at the beginning of 2013 going forward.
In 2012, we recognize $1 billion in revenue, $306 million in margin. That's incremental to that $3.5 and the $1 billion.
In 2013, this year, we'll recognize $1.1 billion to $1.2 billion in revenue and a margin of 29% to 34% and that includes development margin on AVSP that we've already recognized in Q1, our EPC revenue and margin on both AVSP and CVSR in the back half of the year. And you can simply do the math, the $1 billion in profit and gross profit, and do the math and see what will recognize in '14, '15 and '16, pretty straightforward.
From a GAAP standpoint, things are pretty interesting in that by separating the development piece, non-GAAP has exceeded GAAP. This year, in fact, it will flip. This year, GAAP will be higher than non-GAAP. Eventually, they'll end up at the same place. So GAAP revenue, non-GAAP revenue in the end, are identical.
Now just to provide some additional clarity, the difference between GAAP and non-GAAP is pretty straightforward. GAAP revenue follows real estate accounting, which has some unusual requirements. One, you have the collective around 20% of the cash before you start recognizing revenue. And the revenue is recognized on a percent complete basis, irrespective of the stream of revenue.
Non-GAAP follows IFRS, and this is, we think, a lot more straightforward and follows the flow and the commerce of business. And what does that mean? It means you separate the contract and the multiple elements and recognize revenue on the development margin up front. So we build the project, we perfect the PPA, interconnection, land, site control, et cetera, have a completed project shovel ready, sell that to a buyer, they buy the project, we then, at that point, recognize the development revenue. From there on out, under IFRS and non-GAAP, the revenue we're recognizing is the EPC revenue. So we think it's relatively straightforward and that non-GAAP/IFRS provides a greater level of understanding in the P&L.
So moving now to our Energy Solutions business. We'll -- I'll show you the tools to model this. I'm going to pretty deep into the data here, and so we'll take Q&A after please. If you have questions, write them down and we'll address this in detail at the Q&A session.
So first of all, what is Energy Solutions? Think about this in terms of in North America, a commercial project, a residential lease, a PPA. Step one is monetizing the ITC. SunPower today is not a U.S. taxpayer. We will be, we think in the next couple of years. But today, we're not a U.S. taxpayer. So we bring a tax equity partner in, who can monetize the ITC benefits.
We get the customer signed up, PV installed, and before it's interconnected, we turn that over to our tax equity partner. They then provide us the cash and on a reasonable return for that tax equity investment, and that provides a really nice liquidity at the very beginning of the transaction to SunPower.
The next step is we collect rents over approximately a 20-year period, very straightforward, a monthly billing relationship, Howard mentioned our world-class platform of how we bill and collect and monitor our customers, very, very straightforward, typically a 20-year relationship.
Now what's unique about this relationship is over that 20-year period, we have an ongoing relationship with that end customer.
During that time, we see their energy profile. What's great about that when they have a life-changing event, they add a pool or a hot tub, buy an electric car, expand the family. We see that, and we have an opportunity to go back to that customer and upsell them additional product, additional panels, battery storage, these new solutions that are evolving over 20 years. We are a technology company, a Silicon Valley company that is great at innovating and creating new products.
In addition, that customer may move over time, they might want to remodel their house and we can go out there, take the system down for free, put the new roof on, come back up, put the system back on and sign them up to a brand-new energy contract for 20-plus years. And Jack talked about our reliability, our technology, our efficiency, that is so important because at the end of that 20-year period, we're generating 95% of the energy we're generating in year 1. That product will last, on most estimates, 35 years. This is a product that has a very, very long life cycle. So a 20-year PPA relationship is just the beginning. We've modeled the renewal value at a 10-year period, which still has a longer useful life, but a 10-year renewal period, and I'm going to put some math behind this now.
From a customer standpoint, this is a actual lease summary of our typical California customer, our fleet average for California, which is by far the largest market segment for SunPower. This customer bought 22 modules. They brought the E-20 product and it generates 7.19 kilowatts DC. Their current utility bill is $219. They buy or lease the SunPower system, their current avoided cost is $0.21 for California.
Now you might readout the California average is lower than that. The large consumers, people that own homes, that are not in apartment buildings, their average bill is higher, they're in tiered rate structure. We save them on average 10% to 15%. This customer in year 1 saves $482. Their new utility bill is $20, back to Tier 1 for just the low base. And their monthly lease payment to SunPower is $158. So great economics to the customer.
Now I want to point out a couple of very important points. So our average at SunPower in Q2, Q2 2013, the deals that we're signing is $0.18 per kilowatt hour. And an average fleet-wide, company-wide across our entire 16,000-plus customers have an average escalator of 1%. Now a lot of you read in the press and heard about high escalators, and we think that's the problem. People are signing up for a high escalator and the PV has high degradation. That creates a problem for that customer in year 10, 15, et cetera. With SunPower, think about it, 0.25 degradation over a 20-year period. You're producing 95% of the energy in 20 years, a 1% increase in the overall lease price when energy costs are increasing you name it 2%, 3%, you call it. We think that there's a really, really nice sweet spot once it's created throughout the life of that lease, where their avoided is much higher.
The current estimates for this simple transaction, that this customer is saving, $35,000 over this 20-year period.
Now I want to shift and have you think about this from a SunPower perspective. That's the end customers' economics. Now let's think about for how does this look to SunPower.
So the first thing is the inflow side. So think about the economics to SunPower using a discount rate of 6% for the end customer. So we signed the customer, they pay us that monthly fee and this is the average for SunPower in California in Q2. The discounted 20-year payments to SunPower at a 6% discount rate is just over $3 a watt-peak. Now you know we hate talking watt-peak, right? LCOE -- with lowest LCOE, best technology. Watt-peak helps you model the business, we talked about production and capacity and size of the company, so we're using this to help you model the business. So think about watt-peak and the guidance that we're giving you. $3-plus for the NPV of the customer payments. A small sliver for the California rebates, and then monetizing the tax benefits. So this is the net monetization of makers in ITC for this system.
