Four Problems Facing Solar Power Companies

We see at least four structural problems facing existing public solar power companies:

1. There is risk that some new entrant will leapfrog them by developing a better, disruptive technology.
2. Solar energy has to compete with the memory chip industry for its raw semiconducting materials, which, much like corn, gasoline and ethanol, breaks the link between input cost and selling price.
3. Competition comes not just from other producers of solar energy, but from other producers of electricity from other alternatives and conventional sources. On a LCOE basis, solar will usually lose on pure economics. Thus,
4. Demand is heavily reliant on subsidies that will inevitably be reduced or phased out.

Solar produced energy, ultimately, is highly compelling, given it is the shortest path to useable power, provided it can continue to lower costs significantly; there are plenty of other reasons to like solar which we don’t need to list as they are well known. Also, it is competitive now in some marginal situations (locations with very high insolation, very high costs of grid-based electricity, very high subsidies), but valuations suggest investors anticipate far larger markets. Something we don’t predict will be seen from the current set of public solar companies.

On point #1, we noted an article in the July 25 Economist magazine about two private Israeli companies (GreenSun Energy and 3G Solar), each with a promising-sounding technology. We won’t try to summarize them here, but the point is that this is one of many examples of pre-commercial technology that could potentially render current production methods obsolete, very quickly.

The rapid growth of many of the public solar energy companies also suggests that this is a relatively easy business to enter, another risk to the valuations of the current players. Suntech Power Holdings (STP) began operations in May 2002, went public in December 2005, and is a major player, to pick just one example.

In our view, it is far too early for the market to be declaring who the “winners” are in the race for dominant positions in solar energy, as these two companies profiled in the Economist are just examples of what are probably hundreds of companies working on solar technologies.

Comments

[Zenfar:]

Anybody can contribute to Seeking Alpha that is both a strength and a weakness, at least there are comments.

1) There are oil subsidies and ethanol mandates right now. Why should they have special status and not solar?
2) So what if somebody has something cool in a lab somewhere? It is a long way from the lab to the marketplace.

Jul 27 01:54 PM

[User 427204:]

Thumbs up to Allie!

Jul 27 01:56 PM

[BatteryUser:]

The problem for new photovoltaic technologies is to demonstrate a 20 years lifespan with a predictable efficiency (or efficiency decline). In larger projects, which rely on purchase agreements for revenue and loans to cover the capital investment, the business case typically runs over 15 to 20 years, and if you can not predict your revenue over that time frame, it can be difficult to find the institutions that will fund it. Si based solar panels have the history and it is easy to predict their future output, whereas other technologies including thin film PV do not have that kind of history and the output is much more uncertain.

So Si-based PV will be around for a while and supply the panels for most of the commercial installations out there, while the other technologies mature. By the way, GreenSun Energy still relies on Si-based PV cells and if successful they will either be copied very fast (CPV is not new) or they start an aggressive licensing campaign to the established module manufactures.

Jul 27 02:03 PM

[rooferguy:]

Good article. It’s important to remember that silicon is a commodity and it is widely accepted that there will be an abundance of solar grade silicon for the next few years. It is difficult to foresee a near-term scenario in which the semiconductor industry’s demand will cause silicon prices to rise substantially again.

That means that a “disruptive” technology is unlikely to address the solar cell itself, but will instead address all the other costs that go into an installation (figure $7/watt in the U.S). If solar cells were absolutely FREE (current cell prices are in the range of $1.25-$1.50/watt), then the steel, aluminum, glass, racking, inverter, direct labor and bureaucracy costs that represent the other $5.50/watt costs would still apply. Remember, to meet fire codes you still need glass panels with strong frames to last 25+ years, and all that stuff takes labor to install.

Some practical disruptive ideas are micro-inverters, solar panels with integrated racking (SunPower’s T-5 for commercial and Andalay for residential), new sales & marketing models (retailers actually carrying plug & play panels, thereby eliminating direct and indirect labor costs), etc. These disruptions are unlikely to come from real cheap solar cells since there’s not a lot of room between $0/watt and $1.25/watt to make money and reduce total installation costs.

Once these non-cell costs are reduced (and there is a great trend towards this reduction), we’re way beyond grid parity in many locations (northeast, southwest) even without incentives (but the 30% ITC will still apply). So points #3 and 4 become irrelevant as solar installations rapidly become more cost effective.

