Picking Solar Energy Winners

When it comes to picking solar companies as investments, there is no shortage of opinions and metrics ranging from the technical analysis and charting disciplines used to spot trading opportunities, to speculations on potential future events such as big deals or acquisitions. While I like to include such information in the equation, I favor fundamental analysis to identify the winners. The business fundamentals and financials are critical, but when it comes to solar photovoltaic companies, the two primary measures I use to distinguish the leaders from the field are efficiency and cost/watt.

Photovoltaic solar cells have been around for decades but they are still in the early commercial phase, with a great deal of evolving, maturing and growth ahead. By far the largest type of PV technology is based on polysilicon and manufacturing technology very similar to that of computer chips and other semiconductor devices. If you have something against acronyms or tech jargon we advise you to skip right over this section.

There are two basic types of solar photovoltaic technology: 1) crystalline and 2) thin-film. The market is mostly multicrystalline silicon today but thin film is emerging. Efficiency is the percentage of the available light energy converted to electricity. The table below shows how the various technologies compare:

Manufacturer power ratings are to be read as maximum output under ideal conditions, and to make comparisons even more tricky there are other factors affecting efficiency:

• Space utilization (it only takes half as much space when using panels with twice the efficiency), which means that higher efficiency technologies like crystalline silicon will have an advantage when there are space constraints such as urban rooftops
• Power temperature coefficient. Some solar cells lose more efficiency with higher temperature than others. Thin film technologies demonstrate substantial superiority in areas where the module operating temperatures are high year-round
• Light absorption properties. Again, thin film technologies maintain a much more constant output curve compared with traditional silicon modules which results in higher output under cloudy and diffuse light conditions such as dawn and dusk, or in higher latitudes
• Directional sensitivity. Some technologies operate efficiently only when the sun rays hit the cell squarely and require expensive tracking mechanisms

Just based on maximum efficiency numbers, monocrystalline silicon appears to be the clear winner, but when costs are taken into account you realize why no single technology will win it all. The cost generally grows with the efficiency level. The second and most critical factor for economic success, cost/watt, depends in part on efficiency but also in material costs, manufacturing costs and economies of scale.

We look at costs instead of prices because they are what matters. Two companies could sell a solar panel at the same price, but one could be making good profit margins while the other sells below cost. Such distortions never last very long in the market place. All things being equal, the company that has, and can maintain, the lowest $/watt package wins.

Since we here at The Green Investor firmly believe that both crystalline silicon and thin film technologies will coexist and serve their respective markets for a long time to come, our favorite solar companies are the low-cost/watt leaders in the two technologies: Trina Solar Ltd. (TSL) and First Solar, Inc. (FSLR), respectively.

I understand that FSLR has been a favorite target during solar industry downgrades and the object of hatchet jobs by short-side speculators, but reports of First Solar’s demise have been greatly exaggerated. The company became the first and so far only manufacturer to break below the $1/watt mark this year for a finished panel and reached 87 cents during the second quarter while still maintaining a 56.7% gross margin. It has a new CEO, a new $300 million credit line and just announced initial approval from the Chinese Government to build what would become the largest solar field in the world.

Yes, the future for solar PV technology involves many challenges with the race for higher efficiencies and lower costs to continue for years to come. All things considered I believe FSLR and TSL have what it takes to maintain or increase their distinctive competencies and I view both as key long-term holdings for serious renewable energy investors.

Note that the stock market has had a strong uninterrupted rally, and our solar stocks have been flying (both stocks are up over 30%, just in September). A pullback over the next couple of months would not be unexpected and should be viewed as an opportunity to accumulate at lower prices.

Disclosure: The author is long TAN which holds positions in both FSLR and TSL.

Comments

[Steve Pluvia:]

Greeninvestor, unlike most SeekingAlpha posters, you seem to understand the solar biz... So why in the world would you invest in TAN that's been anchored down by bad assets?

Our buy/hold portfolio is up 106% ytd, while our trading portfolio is up just over 240% ytd. Quality research means you can take advantage of individual stock buying opportunities that are clearly not available by owning TAN. Which leaves me thinking -- If you *really* knew the PV industry, you'd know immediately not to own TAN...

Sep 23 09:03 AM

[The Green I...:]

I wish I could but by policy I do not invest in the stocks recommended to our subscribers to avoid any perception of conflict of interest or manipulation.