In addition, the net renewal rate. And the model that we're assuming in the net renewal rate is a 95% renewal rate at the then current energy prices, given the 1% escalator, which is dramatically lower than what the forecasted retail electricity costs are at that point. And we're assuming a 10-year renewal.
We think in all likelihood, we'll actually have more because we'll be upselling and cross-selling new products through relationship of the customer, life of that customer.
Now from a cost standpoint, one of the hard cost to SunPower. Most of these costs are born out in year 1. So the O&M fees are very, very immaterial. Inverter replacement in year 10, et cetera, but the O&M costs are very, very low.
The total system costs, NPV, are about $4 a watt peak. That's about 50% SunPower, and Jack showed you the stats. That's about 50% SunPower, and that's PV, racking, BOS, monitoring, et cetera; and about 50% channel costs, and that is customer acquisition, install labor, the dealer fees, channel management fees, et cetera. So if you take the NPV of the inflows/revenue and look at the NPV of the outflows, you effectively have a retained value to SunPower of $1.75 per watt. And this is just a really, really strong business.
Now I want you to think about this in terms of how would you model this. Pretty straightforward: DCF amount, how many megawatts do we deploy, what's the retained value. Now think about, how does that value change over -- sorry, now think about this in terms of, what is the amount that we've deployed? This chart shows you a couple things. First of all, the yellow bar represents the residential nominal contracted payments remaining. In other words, take all the remaining lease payments, only the lease payments that are remaining to SunPower. At the end of 2012, we had about $400 million in customer payments that were owed to SunPower over time. It does not include the ITC or the residual value.
The green bar represents commercial payments. Commercial, in fact, is a really important part of our business. Howard showed you we're #1 in residential, #1 in commercial. Commercial deals are -- come in more flavors, right, where you have sale leasebacks, we have a PPA, but we own some in the balance sheet. And some of those deals in the balance sheet, we can finance via nonrecourse debt to SunPower at very, very low rates and drive a very, very high value terms of NPV per watt.
So if you add the residential piece and the commercial piece, at the end of '12, we're over $600 million in nominal contracted payments. At the end of this year, we expect to exceed $1 billion in nominal contracted payments. We did our first commercial PPA in 2008 and, over that time, have a CAGR of 124% through 2012. And you see really, really nice growth into 2013, north of $1 billion through Q4 '13.
Now let's talk about what drives NPV upsides for both commercial and residential. Well, first of all, the obvious: our relationship with Total. We have the strongest balance sheet in the industry. And with Total, 11th largest company behind us at a 2/3 shareholder, that gives us great access to low-cost capital and a -- and much better bankability, and I'll talk in a bit more detail about this.
Second, channel efficiencies. Howard talked in detail about our channel and how great our channel is both UPP and our Power Plant and DG. There are significant opportunities for cost reduction. You've seen our great progress on BOS that Jack showed you with our cycles of learning. That same methodology holds true for our residential business and our DG business. So that's $4 a watt. We see the ability to really drive that down through channel efficiencies.
The foundation of the company, our superior technology, our reliability, technology efficiency, those drive huge value. And I'm going to put some math behind these, but we think those drive upsell, cross-sell, plus a very high expected renewal rate.
So putting some numbers behind this. Retained value, on average, California Q2 '13, $1.75. There would be some view of, "Well, gee, what if your -- the energy price goes down by $0.01?" Well, some markets like Hawaii are very, very high, call it $0.24; some markets, Arizona, are $0.10. A lot of those can be lower because there are dealer efficiencies. And Hawaii, it's more expensive; in Arizona, it's very inexpensive. California, on average, drives $1.75. But even as prices change, you'll see that a $0.01 drop in -- per kilowatt hour is a $0.23 reduction in retained value.
On the upside, though, with our channel efficiencies of driving costs down on the channel and with the -- a superior technology and the efficiency and the benefits that Jack talked about, the -- an installed cost reduction of 10%, so going from, call it, $4 to $4.60, we drive $0.29 per kilowatt -- per watt of NPV upside.
And finally, lower cost of capital. A 1% reduction in the cost of capital drives a $0.40 increase in the NPV per watt. Now with our technology and risk profile, we expect both the technology attributes and the balance sheet and financial strength of the company to drive to lowest cost in the industry.
From a financing side, this is kind of the wall of fame for SunPower, and many of you are represented by these firms. We've done over $6 billion in transaction history for the company, not to mention and not including multiple capital markets transactions. We've worked with, really, all the key banks out there. And it -- chances are, we have not worked with a global bank that Total has with our 130-country footprint. Now what does this mean? It means that SunPower has unprecedented market access to the capital markets for tax equity, project financing, et cetera. In addition, it means that we will enjoy a lower cost of capital via more competition for our deals and our projects.
Now I want to walk through and give you a little more color on lease structures. So I showed this slide at our -- on our earnings call in January. And I want to just show it again because it's -- there's an important points here. So the -- from a cash grant deal of the past, the cash grant value is relatively straightforward. You apply the treasury, get a 30% credit back or check back for the system value, and that manifested as a reduction in COGS for us and all the companies in the industry. Relatively straightforward: revenue minus COGS equals margin. And so those transactions are relatively straightforward for whether it's Power Plant or DG.
Now in the ITC flip partnership world, that -- monetizing that. If -- that tax credit now shows up in a new line in the financial statement, it's called noncontrolling interest. The math is really the same. It's not -- it's fundamentally not different. However, it shows up on the P&L, under noncontrolling interest. That cash flow, and I'll show you the word, it's the cash flow is included in EBITDA. It's included in non-GAAP and GAAP earnings. It's not included in adjusted EBITDA because we want to monitor the lease business separate. Now from a cash flow standpoint, the flip ownership structures are relatively straightforward, but I do want to point out the geography because there's been some questions and this will help to clarify and provide more transparency.