Jul 27 02:11 PM

[Howard_T:]

On top of the reasons posited in the article, solar power also has the problems any business faces: where do I put the production facility and how do I get the product to the consumer?

To produce commercially viable amounts of power, solar needs to have a very large array located somewhere that the sun shines nearly all the time. In other words, we are talking about the desert southwest. I'm not too sure that the same environmentalists who are urging the replacement of carbon-based energy will be too thrilled at having several hundred square miles of fragile desert environment destroyed. Assuming that this problem can be overcome, you now have to transmit this power to where it will be used. Here in the northeast, this would mean around 2,000+ miles of transmission line. How do you overcome the line losses? Do you build periodic substations to boost the voltage? If you are to depend on energy storage in a "smart grid" infrastructure, it hasn't yet been looked at from an engineering economics viewpoint, and perhaps the means to store the energy don't even exist in a practical sense. Allie, you may be correct that solar is inevitable, but it has a very long way to go before it is a proven and reliable technology on a nationwide, mass-market scale.

Jul 27 02:58 PM

[E4 Capital:]

Your comments are very insightful, as I would expect that from an installer with a Master's degree! The Wiser LBL Feb. 09 study you have posted about shows the cost improvements in US installed PV have been coming more from BOS than modules. The risk we see, to be more explicit, is that the pace of installed system price declines, driven by subsidy phase outs that are set by legislation years ahead, could be faster than the rate of cost declines achieved by producers. Do you know about either GreenSun or 3G Solar? Contact us.


On Jul 27 02:11 PM rooferguy wrote:

> Good article. It’s important to remember that silicon is a commodity
> and it is widely accepted that there will be an abundance of solar
> grade silicon for the next few years. It is difficult to foresee
> a near-term scenario in which the semiconductor industry’s demand
> will cause silicon prices to rise substantially again.
>
> That means that a “disruptive” technology is unlikely to address
> the solar cell itself, but will instead address all the other costs
> that go into an installation (figure $7/watt in the U.S). If solar
> cells were absolutely FREE (current cell prices are in the range
> of $1.25-$1.50/watt), then the steel, aluminum, glass, racking, inverter,
> direct labor and bureaucracy costs that represent the other $5.50/watt
> costs would still apply. Remember, to meet fire codes you still
> need glass panels with strong frames to last 25+ years, and all that
> stuff takes labor to install.
>
> Some practical disruptive ideas are micro-inverters, solar panels
> with integrated racking (SunPower’s T-5 for commercial and Andalay
> for residential), new sales & marketing models (retailers actually
> carrying plug & play panels, thereby eliminating direct and indirect
> labor costs), etc. These disruptions are unlikely to come from real
> cheap solar cells since there’s not a lot of room between $0/watt
> and $1.25/watt to make money and reduce total installation costs.
>
>
> Once these non-cell costs are reduced (and there is a great trend
> towards this reduction), we’re way beyond grid parity in many locations
> (northeast, southwest) even without incentives (but the 30% ITC will
> still apply). So points #3 and 4 become irrelevant as solar installations
> rapidly become more cost effective.

Jul 27 03:12 PM

[rooferguy:]

OK, busted. Dr. Science I am not.

At a first approximation, subsidy phase outs should roughly match total installed cost reductions (lower priced panels, BOS reductions, labor savings). That leaves continued electricity cost increases (and potential RPS requirements or RECs like we have in NJ) to provide impetus for further growth potential. In other words, if costs go down 30% and incentives go down 30%, we're at the same place -- except electricity rates continue to increase.

I like plain old silicon cells because they don't fade like the dyes in my shirt, or require any complicated cell construction. Those companies may have a good idea, but they need to aim ahead of where crystalline cells are now -- and shoot for cell costs about $0.50/watt that will last for 30 years.

The wild cards are disruptions we don't plan for. What if Home Depot carries plug & play panels by the pallet-load for Do It Yourselfers? No installation costs there. And negligible (if any) bureaucratic costs since very few people will bother filling out the 50+ pages of permit, incentive and interconnection paperwork if they install the panels themselves (<5 year payback in Hawaii right now). New technologies that enable new distribution may mean drastically lower installation costs.

