Picking Solar Energy Winners

Includes: FSLR, TSL
by: The Green Investor
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. (NYSE:TSL) and First Solar, Inc. (NASDAQ: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.