So the cash flow from the lessee flows to SunPower and shows up in our net income, pretty straightforward. The costs that we pay for our PV inverters, et cetera, show up in a working capital line and they stay there. Those get depreciated over time, and underpinning the depreciation lines, they -- those will normalize over time. However, it'll look like -- the working capital would look like a negative to operating activities in the short term. The fee that we pay to our dealer for branding, marketing, their profits, their installation, et cetera, shows up under investing activities, sort of like PP&E, sort of like buying a piece of equipment. The financing proceeds, as we monetize some of these assets, will show up under financing activities, and monetizing the ITC also shows up in financing activities.
Now we report free cash flow, and it's a measure that we track very carefully. Last quarter, we generated $216 million from free cash flow. We count all 4 of these streams -- all 5 of these streams in our free cash flow number because, ultimately, it's all part of the economic transaction.
I now want to shift and talk about our manufacturing R&D and IP. So the question is ultimately, how do you value the upstream business? I'm going to give you 2 models and 2 ways to think about this.
First is, look at the balance sheet. Our balance sheet is very clean and very straightforward. Our assets are primarily cash assets. We don't have a lot of good -- we don't have any goodwill; minimal intangible assets. So as you go down the line, most of our assets are hard cash, tangible assets, $3.1 billion in total assets, $2.2 billion in total liabilities. One important thing that's included in the total liabilities is our warranty liability. We have a warranty reserve of $120 million. You saw Jack talk about our technology, our reliability, the bankability of our technology. We think that's a really great insurance policy, and it's not likely to be a short-term cash liability. So if you subtract assets from liabilities, you get $938 million of stockholders' equity. Call it $1 billion, to round up. So $1 billion of tangible book value.
Now think about the replacement cost for a fab. What does it take to replace 1.3 gigawatts of capacity? Well, on our books, net today in PP&E, is $806 million. What's not included in that $806 million is Fab 3. Fab 3, our partnership with AUO, is approximately $100 million sitting in other assets, and that provides great leverage to SunPower. We have access and rights to 80% of the output of Fab 3 at a very, very capital-efficient model. So if you add Fab 3 to our PP&E, I think it's fair to say that the upstream business, the technology, the innovation, the in-place capacity, is roughly $1 billion asset to the company.
I'm now going to shift and talk about our guidance for the year. So 2013 non-GAAP guidance for Q2: megawatts recognized, 260 million to 280 million. Again, megawatts recognized, this is not deployed. We showed deployed, which includes our DG energy services business. So megawatts recognized, 260 million to 280 million, and for the year, 1 to 1.1 gigawatts.
Revenue in Q2, $550 million to $600 million, $2.5 billion to $2.6 billion for the year. Again, that excludes the megawatts, exclude the impact of our energy services business.
From a margin standpoint, we see margins growing: Q2, 14% to 16%, growing to 15% to 17%, driven by, again, Japan, CVSR, AVSP and improvements in Europe. Adjusted EBITDA for Q2 is $30 million to $50 million and for the full year growing to $200 million to $240 million.
Non-GAAP earnings per share, $0.05 to $0.15 in Q2, and for the year, $0.60 to $0.80.
Now our GAAP guidance. Megawatts recognized, 260 to 280, 1 to 1.1 for the year, slightly higher than our non-GAAP. Revenue as well, $540 million to $590 million in Q2, growing to $2.6 billion to $2.7 billion, about $100 million higher than our non-GAAP. Margins also grow. And again, we talked about CVSR. That real estate accounting provides at the end of the construction period a really nice revenue and margin bump to the GAAP margins.
For Q2, GAAP loss per share, $0.15 to $0.25; and for the full year, non-GAAP (sic) [GAAP] loss of $0.05 to GAAP profitability of $0.20.
Other key financial assumptions. So megawatts deployed, including energy solutions and megawatts recognized, 1.1 to 1.2. Contracted energy solutions, 95 to 110 megawatts. Operating expenses are going down 10% year-over-year to $275 million to $290 million for full year '13. OIE, which is primarily interest expense and foreign currency hedging costs, are $70 million to $80 million. A tax rate of 30% to 40%. This tax rate is not applied to the NCI line, it's applied only to the pretax line.
Capital expenditures for staff reduction and Gen 3 implementation of $60 million to $80 million. And a weighted average shares outstanding or WASO of 126 million to 130 million. The increase in WASO is related to the increase in share price. And so using the treasury stock method, the warrants have slightly higher dilution.
So let's now summarize sources of value. So distributed generation and Power Plant, cash business, 2013 EBITDA, $200 million to $240 million. So using a relatively traditional multiple of EBITDA, you can apply a value to the cash business.
Energy solutions. Looking at an NPV per watt, applying your view of the discount rate, size 95 to 110 megawatts. Think about that in terms of a model of what do we expect next year and the year after. and run your DCF model going out into the future, bring that back to today, and you can fairly value the energy solutions business. And then finally, the technology platform, the upstream piece: Net asset value, we think, is a good proxy.
So with that, I'll turn the meeting back to Tom.
Thomas H. Werner
Great. Thank you, Chuck and Jack and Howard. We are very much on schedule.
And let me just summarize with, SunPower is a different solar energy company, and we're different by design. What we've communicated is that our technology is different. It makes for an advantaged position particularly as we move to a finance solution, which we are increasingly doing. And we are now leveraging the investments we've made in the distributed generation channel and a Power Plant channel that is big in international and uniquely show. And as we emphasize those 3 things, we increasingly look like an energy solutions company. And when we go back a few years and we look at how we structured this company, we very much thought that a differentiated technology with critical, deep channel investment was critical because we saw -- foresaw the time when we would cross conventional electricity and we could sell solutions. And of course, that required a strong balance sheet, which is complemented by our relationship with Total.
So the structure of our company is unique and very, very much on purpose. Over the course of the presentations today, I think we are able to highlight these features and also give you the transparency needed to model our company more clearly.
What we're going to do next on -- I'll take a pass at this, and Bob can jump up and make sure we have the logistics correct. We're going to take a break, let you get lunch, call or do email for a few minutes. We're going to take a break, I think, for 15 or 20 minutes. We do have all of the speakers, plus a couple of other SunPower executives, that will then take Q&A. We'll do that for a finite period of time, probably around half an hour. And then we'll give you back a part of your day.