Jul 27 03:32 PM

[E4 Capital:]

The Home Depot is analogy is a good one; curious what you think about GreenRay's AC panels or micro-inverters. Also, with RPS and cap & trade, the price of electricity will continue to increase.

In general, though, it seems unlikely to us that the subsidized price declines and the cost declines would match exactly at say 30%. The dynamics behind the two are fundamentally different. The government will decide something like 10% per year decline. Or the ITC expires in December of year xx. It will be something that a politician can remember easily like "20% renewables by 2020". Meanwhile, the cost decline rate might by 18% decline with every cumulative doubling of production. That curve might have a slope of 4% per year decline depending on where we are in the cumulative production volume. A lot of solar companies are showing rapidly declining margins lately...


On Jul 27 03:32 PM rooferguy wrote:

> OK, busted. Dr. Science I am not.
>
> At a first approximation, subsidy phase outs should roughly match
> total installed cost reductions (lower priced panels, BOS reductions,
> labor savings). That leaves continued electricity cost increases
> (and potential RPS requirements or RECs like we have in NJ) to provide
> impetus for further growth potential. In other words, if costs go
> down 30% and incentives go down 30%, we're at the same place -- except
> electricity rates continue to increase.
>
> I like plain old silicon cells because they don't fade like the dyes
> in my shirt, or require any complicated cell construction. Those
> companies may have a good idea, but they need to aim ahead of where
> crystalline cells are now -- and shoot for cell costs about $0.50/watt
> that will last for 30 years.
>
> The wild cards are disruptions we don't plan for. What if Home Depot
> carries plug &amp; play panels by the pallet-load for Do It Yourselfers?
> No installation costs there. And negligible (if any) bureaucratic
> costs since very few people will bother filling out the 50+ pages
> of permit, incentive and interconnection paperwork if they install
> the panels themselves (<5 year payback in Hawaii right now). New
> technologies that enable new distribution may mean drastically lower
> installation costs.

Jul 27 04:50 PM

[WayneS:]

I too, see solar as a structural energy rather than a grid energy. I retired last year and am living in a 5th wheel & travelling for the time being. I'm thinking when I build my retirement home, why not make the lights 12 volt and run off of solar/battery like the trailer. My cousin built a vacation home in Mexico and it runs on a home-made solar system. Here in Texas, they are erecting thousands of wind generators, but no one wants power lines across their property, hence a problem with grid distribution. Maybe money can be made from the companies that supply Home Depot with the DIY.
I seem to remember that in the 60s or 70s a large solar collector was built in AZ and it developed its own environ and clouds formed over it. These are just randoms thoughts. Since retiring, I have been approached by a dozen energy companies (probably mom&pop) offering me a job. Are we trying to find a solution or just money-making schemes?

Jul 27 05:26 PM

[rooferguy:]

I wish I could get more AC solar panels. GreenRay has a great idea, especially if they've integrated the racking and wiring, too.

You're right about predicting the slope of cost decline curves - impossible to do. We can only guess at reasonable long-term trends. Installed costs were on a downward slope until 2004, then they went UP as panel prices increased, and now they've resumed an even faster decline -- as if to make up lost ground.

Jul 27 06:00 PM

[A Barrel Full:]

Building utility scale photovoltaic solar is just stupid. Thermal solar is far cheaper on that scale. Photovoltaic is far better suited to local production. I see potential for solar cells integrated into building materials, so that the installation cost is effectively zero.

Jul 28 03:35 AM

[E4 Capital:]

Judging by some of the comments here, we were probably not clear enough about what we meant regarding solar companies facing "structural problems." Ultimately, solar generated power is the best and most direct source of electricity available. We just believe in subjecting "cleantech" stocks to the same kind of analysis as anther other stock. As it stands, the "problems" that we cite in this article are issues with the valuation of the current crop of solar company stocks in the market, not the concept in general.

Another way to say what we were saying is "economics applies to solar too." To elaborate on our point #3, if the price of natural gas drops, and since natural gas is used to produce electricity, then the price of PV solar has to drop too, in order to be viable, since solar is used to produce electricity. The coverage of the earnings report by SolarWorld AG yesterday indicates that market prices for solar modules around the world are about 25% lower this year than last year in a first half comparison. (As roofer guy pointed out above, it makes up for the periods when the prices failed to go down.)

