How First Solar Will Win In The Solar Market

| About: First Solar, (FSLR)

There have been a number of articles discussing the positioning of the various firms in the solar industry. These articles focus primarily on the silicon-based manufacturers such as SunPower (NASDAQ:SPWR) and Chinese firms such as Yingli (NYSE:YGE) or Canadian Solar (NASDAQ:CSIQ) and some also include discussion of First Solar (NASDAQ:FSLR). While they have provided some analysis of the costs and efficiencies of these technologies, few look at how the various technologies compete in different market segments which have markedly different economics. This article focuses on the two main markets, rooftop and utility scale and the two primary technologies, cadmium telluride (CdTe or "thin film") and crystalline silicon. The two main forms of crystalline silicon are referred to as c-Si and poly Si and will be referred to as silicon for simplicity. This article will also look at how these technologies are evolving and how this evolution may affect their prospects in the future.

First Solar is the world's largest PV manufacturer of cadmium telluride (CdTe) or thin film modules. The company's CdTe thin film modules come in at just about 14% module level efficiency and in its most recent quarterly conference call it indicated that cost per watt has declined to 59 cents per watt including warranty, freight, and recycling (or 49 cents per watt without warranty, freight and recycling, which it indicated is similar to how the other manufacturers quote their cost figures).

The silicon manufacturers fall into two relatively distinct groupings. First is the extremely high-efficiency modules produced by SunPower. These types of modules lead the industry with module efficiencies between 21% to 22%, however, this comes at a price. While SunPower does not give out regular updates on its cost per watt, in its February 7th 2013 conference call SunPower said that "[blended cost declined] in our largest format panels coming in at less than $1 per watt in Q4". So costs are likely in the $0.90 to $1.00 range. The second silicon group is composed of many of the Chinese manufacturers such as Yingli and Canadian Solar whose products are not as high in efficiency, coming in between 15% to 17%. However, companies such as Canadian Solar claim to be in the 55 cent per watt range in manufacturing costs in 3Q 2013.

There are two other factors that are critical in understanding the economics of PV. First is PV performance in a production environment. Both CdTe and silicon incur not insignificant performance losses as temperatures increase. However, above around 25 degrees Celsius CdTe has an incremental power loss which is about half that of silicon. A typical production environment can reach temperatures of 65 Celsius at which point standard silicon modules will experience a loss close to 20% on nameplate rated power production while CdTe only incurs a loss of about 10%. What this means is that at temperatures which are more typical in an generating environment, a silicon-based module with a 16% efficiency will drop to about 12.8% efficiency whereas a CdTe thin film with an efficiency of 14% will drop to about 12.6%. So essentially thin film solar modules are already comparable in efficiency to many of the Chinese silicon modules and in many cases outperform silicon.

The second factor is the Balance of System (BOS) costs. These costs consist of the additional costs such as labor, support structures, electronics such as inverters, sun-trackers etc. which are part of a completed solar installation. These costs are quite different between rooftop and utility markets. As will be seen, the majority of the costs in the rooftop market are made up of labor and other costs which make rooftop installations much more expensive on a cost per watt basis than a utility installation. Historically in the utility market, BOS costs have favored silicon and thin film has had higher BOS. However, as will be seen, BOS cost are, for the most part, no longer an issue between silicon and thin film (CdTe) technologies in the utility market.

The Rooftop Market

In the rooftop market SunPower has done very well even though its module costs come in just under $1/watt compared to other vendors in the 50 cent per watt range. On the surface the 40% to 50% advantage in cost might suggest that First Solar and the low-cost Chinese manufacturers have a significant advantage. However, in the rooftop market efficiency is the most important factor. With the fixed area of a rooftop thin film and lower efficiency silicon panels produce 20% to 40% less wattage in the same space used by SunPower panels. In addition, current price quotes for a rooftop system (before any rebates or tax incentives) are about $4/watt to $7/watt as a result of the high cost of installing the modules versus the cost of the actual modules themselves. What this means is the 40 to 50 cent per watt module cost difference is only about 10% of the install price if your average cost before incentives is $5/watt. However what you get is significantly more wattage gain from the SunPower panels for the same surface area. This has given SunPower a clear edge in deployments where space is at a premium. The Chinese vendors are also finding some success competing in this market space, however, First Solar has decided not pursue the rooftop market with its thin film technology and is currently looking to enter the market with a new product which will be discussed later.

The Utility Scale Market

Turning to the utility marketplace the numbers work the other way around. The utility price point for a totally installed system is in the range of $1.5 to $2.5 a watt depending on the installation. Many utility class installations are done in the desert or areas where space is relatively unrestricted and land costs are not material to the overall cost of the installation. As a result, in the utility market, module and installation costs are key. For example, a 250MW system that might be priced around $500 million @2.00 per watt fully installed. However, adding a 40 to 50 cent per watt premium for the highest efficiency solar panels could add an additional $125 million to the cost. As a result, the lower efficiency, cheaper, CdTe or silicon panels can compete more effectively in this market. While the mid-efficiency Chinese panels have an advantage in their nameplate efficiencies, in actual real world application the impact of heat on performance comes into play. As already noted, at actual operating temperatures CdTe efficiencies degrade less and as a recent Bloomberg article indicated, CdTe outperforms other technologies because of this advantage. This is also consistent with First Solar's 3Q 2013 conference call where it indicated that "[the] gap between cadmium telluride and crystalline silicon is all but closed, virtually eliminating the so called utility scale balance of systems penalty."