Anything else I needed to cover? Well, how about location of lunching...
Yes. So we'll get back together around 25 of 1. Lunch is right outside the door here. Restrooms are down the hallway. Feel free. We'll get everybody back. We'll have the execs up front, and we'll go from there. So thank you very much for coming today.
Hello again, everybody. Thank you, again, for attending our Analyst Day. We will have 30 minutes of Q&A here with the executive team: Tom Werner, Jack Peurach, Howard Wenger and Chuck Boynton. So we have handheld mics out there available. Please wait. Since we're webcast, please make sure that you speak clearly for the question. First question, Vishal?
Vishal Shah - Deutsche Bank AG, Research Division
Chuck, I just had a question on the guidance you provided for the 2013 earnings numbers. So I just -- when you think about the ITC impact in the -- associated in the guidance, I'm just -- I'm looking at the numbers you provided. Looks like you have about $50 million, $50 million or $60 million, of ITC monetization in your earnings for this year. Am I looking at that right? So that's what, $0.45 of earnings from ITC. And you have $0.70 midpoint of guidance for this year. And you're talking about tripling that number of energy solutions in the 2015 time frame. So how should we -- I mean, should we think about earnings growing from $0.45 this year to more than $1 in 2015 time frame just from the energy solutions business?
Charles D. Boynton
Yes, so energy solutions, you correctly point out the difference between the adjusted EBITDA and EBITDA. It's the NCI benefit for this year, that's correct. Going forward, if you look at that energy solutions growth from 15 -- 12%, almost doubling over that 3-year period, I think it's fair to think that a portion of that would be North American tax equity benefits that we've received, a portion of, as Howard mentioned, will be international expansion, first Europe, second Australia, where there is no kind of upfront P&L benefits or true [ph] 20-year benefits. And that tends to model, we're showing off EBITDA and an NPV per watt, and excluding that NCI benefit from the EBITDA results, and you'd count that in the DCF for the energy solutions business. But your model of that linear is reasonable, but the mix will shift and grow internationally.
Vishal Shah - Deutsche Bank AG, Research Division
That's helpful. And just on the international markets, talk about the pipeline of 6 gigawatts and 25% realization. Can you talk about how we should model that in the next couple of years? Where do you think the growth is initially coming from? Is it a lot of the international markets?
Howard J. Wenger
Yes -- this is Howard. Part of the 6 gigawatts are some U.S. projects, 2 of which we have announced, Henrietta and then Quinto. Together, those comprise about 250 megawatts. Those projects, by the way, are -- all the major development milestones have been achieved, meaning we have the power purchase agreement, it's approved by the public utilities commission. We have the interconnection approved. We have the CUP, which is the conditional use permit to construct the project. So those are in advanced, very advanced, stage of development. That's part of the 6 gigawatts. But yes, to answer your question directly, more of it is going to be international, and more of it is going to be weighted in terms of recognition to 2015 and beyond.
So I learned Citi is [ph] -- think of this 2 projects taken in majority [ph] outside of America [indiscernible] spread across 4 continents. So I did not exclude the [indiscernible] part [indiscernible] Total. I hope it [indiscernible] in the next few quarters so that we can [indiscernible] quarterly. I'd say that China [indiscernible] Chuck, you talked about the 1% decrease in your financing costs and the impact it has on the leasing model. Can you talk about how securitization ties in there, the timing and what type of securitization you think will come first? So that's a floating rate, or a fixed rate.
Charles D. Boynton
That's great. We're very excited about what securitization means to our industry. I think it's great for the industry as a whole and will really benefit SunPower as the investors take the same criteria they've applied for our large-scale products using independent engineering studies and study performance reliability and the technology underlying this. And so we think that is a huge advantage to SunPower. A lot of Jack's presentation is the same data that the IEs look at. So as we go and open up new markets with ABS, whether it's fixed or floating rates, I'm not sure how the markets are going to -- what the first deals to do. SolarCity talked a lot about that on their call. And we're excited for the first deals to get done. SunPower will not be in the first deals that get done, and we're happy with. They'll pave the way. We started residential leasing a little bit later. We've got a great portfolio of products. And we think that, over time, will drive better economics on the ABS deals that we do. We see deals happening this year, though, for the industry, and for us, hard to predict but shortly thereafter.
[indiscernible] What we presented today [indiscernible] so having a -- the one-stop shopping or, if you want to think of it [ph], as the vertical integrations [indiscernible] so you're not taking some [indiscernible] partner [indiscernible] having obtained this technology, high probability of being there to service the lease. All of that Chuck and [indiscernible] and his team will leverage [ph] or work closely with the bank in a way that we think it's going to be very scalable for an initiation [ph] as well as ABS. But think of us as currently the best [indiscernible].
Yes, I was wondering, on the DG business, if you could talk about how the international markets look like. Obviously, in the U.S., net metering is a big enabler of that market. Where are we in terms of net metering in those markets that look more attractive at the moment? And also within the U.S., I guess one of the worries that all these companies have that are in the DG business is some type of net metering, that the caps is, particularly in California, at 5%, as well as the 2016 ITC sunset. So how would the business evolve as you start hitting those cliffs? And how does the economics look as you start looking at some of the international markets?
Thomas H. Werner
I'll go -- let me take the economics. And Howard -- I will just provoke some thought, and Howard, you can expand significantly. I think it is a well-worded question because the structure of selling energy solutions, no matter if it's net metering or if it's a feed-in tariff or if it's a retail electricity market, on -- it will be in all 3 because Australia is retail electricity. And don't forget the investment we made in Diamond Energy. So Howard, you can expand on that. Feed-in tariff is a great environment to offer a solution if, of course, you could predict the feed-in tariff over time, which, I think we all know we -- it's difficult to do, except in some isolated instances. So that's transitory. In terms of net metering, we think of it this way: Our biggest customers are investor on utilities in California, yet we also have a DG business. So we're -- we kind of have a more civil view of how we need to work with the utilities. We think there's a way to work things out with them. And we're in active dialogue. We'll see as time develops. Now the -- by virtue of being international, we're not overly dependent on one net metering market. In fact, if you looked at -- if that market were to vanish instantly, that would be 10% of our company. And frankly, we could use that product elsewhere as we sit here. So we certainly don't want that to happen. We're going to actively manage it so it doesn't happen, but we're going to be that -- we're going to be Switzerland in the middle of that, we think, and we'll see how that develops.