Another basic fact from economics is that once a company has built capacity, it will usually try to run the capacity rather than idle it. Although it also depends on fixed versus variable cost trade offs, a typical outcome is a company with a big new capacity increment has to cut he price to move the volume. Apparently SolarWorld AG had to cut its prices about 30% in order to move 26% more volume and thereby run full.


In a "long-run theoretical" sort of ideal world, the prices and the costs of solar energy would gradually decline at the same steady rate. Contrast that with the real world, where there were price signals in 2007-08 from high oil and gas prices and an insanely rich feed-in-tariff in Germany that told the solar panel makers to build more. They responded by building too much solar capacity, and then the world entered a deep recession. So solar prices collapsed. That's exactly what is needed in the long run to get solar power prices down enough to be cost effective. But it is not a smooth process. We would be surprised if all the solar companies had expected and planned for a 25% price drop in one year, though.

Jul 28 09:52 AM

[jerrydd:]

Rooferguy, Barrel Full are right on target as big wind, solar farms have high costs and plug and play for homeowners who don't have the big RE costs and pay, make 2x's as much for their RE power mean they have much faster paybacks and more savings/profits after that.

WayneS is correct many homes should go 12vdc and only use AC for heavy power needs. I lived for 2 decades on various boats powered by wind, solar and best of all, tidal power which we had to turn off most of the time as it made way too much power. I'll retire to a boat and with tidal power even have AC. If I can get a powerline to land then I'll make a very nice check/mo from power sales as not hard to make a megawatt that way.

Almost everything can run on 12vdc and if one needs more power an inverter is inexpensive now buying 3kw units for $100 on sale.

While one needs batteries they need not be expensive/day of use.

Jul 28 09:58 AM

[jerrydd:]

On E4 Capital last post is true but at about $2/wt retail PV becomes a far larger market as homes around the world want them. At that price or lower they become the low energy cost source in many places. So if a company can make that price point with a profit then an almost unlimited market is available for decades..

Jul 28 10:06 AM

[gebby:]

solar is here to stay, the new technology is an application on exisiting installed panels that will double efficiencies. it is nanotechnolgy. dont worry buy

Jul 28 10:09 AM

[E4 Capital:]

Case in point, here is the CEO of SolarWorld in an interview posted on Seeking Alpha December 31, 2008, predicting that panel prices would drop "more than 10%" but thinking his own sales would be up 25 to 30% in 2009. He must not have been thinking very much more than 10% for the price decline. He has since backed that sales projection down to a 10% sales increase.

then link to this:
seekingalpha.com/artic...

Jul 28 10:19 AM

[ECONOMICS 101:]

Allie and Howard are bang on, but, i believe solar has a place in this "alternative energy" world.
Some places will use wind, water or bio but some will also use solar.
Cosmo Mannella of LIUNA says, "all are good as they all employ people and jobs in North America which are paramount today".
By Johnathan Vrozos
johnathanvrozos.com
johnathanvrozos.ca

Jul 28 11:56 AM

[Moochacha:]

Thought this looked interesting for those with grid concerns,

www.simcoereformer.ca/...

I think solar is here to stay, especially in China, where the size of the population precludes increasing carbon emmissions to meet demand for energy. Its getting hard to breathe there.

Jul 29 05:04 AM

[Matt768:]

I think everyone posting assumes that photovoltaic panels are the only way to generate power from the sun. Au contraire...check out the unique way a solar power company, in Utah, is approaching power generation.

The company is: International Automated Systems, Inc. It's products convert the sun's energy directly to alternating current and their "closed loop" system can store energy for up to 36 hours, allowing power generation; 24/7.

Check them out @ iaus.com

Jul 30 04:38 PM

[Steve Pluvia:]

International Automated Systems has nothing new and they have no breakthrough technology. They're hyping old solar thermal tech that is not cost competitive with PV and is not nearly advanced as existing solar thermal systems. In short, think hype, scam and waste of time.


On Jul 30 04:38 PM Matt768 wrote:

> I think everyone posting assumes that photovoltaic panels are the
> only way to generate power from the sun. Au contraire...check out
> the unique way a solar power company, in Utah, is approaching power
> generation.
>
> The company is: International Automated Systems, Inc. It's products
> convert the sun's energy directly to alternating current and their
> "closed loop" system can store energy for up to 36 hours, allowing
> power generation; 24/7.
>
> Check them out @ iaus.com

Jul 31 12:13 PM