In The Solar Industry, 40 Is The New 50

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Includes: BRK.A, FSLR, SCTY, TSLA, VSLR
by: Andy Zelenak

Summary

Solar manufacturing costs have fallen from 50¢/W to 40¢/W.

When a utility restricts solar generation, everybody loses.

Residential solar provides many positive externalities.

Utilities should gradually pivot to energy storage to stay relevant.

Just a few years ago, I remember the excitement as solar module manufacturers crossed the 50¢/Watt threshold. This was around late 2013 and enthusiasm over falling costs enabled those of us who got in early to make several-100% returns over 12 months. Today, enthusiasm seems to have left the solar energy marketplace with most stocks being moribund and trading near 2-year lows.

However, manufacturing costs and selling prices still tick downward relentlessly. Historically, module prices have fallen 10% per year and this year should be no exception. To be a competitive module manufacturer today, you need to produce for around 40¢/Watt and sell for around 55¢/Watt. That means that, on a cost-per-Watt basis, solar is now cheaper than light bulbs. I've started plotting this cost data on a weekly basis (data is pulled from pvinsights.com) and the steady downward trend is apparent:

First Solar (NASDAQ:FSLR) may be the world cost leader and FSLR CEO Jim Hughes recently pointed out that utility-scale solar projects are now being bid at the 4-cent-per-kWh range. Compare this to the average residential rate (as charged by the utilities) of 12.7¢/kWh. It should be clear that solar will be the cheapest method of generation soon if it is not already.

What I find interesting is how utilities are coping with this new reality. Those utilities on the bleeding edge of solar adoption are working to provide the missing link: energy storage. The first Tesla (NASDAQ:TSLA) battery was just installed in Australia, and Tesla partnered with the country's largest utility to make it happen. Hawaii has new rate structures that will encourage more residents to install energy storage. Solar penetration in both Hawaii and Australia is about 15%. Becoming a provider of energy storage seems like a straight-forward method for utilities to stay relevant as the grid transforms.

Contrast that with Nevada, which has priced residential solar out of the market with targeted fees. The largest utility in Nevada will be charging solar homeowners a flat monthly fee of $40, reimbursing them for generated electricity at ~3 ¢/kWh, and reselling the same electricity to their neighbors at 12.7 ¢/kWh. Obviously the utility profits twice in this scenario (once from the fee and again for reselling the energy at a 400% markup). The announcement of the fees sets up a clash between Warren Buffett (who owns the utility via Berkshire Hathaway (NYSE:BRK.A)) and Elon Musk.

To me, this seems like a lose-lose scenario. The residents of Nevada will miss the positive externalities associated with residential solar, including:

  • Efficient usage of land.
  • Cheap energy generation.
  • Zero pollution.
  • Shading of the roof by solar panels.
  • Trickle-down effects from the employment of 6,000 workers.
  • Reduced reliance on grid infrastructure as residential solar power does not require step up transformers, high voltage transmission lines, nor step down transformers.

Meanwhile, the utility is breeding animosity and missing an opportunity to provide energy storage infrastructure. I argued in 2014 that energy storage is the best way for utilities to remain relevant and I still believe that. As solar costs continue to fall, the Nevada decision will look even worse for all parties.

Obviously the Nevada fiasco is a bump in the road for solar installers including SolarCity (NASDAQ:SCTY), Vivint Solar (NYSE:VSLR), and SunRun. Remember, however, that there has been more positive news than negative recently, including the upholding of net metering in California and the long-term extension of the ITC.

Disclosure: I am/we are long JASO, SCTY, SPWR.

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.