On Sep 23 09:03 AM Steve Pluvia wrote:

> Greeninvestor, unlike most SeekingAlpha posters, you seem to understand
> the solar biz... So why in the world would you invest in TAN that's
> been anchored down by bad assets?
>
> Our buy/hold portfolio is up 106% ytd, while our trading portfolio
> is up just over 240% ytd. Quality research means you can take advantage
> of individual stock buying opportunities that are clearly not available
> by owning TAN. Which leaves me thinking -- If you *really* knew
> the PV industry, you'd know immediately not to own TAN...

Sep 23 09:15 AM

[HChang:]

Yup. I had a position in FSLR and still looking to buy more. China has many cheap solar manufacturers. Despite this, the fact that China had endorsed FSLR is a bullet proof testimony for the company. The world largest solar plant, my friend, do you have any idea how big that is in China? I will ignore what the shorts are saying, because their aim is to drive down the price to cover their positions but I'm afraid they will be sorry and rush to cover their ass soon.

Sep 23 09:49 AM

[Jack Yetiv:]

First, I think your metric of cost/watt of panel is the WRONG metric to use. The correct metric is cost per INSTALLED watt. Since you have to install almost twice as many FSLR panels to equal the output of a silicon panel, your land cost is going to be substantially higher, as will be balance of system costs such as racking, wire, labor, etc. When you look at cost per INSTALLED watt, the cost delta between thin-panel and silicon-based panels is much narrower.

In addition, we KNOW that silicon-based panels will produce power for 30 (and more) years--because we have panels of that age out there. We do not have any 30-year-old thin-film panels out there so their longevity is more of a question in my mind.

Also, the rooftop market is almost off-limits to thin-film panels because such panels require almost twice as much roof space.

Given the foregoing opinions which I hold, I disagree that FSLR is good value at $150/share. I do not doubt that FSLR sales will grow significantly in the next few years because overall solar panel sales are going to increase trememdously.

But I will bet you that by the end of this year--if not sooner--FSLR's 50%+ margins will be history, and I will also bet that its margins will be in the 30's in 2010. If margins are cut in half, FSLR can double sales and yet not make any more profit. That outcome does not justify a PE of approx 20, which is where FSLR is right now.

As to TSL, I like it a lot (see my articles on TSL last year, before others began touting it), but am concerned about buying it at $35. Although there is upside potential, I think downside risk is significant as well.

Jack Yetiv

Sep 23 10:18 AM

[robdoc:]

Jack,
Thanks for introducing reality into the conversation of cost. I have yet to see anyone discuss the actual cost comparisons of solar Installed per watt.

As solar panel costs universally come down (which they will) a larger percentage of the cost of a system will be the racks etc. This will be even more true of the least efficient systems.

HChang,
I don't think that the fact that China endorsed FSLR means that China thinks that FSLR is the best company (or that it is bullet proof testimony for the company). There are a variety of reasons that China will benefit from the agreement with FSLR...not the least of which is extending an outstretched hand of peace in the what will soon become a trade battle with the US in solar. The Chinese have multiple companies that are ramping up their scale quickly and will soon saturate all markets if there truly is a free market. China creating an agreement with FSLR preemptively forces the hand of the US to be less protectionist.

Good article.
Thanks.

Sep 23 10:56 AM

[Fred W:]

Until you started writing about fslr you were doing pretty well...although your a-Si efficiency number will not be appreciated by UniSolar/ECD since its a-Si efficiency is much closer to 11% than the 6% you claim.
There is a train coming down the tracks and it is headed to collide with fslr--continued "success" only speeds up the train...there is no escape other than to diversify into Si based products--eslr would be a good tech purchase and fslr can actually handle the mountain of debt amassed by Evergreen over the past few years.

Sep 23 11:13 AM

[jerrydd:]

Sorry but Uni-Solar/ECD/ENER has never made a profit from making things. Only by gov grants and screwing customers, stockholders.

By far the largest solar market will be roofs, mostly homes, small businesses who don't have land, transmission line, overhead or stockholder costs. Because of this and higher savings, income from the panel output, they are 2-3x's as cost effective as solar farms.

Nor is there a lack of roof space in homes, most small businesses as they normally only need 25% of the roof to supply basic building power. So wt/sq' is of little meaning. In the future walls, roofs will be replaced by solar panels cutting costs. In these Thin film excels, not as you say, is a problem.

The real future is in home, business plug and play units with panels, inverter and mounting as a package, just set up and plug in.

