Will GT Advanced Technologies Revolutionize The Solar Industry?

| About: GT Advanced (GTATQ)

Summary

The drop in the per watt costs for solar energy will be a vital element in bringing this source to the mainstream.

GT Advanced Technologies has the products to help manufacturers reduce production costs.

The growth in clean energy projects is encouraging for the sector.

The demand for clean energy has been rising due to concerns about the environment. Solar energy will be one of the most important energy sources in the future as a result of a focus on the clean energy. However, the per watt cost of solar energy remains substantially higher than other sources, and it has been a major hurdle in solar energy becoming a mainstream source of energy. Sunlight is free, but the technology to convert the sunlight into energy is extremely expensive. However, the cost has been coming down recently due to advancements in the technology and the need to have a cleaner source of energy. The image below shows the trend in the per watt costs of solar energy since 1977.

Image Source: Bloomberg

There has been a drastic fall in the per watt cost over the last three decades. Per watt costs for the last year were forecasted to be $0.74, down from $76.67 per watt in 1977. People at Goldman Sachs (NYSE:GS) believe the solar energy future is not far and it can become the major source of energy. Companies like SolarCity (NASDAQ:SCTY) and First Solar (NASDAQ:FSLR) are continuously bringing down the cost of solar panels through volumes and better technology. The image below shows that clean energy is delivering big numbers.

Image Source

The image above shows that clean energy sources can deliver big numbers and the issue of reliability is nothing more than a myth. However, despite these large numbers, Renewables remain a small fraction of total U.S. energy generation. The image below shows total U.S. utility generation capacity.

Click to enlarge

Image source

Despite an increase in the generation from renewable sources and a decline in the cost - clean energy still accounts for just 5% of total U.S. energy generation capacity. A further decline in costs and an increase in efficiency will surely result in increased clean energy generation capacity.

The above paragraphs give us an idea about the current situation of the clean energy market - let's now look at what role GT Advanced Technologies (GTAT) can play in this industry. GTAT operates in three business segments: Sapphire, Polysilicon and Photovoltaic (PV) - two of these segments are directly related to the solar industry and GTAT can impact the industry through these segments, especially through the photovoltaic segment. GTAT does not provide the final products to the customers - it is a supplier to the manufacturers. Polysilicon is a raw material used in silicon-based solar cells and wafers - the company sells equipment to manufacturers to produce high-quality and high-purity silicon. In the photovoltaic segment, the company sells Directional Solidification Systems (DSS) to produce crystalline silicon ingots, which are used to make PV solar cells and wafers. Both of these segments can impact the cost structure of solar panel manufacturing.

However, one of the most important products in the company's portfolio is "Hyperion" - an ion implanter that will likely change the dynamics of the industry. Hyperion decreases the wastage and cuts silicon, silicon carbide, sapphire, germanium and other crystalline material substrates to the thickness of 20 microns - ten times smaller than conventional methods. The technology of Hyperion allows for the repeated use of a block of material - savings from the decrease in wastage only will be substantial, and the ability to manufacture slimmer wafers will further decrease the costs. You can read in detail about Hyperion in my previous article. Hyperion can bring down the cost for an integrated manufacturer by about 50%, and by 2018, GTAT is expecting to sell 200-250 units. This machine will certainly have a major impact on the cost structure of the solar panel manufacturing segment.

Hyperion is not the only tool in the Arsenal for GTAT - the company has also been working on Merlin - a solar cell metallization and interconnect technology, which is expected to bring down costs by more than 10%. The technology used in the process decreases the use of expensive silver paste, hence resulting in lower costs. You can read further about the technology here. The image below was taken from the GTAT new product and Technology briefing. The image shows where the cost savings can be expected.

Click to enlarge

Source for the image

The total cost per watt to consumers varies for different regions as the permissions and licenses also account for a substantial chunk of the total cost - this portion of the cost is out of the control of manufacturers, hence GTAT will not be able to impact this portion. However, module cost, installation labor and the other two costs mentioned above will come down with the help of Merlin. At the moment, the cost is $2.90, which should come down to at least $2.61.

Hyperion and Merlin are expected to bring down manufacturing costs substantially. Usually, manufacturers only pass down the cost savings in certain conditions: First, if the company is competing on cost leadership and provides its products at a lower cost compared to its competitors. Second reason is usually the process of creating an incentive for consumers in order to develop the market for the product. If there were no concerns about the costs attached to the solar market, manufacturers would ideally like to keep the cost savings and enhance the margins. However, as the biggest hurdle in the development of this sector is the cost, manufacturers will most likely pass down the cost savings to consumers. There is massive room for the solar market to grow, and the short-term sacrifice of margins will result in long-term stability and profitability. If per watt cost for solar energy becomes equal/less than the conventional methods, the growth in the solar market will be massive. As a result, solar panel manufacturers will be able to sell massive volumes and drive margins. GTAT will play a big role in bringing these costs down over the next 3-5 years, and we will likely see a shift toward the solar energy over the next decade.

China is the market leader in the global solar panels market at the moment. The common belief is that the lower labor costs allow Chinese manufacturers to produce cheap solar panels. However, this study shows that the major portion of the cost savings does not come from labor costs as the manufacturing process is automated. The reason for the cost savings is the supply chain and the volumes which result in economies of scale. Hyperion and Merlin can result in improved operations and better manufacturing process resulting in further cost savings. Western manufacturers can also compete with Chinese manufacturers by adopting these technologies and enhancing the production process.

Bottom Line

GT Advanced Technologies has some products that will go a long way in helping manufacturers bring down solar panel manufacturing costs. I have only focused on the solar segments of the company in this article intentionally so that the readers can see what sort of impact GTAT can have on this market. Costs are a key element in the solar market and GTAT's efforts to bring down these costs will increase the viability of solar energy projects. In addition, the efficiency of the solar panels is another factor which will need further improvement. Nonetheless, GTAT is playing a vital role in addressing one aspect of the problem, and in the process of helping the industry, GTAT will reap substantial benefits over the next 3-5 years. The answer to the question in the title is yes - I believe GTAT will revolutionize the solar market.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investors are urged to do their own due diligence before making any investment decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.