As a result, FSLR has been able to compete effectively in the utility scale market. This is reflected in its bookings and backlog in 2013. In its 3Q conference call First Solar indicated it had added 1.3GW(dc) since the beginning of the year, for a total backlog of 2.7 GW(dc) which is over 3 times the backlog of 800 MW(dc) reported by Canadian Solar in its 3Q investor presentation. Yingli did not provide any backlog information in its 3Q review. SunPower also does not provide updates on overall backlog, however, reviewing its 2013 news releases and quarterly summaries indicates it only added three projects that were in the utility scale category in Japan, Chile and South Africa for a total of approximately 225 MW. So First Solar appears to be leading in the utility market in terms of overall backlog and new bookings.

The Future Continues to Look Promising

In its analyst day presentation SunPower projected that every 10% increase in panel efficiency leads to a 35% decrease in cost per watt. SunPower stated that it expects its leading X-Series to move from 22% to 23% efficiency by 2015 a 4.5% increase. This compares to First Solar's roadmap which takes it from 14.1% to 16.2% by 2015 - a 17% increase in its efficiency. Based on these roadmaps, SunPower will continue to retain a significant lead in efficiency which will help it maintain its position in the rooftop market. At the same time, First Solar should gain further cost advantages which will enhance its competitiveness in the utility market. As First Solar noted in its 3Q 2013 conference call "with our steeper efficiency roadmap, we expect to have surpassed the performance of c-Si by mid-'14 thereby gaining a significant advantage in the future and at the same time further improving on intrinsic manufacturing cost advantage."

Outlook for these Solar Players

What becomes clear in reviewing both the efficiencies and costs of the various players is why each vendor is more effective in winning business in their key markets. Given their various strengths many of the major players such as SunPower, First Solar and perhaps to a lesser extent Yingli and Canadian Solar are likely to continue to be players. Here is a quick summary of the pros, cons for each.


SunPower has a major selling point with its industry leading efficiencies, particularly in the rooftop market. It is likely that it will continue to find its strength in this market segment. However, in the short term it is currently working at capacity in its manufacturing plants. A situation that won't be resolved until 2015, when newly announced manufacturing capacity comes online. Given this situation, even though it are likely to see its margins rebound in the coming year, its growth will be dampened until the additional capacity is realized.

Yingli / Canadian Solar and Similar Chinese Vendors

Canadian Solar and similar Chinese based manufacturers will continue to sit somewhere in the middle between rooftop and utility based markets. They will likely be able to compete on price and efficiency to a certain extent in both markets. However, they will not have module efficiencies as high as SunPower in the rooftop market and have been eclipsed by First Solar in the Utility Market when taking into account the impact of temperature on module efficiencies. In the short term they will be able to take advantage of SunPower being stalled for the next year as it works to increase its capacity. However, in the long run they are likely to be squeezed both in the rooftop market as SunPower regains its ability to increase its output and in the utility market as First Solar ramps its efficiencies.

First Solar

As already outlined, First Solar's Thin Film CdTe technology competes most effectively in the utility market. With the steep ramp on its efficiency roadmap which gets it to greater than 17% efficiency by 2017 it will be able to increase its competitive position in the utility market. In addition, with the technology provided by the acquisition of GE's Thin Film technology - which in the lab gets to 19.6% - it may be able to ramp its technologies more quickly than the current roadmap. Given its strong roadmap on efficiencies and costs it is likely to maintain and increase its lead over competitors such as Yingli and Canadian Solar attaining higher margins relative to other utility scale vendors as it moves into the future. In addition, First Solar is also addressing the rooftop market with the addition of TetraSun to its portfolio. In its April 9th Investors Day presentation First Solar indicated that TetraSun is expected to have module level efficiencies in the order of 20% at a cost of 60 cents per watt, which it expects to begin shipping in about 7 to 8 months (starting 2nd half of 2014). Given SunPower's capacity constraints this may give First Solar a strong start for the TetraSun technology. Ultimately, if First Solar meets its technology roadmaps (which it has up until now) it may find itself in the best of both worlds, with a lower cost silicon based TetraSun product for the rooftop that is almost as efficient as SunPower's and a superior cost per watt position in the utility market with its improved thin film CdTe technology.

The Short and Longer Term Prospects

The strong positioning of the First Solar and SunPower will likely allow them to be successful in their key market segments while the Chinese companies are likely to see some short-term success in filling the void left by SunPower's capacity problems. However, when comparing First Solar and SunPower in both the short and longer term First Solar seems slightly better positioned player. With $7.8B of backlog which is the equivalent of nearly 2 years of revenue, $1.5B (~$15/share) of cash on its balance sheet and currently running at about 80% capacity First Solar has significant resources to grow its dominance in the utility market. With the spare capacity First Solar has it will be able to optimize its $7.8B in backlog and bring revenue into 2014, similar to what it did in 2013. The additional capacity of 25MW to 50MW from TetraSun, will also be potentially incremental revenue for First Solar. The fact that SunPower will be capacity constrained in 2014 should further help First Solar launch its TetraSun product in rooftop market. Bottom line, First Solar has the potential to be a significant player across both the utility and rooftop markets.

Disclosure: I am long FSLR, SPWR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.