Sep 23 11:54 AM

[Mayascribe:]

Green Investor: Have you ever heard of NanaSolar? A privately held German outfit with revolutionary technology. Possible IPO?

nanosolar.com

Sep 23 05:01 PM

[The Green I...:]

Mayascribe: Yes, Nanosolar's printing technology looks very promising but we have to wait until it becomes publicly traded, which should not be too long.


On Sep 23 05:01 PM Mayascribe wrote:

> Green Investor: Have you ever heard of NanaSolar? A privately held
> German outfit with revolutionary technology. Possible IPO?
>
> nanosolar.com

Sep 24 12:53 AM

[sako shooter:]

Investing in Green Technology electricity places your money at the whim of government planners, subsidized tax codes, and rent seeking business owners operating in an environment where they cannot compete on price. Rather, the businesses depend on the largess of government. Risking money in an investment where government planners determine winners and losers in not something rational investors should undertake. If and when green energy becomes price competitive, then I would consider investing. As long as oil, gas, coal, nuclear and hydro beat the greenies on price, and I don’t see that changing in several generations, letting money ride on the whims of government planners and carbon haters does not make sound financial cents.

Sep 24 06:02 AM

[rooferguy:]

Don't forget to add in the costs for a mammoth transmission and distribution system to the Chinese Solar Field everyone is talking about.

Without a doubt the total costs (installed $/kw or lifecycle $/kwh generated) for a Solar Field PLUS transmission and distribution will be much higher than the comparable cost for commercial or residential rooftop systems.

Here in the U.S. we're beginning to realize the same dilemma: total costs of centralized solar are higher than distributed solar.

Sep 27 03:17 PM

[oilsands:]

Sako shooter, the price of oil is highly subsidized. Depletion allowances for a start account for 90 billion dollars per year, not counting the defense spending to "protect our interests".
You might also look at the subsidies for various forms of transportation before you draw conclusions about prices.
Technology already exists to stop bankrupting ourselves importing oil.
The lack of alternative energies use is determined more by lobbying than by what is cost justified. The bottom line of mega corporation campaign contributions is the determinant, not what is cost effective.
The upgrade of transmission is another major component of any approach, but it is rarely discussed.

Sep 29 12:03 PM

[User 79512:]

Rooferguy...

1. What are current residential installation costs at? Where do you think they're heading?
2. Could you ballpark the installation time per kW of an average residential system? How much time do you think AC panels could shave off of this?
3. Do you have any doubt that AC panels will dominate? What's your time frame?

Oct 08 11:05 PM

[sirfisup:]

I am scatching my head regarding the advantages of TSl versus STP.

Foe now TSL is better positioned only because it is the smaller of the 2 comapnies. As far as the technology is concerned how can anyone compare the two companies. STp far outclasses TSL in every way.

TSL is only benefiting bases upon its size but will not be able to compete long term when the market changes and the demand is driven by large scale utility projects of which STP will leave TSL in the dust.

If you ask me TSL is heading back to $15 sooner than later and the optimisim for a company with no technological advantages is IMHO a bit far fetched.

Oct 14 11:17 AM

[fireofenergy:]

Evidentially, in China, the costs of installing twice as much is offset by the price and ease of such installation. In America however, even deflated property prices should still warrant the use of the proven monocrystaline which will hopefully be robotically mass produced to actually compete.

What about the CIGS tech? Isn't that the "cheapest" thinfilm due to its higher efficiencies and printing press production?

Nov 02 11:20 AM

[Cburg:]

How about SUNV? They claim to have the best cost per kWH; or NanoSolar?

Nov 06 06:51 PM

[sail.rick:]

Besides Nanosolar, HelioVolt is another printed CIGS thin film company to watch for an IPO.

jerrydd
While I agee that the potential for rooftop solar is huge, I believe we need both central utility scale solar, as well as distributed solar on rooftops etc. Solar thermal power plants will be very cost effective for centralized solar, as will some PV, like Nanosolar's for instance. Concentrating PV solar also has potential here.
Tom Conrad had a good article at Alternative Energy Stocks dot com about the ability of solar thermal (CSP), with it's dispatchable power and heat storage, to decrease the need for so much base load power.
In fact, it would be easier to manage the new smart grid with it's diverse and/or intermittent energy sources, if there was more dispatchable power from CSP and much less base load.
That means far less need to burn coal or build nuclear plants.

Dec 08 01:44 AM