North Coast Solar Stocks

June 4, 2009

New Energy Bill Could Light Up Domestic Solar Power Industry

By Miho Nagano
Thursday June 4, 2009, 6:03 pm EDT

The federal comprehensive energy bill could change the whole game for the solar industry.

If the bill passes Congress and becomes law, it would require U.S. utility companies to supply around 15% of their electricity from renewable sources like solar and wind power by 2020.

This means utilities would need large-scale solar systems to generate enough electricity to meet the federal mandate.

Up to now, Germany has been by far the biggest solar energy market — close to a 35% share — because of its heavily government-subsidized solar facilities. The U.S. accounts for only 5% of the global market, according to analysts.

But that could quickly change. The U.S. will be the strongest market in the next two or three years, and could grab a 25% to 30% market share in the long run, says analyst Stephen Chin of UBS.

Price Matters

When utility companies shop for solar panels, price matters. They may go for the providers with the lowest prices. Utilities, which largely depend on public money, are “very price-sensitive,” Chin said.

The industry’s cost-cutting leader, First Solar (FSLR) of Tempe, Ariz., has a big advantage when it comes to pricing. The maker of solar panels can now manufacture solar modules for 93 cents per watt, down 5% from 98 cents in its fourth quarter. Still, it managed a hefty 56% gross margin in the first quarter.

First Solar’s costs per watt of electricity beat Chinese competitors. Yingli (YGE), a Chinese low-cost leader, couldn’t break $1 per watt in the first quarter even with falling silicon costs, says analyst Kelly Dougherty of Macquarie Research.

UBS analyst Chin estimates that First Solar charges $1.80 per watt to utility clients for panels while competitors charge around $2.50 per watt, a difference of 25% to 30%.

First Solar’s plants in Malaysia, where labor and material are cheaper, play a big role. Compared with its Ohio operations, First Solar’s Malaysian factories can produce solar panels for 20 cents per watt less, Dougherty says.

The company is adding two more factories in Malaysia, bringing the total to four in the country. Also, it recently bought the project pipeline of rival OptiSolar for $400 million to expand in the U.S. market for utility-scale solar plants.

“First Solar wants to be a price leader to generate more business. By lowering their prices, they were able to create extra 500-megawatt demand,” Chin said.

Most rivals manufacture solar cells from polysilicon. But First Solar uses “thin film” glass panels, which are made out of a layer of cadmium telluride. The manufacturing process is completely different.

First Solar’s panels are less expensive, but also less efficient compared with rival products such as Sunpower’s (SPWRA, SPWRB) .

First Solar’s conversion efficiency — the percentage of sunlight hitting the panels that is converted to useful energy — is 10.9%. But Sunpower’s panels approach 23% efficiency, Chin says. The industry average of crystalline panels is around 15% to 16%, according to analysts.

This means First Solar’s panels are unsuitable for small rooftops and residential home use because its panels need a bigger size to generate the same amount of electricity vs. rival panels. So the company gets less than 1% of its revenue from residential use.

Sunpower is strong in the residential market. “But Sunpower’s panel prices are almost twice as expensive” as First Solar’s, Chin said.

In the U.S. market, Sunpower has been winning big contracts with PG&E (PCG), FPL Group (FPL) and other utility clients, while First Solar has been generating more than 90% of its revenue from Europe, including Germany, France and Spain.

But First Solar recently won a contract for a 48-megawatt Nevada plant from Sempra Energy (SRE) , the No. 2 California utility. First Solar and Sunpower are now fiercely competing in the U.S. utility market, analysts say.

But if price-sensitive U.S. utilities are becoming big customers for First Solar, can the company continue to enjoy fat margins?

Analysts expect the 56% margin to go down. “As utilities are more and more into buying solar, they are not really going to want to pay 56% margins,” Dougherty said.

Chin estimates that the company’s margin will fall to 50% in the second quarter, but he still expects 2009 sales to grow 65% to 70%, year over year.

There is a big risk factor for First Solar: falling silicon prices. Last summer, when silicon was in a shortage, the price of silicon soared $300 to $500 per kilogram. But oversupply has cut the spot price of silicon to $80.

“When polysilicon prices come down further and further, some competitors will be able to catch them (First Solar) on price and squeeze their margins,” said Jefferies analyst Paul Clegg. “But we still think First Solar continues to have great quarter-over-quarter cost reductions.”

UBS’ Chin says that if the price of silicon hits $50 per kilogram this year, First Solar may have to lower the prices of its panels. But he thinks the silicon price should stabilize at $60 to $70 a kilogram because many startup polysilicon makers probably won’t lower prices below that.

First Solar aims to cut solar module costs to 65 to 70 cents per watt between 2010 and 2012. Analyst Clegg expects costs to reach the low 80s in 2010, keeping a 50% margin.

Analyst Mark Bachman of Pacific Crest says First Solar can lower the figure to 78 cents per watt in the fourth quarter.

Manufacturing Ain’t Easy

Can rivals try to make thin-film panels like First Solar to win the price war?

“It’s very difficult to manufacture” thin-film panels, Clegg said. “It’s not so much the science is difficult, but it’s more difficult taking science to manufacturing scale.”

He says most companies haven’t succeeded in large-scale commercialization in thin film.

First Solar’s first-quarter earnings more than tripled to $1.99, beating views by 48 cents. Revenue more than doubled to $418.2 million, also topping views.

First Solar’s shares fell late last month after FBR Capital Markets downgraded the company, citing falling silicon prices and weak demand in Europe.

But analyst Bachman of Pacific Crest says that even with silicon prices falling, First Solar’s cost and price advantage in the industry continues. He says large companies such as Sunpower have already lowered silicon costs to 20% of total costs.

“Everybody tends to believe the vast amount of costs come from silicon, and that’s not true,” Bachman said. “It is possible you could see First Solar achieving 20% market share this year.”

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