Howard J. Wenger
Yes, first talking about the international part of the market. Electricity rates are really high in some of these countries. I mean, in Germany, it's in excess of 0.30 per kilowatt hour. So the rate, the retail rate, of electricity is actually higher than the feed-in tariff. Now that's available in Germany. So with the model that's evolving there quickly is one of self -- what they call self-consumption where the homeowner or the business is putting solar on their roof and they're getting as much of that solar to offset their native demand as possible. And so you're starting to see some battery applications in Europe that are popping up. And so in that case, that's a business that doesn't depend on net metering or a feed-in tariff. So we're rapidly -- or we're there at a great parity situation in places in Europe, such as Germany. What -- and that's good for us. I mean, we have 1,400 dealers in Europe and -- or actually, internationally, 1,300 in Europe. And so we're -- so we have the footprint already in place and the platform to support those dealers and offer energy services and energy solutions to customers there. With respect to California, I'll just add to that and then I'll have a short piece on Australia: California, 20 years of positive policy for solar in California, going back to -- for PV, going back to 1994, so almost 20 years. The net metering law was first put in place in 1995. There's been a rebate program there. And there's a reason for that. It's because, constituents and consumers, they want clean energy, safe energy, solar energy. The state wants to create jobs, and there's been a methodical investment by California to create this incredible ecosystem of jobs and a value proposition for solar. What's happening with net metering, we are hitting a cap in. I agree with Tom very much that, because of that investment and because of -- that consumers want this technology and because the cost of solar has come down, so everything that the policymakers dreamed of. It's like a policymaker's dream to put in policy in place, create jobs and drive down the cost of an offering, it's happening in California. And so that's not just going to get tossed out because we're hitting a net metering cap. That's our perspective. And we believe we can work very constructively with utilities where it's a win-win where they're actually providing a service, getting compensated fairly, and the solar industry can continue to thrive under the -- if the rules are modified.
Thomas H. Werner
Okay, Australia? Just what...
Howard J. Wenger
Yes, in Australia, just a quick comment, which is it's one of the few markets in the world that has been disaggregated and it's a -- there's a -- it's a retail choice market. So consumers can choose who their retail provider is. We made an investment in a company called Diamond Energy. They're a supplier of renewable energy, so they supply 100% of the energy to the consumer and they're bundling solar with that. And that bundled offering of buying both renewable power with peaking solar power on the roof is a proposition they can offer that's below the rate of conventional electricity in Australia. So deregulation can have its benefits we're seeing.
True. I guess the DG piece is very good from a longer-term perspective, as we can pull it out. But I wanted to go back to the guidance again, Chuck. If you look at the 2013 guidance for revenue and gross margins coming from the booked projects and you exclude that amount from the revenue in gross margin guidance for the full year, the rest of the Power Plant and cash sale business is basically running at 3% to 4% gross margins. So as you start completing this $3.5 billion in revenue that we have in the full booked projects and the mix starts to reflect more what you can bid and when in the market, how would sort of the gross margins evolve, x the DG business, as we look into 2015 and beyond?
Charles D. Boynton
So if you look at Japan as a good proxy, last quarter, we were very high teens. And with that sustainable with our costs going down, we see the international DG cash business being in high-teens, low-20 margins. And I think that's a fair proxy for Europe, which has been really struggling over the last 1.5 years. We see that business now. If you exclude the manufacturing underutilization charges, the European business is almost at breakeven margins today. You've heard of rumors or discussions of price increases in Europe. We're optimistic that -- via cost reduction and running our fabs now at full capacity, that we'll have breakeven margins in Europe in the short term and positive margins and a breakeven business overall covering our OpEx for the back half of the year. That will provide a real benefit to the overall margin profile for our DG business. Right now, that's been our real anchor. It's weighting down our results. The cash North American business is only about 30% now, right? We're about 7% energy solutions for our residential DG business. Commercial margins were also improving with our cost-reduction plans. Jack showed you that tremendous progress on BOS cost reduction. So overall, as you build the model and you look at the cash side of the business and EBITDA, that's fair to run your cash margins improving and getting high teens, low 20s, for the cash business.
Thomas H. Werner
And when you think of the Power Plant business, Howard, we're seeing that a lot of it will be in the '15-and-beyond time frame. So you have, the power, the 35% less cost of the module, plus the Oasis for the power plants, the progress in Oasis, in what we think will be a far more efficient financing environment. And the combination of those things would suggest that you've crossed conventional electricity and you'll have a lot of margin room. So -- unless solar companies priced in an unintelligent way, they are -- is -- as you could fully expect to be making 15% or more margins. So then how do you insulate yourself against unintelligent pricing? You will offer more than just bidding in electricity. You self develop, you offer other things that make you unique to that region. And we're certainly doing that, and Howard alluded to that in his comments.
Us -- yes, before we get started, if you could just yell out your name and the firm you're with.
Colin W. Rusch - Northland Capital Markets, Research Division
Sure. Colin Rusch from Northland Capital Markets. A couple of markets that you're entering, Germany and Italy, certainly have high saturation levels of solar now. Could you talk a little bit about how you see that evolving in terms of how utilities are managing negative peak power prices and optimal deployment of energy storage technologies? And how do you guys really approach that strategically? And then as a separate one, if you could just talk about the particular storage technologies that you're evaluating, how far down the road you are with those.
Thomas H. Werner
Yes, I think Jack can -- why don't you kick off the storage and -- storage technologies that we're looking at. And then Howard, take a crack at the 60% penetration of solar.
Okay. As far as storage goes, we've been involved in a number of pilots. Most of those pilots have used [indiscernible] technology, but that will likely be the first technology that's going to make an impact in the industry, possibly driven by the volume that's happening with electric cars. Over there is -- there -- with Total, we work a lot with Total in this area. Total has made -- we spend a lot time in this area in looking at a bunch of alternative technologies. So there are some very, very interesting technologies that could, not in the near term but in the medium to long term, become viable substitutes for the current, today's technology.
Thomas H. Werner
And just a quick comment so to further stand on that. Unless you have incentives, we don't think the math works in storage in the near term, near term being single-digit years. I -- but the -- it's clear, with the amount of money being spent and the learning rate on that, some technologies will become economic. And Howard talked about the value of energy and the time value of energy. So we're studying the whole world, the meaningful markets in the world and the crossover points. And we have a pretty good sense of when we'll capitalize. In the interim, Total has dedicated Ph.D.'s who are invited in several wide-storage companies that were -- so it's just a huge advantage for us. So we have a really good idea who is likely to make it. And it's all -- as you probably know, it's a very fragmented market. It depends on the size of storage and just long you want to store. And so it's not going to be an answer, it's going to be multiple answers, depending on the scale, is our takeaway. Howard, do you want to talk about markets dynamic and grid penetration?
Howard J. Wenger
Sure. So a big part of the market is commercial, right, and in Europe. And so you can put a PV system on a commercial facility and not export any of the energy. You can just go right into that facility because the peak demand of that facility always exceeds the peak power output from the PV. But you can still get a 40% or 50% self-consumption rate in a commercial. And I don't know if you recall that chart I showed with the total addressable market in electricity. There's actually a larger fraction in the international markets that are commercial, so it represents a really big opportunity for us. Okay, it -- with respect to Germany and Italy, one of the things that happened in those 2 markets, ground systems were really promoted early, as well as rooftop, but there are a lot of ground systems that are put in, big power plant systems in Italy and Germany. And in part, those are really driving a lot of these penetration issues you talked about. But there's a heck of a lot of huge addressable market for -- on the building side in the DG side. And consumers is still want the technology. They want to have clean power, they want it on the roof. They want to be independent. They want to lower their bill. So it is an interesting challenge in terms of grid operation, but so far, they've been able to manage. It is a dynamic. It's something that could -- the policies could change. And so one of the benefits of our model is one of nimbleness when it comes to DG. And if the models do change, we will be able to shift and adjust very, very quickly.
Sanjay Shrestha - Lazard Capital Markets LLC, Research Division
Two quick questions, guys. Again, it's Sanjay with Lazard. First, I want to go back to that 6 gigawatt pipeline you talked about, Howard, right? So 2 markets in particular. So when you think about Middle East, you're competing with sort of 0.18 of COE, right? And we you think about markets like Chile, you're competing against diesel, 0.35 of COE, give or take, right? So at this stage, when you're pricing your system, what do you think solar is going to clear in this market? Because there's an argument to be made that, with costs going down, the margin actually goes up, no the other way around. So can you talk about that a bit? And I have one more follow-up. And I have a follow-up...
Thomas H. Werner
Yes, yes, the -- let me just comment. The -- so Chuck said we're a technology company and we're in Silicon Valley. We said that on purpose because, in Silicon Valley, we all know about Moore's law. And it's sort of, if you're not pulling costs out on, at least, every-6-month basis, you're not running your company effectively. So we will run that way and we will drive costs out of our solution in a way that's durable, not just renegotiating with suppliers but engineering costs out. And we'll do that across the whole chain. And so then, if you have costs out and you're already crossed the threshold of conventional electricity, there's a wedge that forms. And the question is, who is going to harvest that wedge? That's why we call it an energy solutions company because, obviously, our goal and our plan is to be part of that wedge. And an energy solutions company will enable that wedge that forms over time, and then we'll participate in part of it. So embedded in this concept of energy solutions is certainly the answer to your question.
Howard J. Wenger
Yes, the places that you mentioned, Saudi Arabia, Chile, I mean, these are really high-DNI, or what we call direct normal irradiation, markets. It's very clear from a sky and sunlight perspective, which is ideal for our C7 concentrating technology. And so this next generation of technology, we are targeting 15% lower LCOE than our conventional technology. So as Tom mentioned, that's part of our innovation trajectory, it's to keep innovating on the PV and on the balances system to lower the cost of energy. So those markets are great markets from a value proposition perspective. There is no question right now today, we can offer a project at scale. It can be 50 megawatts, it can be 500 megawatts, it could be gigawatt scale with our C7. We could offer today that is better than the price that they're paying right now for electricity. So the question -- your question is, okay, is that going to -- these markets are competitive. We're in a competitive space. If there's an RFP, you can bet -- if it's an RFP-based auction, you can bet that there will be a -- it'll be very competitive. But it's hard to project what the clearing price will be and what the clearing margins will be. Our history has told us that we are able to compete and win. And we are able to do so in a way that gets us margin that is completely acceptable with the company and our shareholders. So well, that's our perspective, yes.
Thomas H. Werner
So what I would add to that is the -- is that markets like Chile are undeveloped. And so you can have markets that -- with a structure similar to what America was 4 or 5 years ago, which is self-develop projects. And as Howard said, we made codeveloper where, actually, Total is an equity investor. And then you get the economics of taking that risk. Second, so that would be -- and we're clearly not going to just get into a bidding war. That's not going to be a good business model. When you look at Saudi Arabia, many of you in the room are probably aware that there was a ministry created called K A CARE. They issued a white paper, and the white paper suggests a number of other variables that are going to be important in their decision. Most importantly is a phrase that I learned, that was pounded home, was Saudization, which is how do you Saudi-ize your product? And how do you create local employment? And when you work in that region of the world, what I'm learning is that they think very long term. So how are you going to create jobs? How are you going to partner with in -- over the long term. That's going to be as important a factor as the economics. And we feel pretty good about leveraging Total's 90-years presence building $10 billion refineries. We can put -- point to a 90-year investment. And we actually go to market really as Total/SunPower. It's a partnership and we're driving it, but we're leveraging, for sure.
Sanjay Shrestha - Lazard Capital Markets LLC, Research Division
One quick follow-up, guys. So one of the big concerns that keeps come back in the sector, right, is that Chinese module, large EPC company are also going to go after some of these emerging opportunity on a global basis, right? Well, 2 question on that. One, do you guys see them in terms of some of the new markets you're going after? And two, is there a real change in the behavior from, actually, the buyers given sort of what happened to the likes of Suntech and the way that you talked about discussions in the industry that their cost roadmap, actually, is not directionally going down? As to the rate [ph], it's decent ratings, so they're probably not going to be able to take too much cost out, anyways. So can you comment on that?
Thomas H. Werner
Yes. I'll say a few words, and then Howard, you can jump in. But for sure, you see international developers are saying, "We're going to offer a solution with the Chinese module," or other source module. And it's just -- there are parts of the world that say, "I'm not -- I care about quality. I care about tenure," and it's almost all of them. And you've got multiple [ph] parties. And how are they going to create up local employment? I just think that it's going to be difficult for that structure to win in what we see in the international markets. And we're deep in these international markets. So do we see them? Absolutely. On -- and will they win? Some, sure, but -- and some of those companies have deep experience. And certainly, some of these regions, they're leverage, bundle it with other solutions. But on average, the one-stop shopping vertical integration and leveraging Total is a winning combination.
Robert W. Stone - Cowen and Company, LLC, Research Division
Rob Stone from Cowen. I have 2 questions, please. The first one is on your assumptions about winning roughly 25% of the 6 gigawatt pipeline. Where do you think that puts you in terms of a competitive position, or market share?
Thomas H. Werner
We don't know. Yes, I don't know. Howard, if you want to make an estimate. It's -- my gut feel, Rob, is that it's conservative. The thing that we're -- the whole industry is having difficulty doing is predicting the structure of those markets and when the structure comes together in terms of timing. Certainly, markets like Saudi, again, have been educated that when they do come together, they're going to come together in a big way, so just like China goes from nothing to 10 gigawatts in a year. I think some of these markets turn on very quickly. And so we're back to Sanjay's question of what we're assuming as -- is it we're doing business where there's rational economics? So it's not so much a share game as it is an economics game. Anyways, that's the way we've built our assumption and what we communicated today.
Robert W. Stone - Cowen and Company, LLC, Research Division
Okay. To put the question in a slightly different way, in what percentage of those situations do you think your relationship with Total is a significant competitive factor?
Thomas H. Werner
30% of that pipeline.
Robert W. Stone - Cowen and Company, LLC, Research Division
Okay. My second question has to do with the costs roadmap. You talked, for instance, about what the delta would be on the NPV of your leasing business if power prices change a little bit. What are some of your assumptions other than, on the technology side, where conversion efficiency is going to drive down costs? Where else are you expecting to see input cost benefits? And where could you see deltas in the wrong direction in that area?
Thomas H. Werner
Here, did you say, in the wrong direction, as well, yes?
Robert W. Stone - Cowen and Company, LLC, Research Division
Yes. In other words, you're expecting to save money. If you can elaborate on how that'll happen and where it might go wrong with that recipe.
Thomas H. Werner
Sure. Yes. If you look at -- and Jack, I'll let you elaborate the thought, for the most part here. But if you look at the cost of a residential install to a SunPower customer, the module is becoming a diminishment -- de minimis part of the overall costs. And then now, it's a little overstated, but I -- you're looking in at less than 25%. So there's a heck of a lot of cross-sells where -- and we're taking our expertise in manufacturing and we're moving it to that part. What is that? It's obviously BOS install and efficiency of the channel. And so we alluded to -- Chuck's slide alluded to doing some work there. When you compare Germany to America, we all know that it's like 2x the install cost in California than it is in Germany. We're going to go help fix that. And that's huge money. I mean, there's huge opportunity there. And not owning the channel, we think, is a huge advantage, and we're going to leverage that. So anyway, that will give you a big sense. The flip side of what could go wrong, you're going to have some commodities that we've really done well in over the last 2 years, the last couple of years, that likely, over the next couple of years, are going to turn the other way. We've built that into our cost forecast, but we may be wrong in a couple of cases. Obviously, in class, aluminum and silicon are the big drivers here.
Yes, I'll just build on what Tom said around the non-module costs and the aggressiveness and the opportunity that exists in those areas, in everything, from installation costs, logistics, site preparation, customer acquisition costs, and working through all of those in a very, very disciplined way as we focus on these very specific markets. And one of the things we're doing is really focusing on these segments to allow us to invest in that really, really disciplined cost-reduction activity across the board, not just in a module.
Thomas H. Werner
Just think about what we're seeing, 35% less cost in a module. Plus we're going to attack these other 3 quarters, and we're already at conventional parity. There is a big wedge that'll form there. And in the -- back to the net metering question. The -- you confide -- the consumers got a choice here, and the consumer is going to weigh in. So renewable energy that's less expensive is pretty compelling to the public utilities commission and, certainly, to the administration in California. So you've got a fairly favorable environment to have things end up in a rational place.
Robert W. Stone - Cowen and Company, LLC, Research Division
So if I could just distill there, what you said about the older system versus the improvement in the module cost, overall cost roadmap. I mean, the conversion efficiency improvement, that's your core technology, but how much of the improvement is coming out of just doing the other stuff better, systemizing the BOS and the rest of it, which is something that comes from the sum of your experience?
Thomas H. Werner
We aren't -- I -- we have not done that calculation. I'd give you an estimate, it's probably -- and we can refine this, it's at least 50-50. The nice thing about the efficiency improvement is it's sort of on a saleable engineering and it's durable, it's hard to copy. The BOS efficiencies at least happened, it has more upside. It would be fair to say that the supply chain in the install in America today is incredibly inefficient. It's there are lots of opportunity there.
No, one in the corner. Yes?
Brian K. Lee - Goldman Sachs Group Inc., Research Division
Guys, Brian Lee with Goldman Sachs. I just had a question about the retained value, which I appreciate the detail and some of the assumptions going up to that. When I look at the $1.75 per watt that you guys are talking about in California today, it looks like it's about 30% lower than what your major peer out there is currently realizing. I would have thought you'd be equal or maybe even higher given your scale and your cost of capital. Can you kind of reconcile why that might not be the case today?
Charles D. Boynton
Yes. I'm not sure where of their -- where they're getting a higher value. I mean, fundamentally, we think that the value would be at parity or we'd better, especially if you look at the assumptions on residual and the durability that Jack mentioned in terms of 5% overall energy drop over 20 years versus other commodity panels are dropping 1% a year. So I don't know how they're doing their overall calculations for retained value. We did the math and the science behind ours, and I would reserve comment for theirs.
Thomas H. Werner
Yes. And yes, Brian, we've read your questions with SolarCity, and I thought it was well done. Nice to meet you. The $1.75 growing -- going north, Chuck, if you -- reconciliation of that, what might not go the right way and what's likely to go the right way, which would suggest that the $1.75 should increase in time. What we didn't do is peg it. You do have a little bit of apples-and-oranges comparison, us being a -- 2 years into lease and not having some of the high fair market value, as an example, leases not having the big military program. So they're maybe part of that, Brian, of not direct comparisons. On a go-forward basis, I couldn't agree more, we will compete on an NPV basis.
Brian K. Lee - Goldman Sachs Group Inc., Research Division
Maybe as a quick follow-up, I think one of the assumptions is that there does seem to be a down pace in the escalator. And I know that the contract you put out there is just an illustrative example. Are you just being conservative on the 1%? Or do you think that ultimately starts to increase over time?
Charles D. Boynton
So 2 things. On the escalator, we think that having a -- letting the consumer decide what is best is the right way to go. Let them choose, get them all the facts. We are a conservative company by nature. And that 1% escalator, we do think, creates additional value over time. There is a risk. The higher the escalator is, the higher the risk. Just to come back to your point on SolarCity, I'm not sure what they're counting in terms of all their G&A and SG&A costs and how that bakes into their calculation. Ours is fully loaded, so that's one of the check.
Scott Reynolds - Jefferies & Company, Inc., Research Division
Scott Reynolds, from Jefferies. First, I wanted to talk about the relative economics of European lease versus a U.S. lease. So in the United States, we started with makers. That drove a lot of leasing market. So how does that work in Europe? Is there an equivalent? And then you guys give each quarter your adjusted free cash flow, but there's go no guidance for that. So you can -- can you just talk through a little bit, there's obviously a lot of moving pieces in the company, how we should think of cash flow throughout the year?
Thomas H. Werner
Yes, so Chuck certainly will jump in on the cash, and Howard will take the lease, with me kicking it off. The structuring in Europe is going to be radically different. You have no ITC. So you have a bigger pool of capital that you can draw upon, but it's less mature because you don't have a lease market there yet. You also have a set of rules that are unique to each country, and that will allow you to have some pretty innovative structures that we've yet to roll out, so it would be unwise to announce them already. But they are quite a bit different. I don't know, Howard, if you want to say more.
Charles D. Boynton
Yes. I think the 2 markets that Howard mentioned, France and Australia, are -- have very compelling economics, for a little different reason. France, more because there's an attractive feed-in tariff; and Australia, because of the available sunshine and high electricity prices. Those models will be different. You don't have to monetize makers in the ITC. And so it'll likely be more of a third-party ownership model where we're getting most of our cash and value upfront and retaining that customer relationship over time. But as Tom mentioned, it's premature to go to the models in greater detail, but there --- then the huge benefit, though, is you don't have the complexity of tax equity as a required element to roll out those models. As it relates to free cash flow, we are -- our guidance is for the year and that we intend to generate between $100 million and $200 million of free cash flow for the year. And we're sticking with that overall guidance. Certainly, working capital will ebb and flow quarter-over-quarter, but we're overall holding with the guidance that we -- and we talked about at the last earnings call.
We have time for 1 longer one or 2 quick ones, so...
I'll have 2 quick ones. Just a quick question about the financing and the -- you just talked about 1% lower financing costs would add about $0.40 to your retained value. Could you give us some sense of what kind of benefit we would see with ABS and others compared to what's going on in the market now? And second question, related to that, does the expiration of ITC at the end of 2016 play into some of these ABS structures? How does that play out?
Charles D. Boynton
So the overall, the 1% reduction, is, we think, real. So today, we model this at 6% in terms of an overall discount rate. With opening up the markets with the asset-backed securitization, should lower that number. And there are what we think is the long-term trend, as compared that to home loans and consumer car loans because that's really the parody what you should be looking at. On top of that, we believe there's actually would be a lower default rate for the solar system because you avoided energy cost that's higher. So effectively, you've got better security than you would over other assets. So that 1%, going from 6% to 5%, we think, makes sense. SolarCity talked about some loans at 4% or forum change. We'll see, but the overall EPS markets will add great liquidity and lower cost of capital. The expiration of ITC or the reduction from 30% to 10% that's projected in '16 to '17, I don't think, will actually overall matter that much to the overall markets. It'll make it easier, for sure, to get more financing because you have less of a tax equity component to this, and that will provide more liquidity. But with the cost-reduction plan, we still see very, very compelling economics post ITC in North America or post reduction in ITC.
Thomas H. Werner
Yes, I'd say, '17 looks a lot like '14 in terms of overall costs, if you want a general guideline. I think the question, Chuck, too, is will that -- does it influence the ABS market today knowing '16? And I think the answer is no.
Charles D. Boynton
Well, the answer is no because, obviously, you're securitizing deals that are already done in ITC in a current-period monetization, not a longer-term monetization.
Okay. I want to thank everybody for coming today. I hope you learned a little bit more about SunPower. If you have any questions, feel free to contact me. To those who'd know me, you can reach out. For those that don't, please come up, introduce yourselves, and I'll be more than happy to spend some time with you. Thank you.
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