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SunShot Taking Its Best Shot at $1 Solar Power

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The “free” power of the sun has given hope to renewable energy investors but until now solar power hasn’t been able to compete head-to-head with most traditional power generation technologies. But solar has a big backer in the U.S. government’s SunShot Initiative.

The government has set an audacious goal of reaching $1 per watt for solar installations by 2017 with SunShot helping push costs down industry-wide. According to SunShot, a system cost $3.80 per watt to install in 2010, so a 74% reduction in cost in just seven years is about as aggressive as you can get.

Solar power is already competing with peak power production in places like Japan and California, and if costs are cut anywhere near 74% from current levels it would be a game changer. Bloomberg New Energy Finance thinks SunShot is a little ahead of itself and reality will be closer to $1.45 per watt by 2020, but either estimate is a big step in the right direction.

Is this just a dream made of pipes?
The first question we should ask: Is this is even possible? In an industry where costs are falling rapidly, venture capital money is pouring in, and innovative technologies are introduced regularly, the conditions are ripe for solar. Trends over the last several years suggest the cost reduction goals for SunShot have a fighting chance.

First Solar (Nasdaq: FSLR  ) reduced cost per watt from $2.94 in 2004 to $0.75 in 2011, a 75.5% reduction in cost in seven years. Thin film CIGS manufacturers are also claiming to have broken $1 per watt, and crystalline silicon panels are getting close to breaking the $1 threshold. But how steeply will panel costs' downward trajectory continue as we approach 2017? Ten years ago module costs were the low hanging fruit, so while continued cost reductions are necessary, costs beyond the panel will play a more important role. 

The low hanging fruit for solar installations now are the balance of system, or BOS, costs. These costs include land, inverters, installation, and regulatory costs. SunPower (Nasdaq: SPWRA  ) claims that its Oasis Power Plant design will cut BOS costs 25% by creating standard modules, using tracking technology to increase capacity factor, and cutting land costs.

Regulation and permitting are also becoming a huge thorn in solar developers' sides. Regulators often take years to go through environmental hoops and other wrangling that costs time and money for installers. So if SunShot is going to be successful, this government program is going to have to cut its own red tape to help solar developers.

Residential solar developer SunRun claims that cutting the red tape could save $0.50 per watt and that similar savings would be available on utility scale projects. The SunShot Initiative has targeted $0.76 in “soft cost reductions,” so regulatory changes are on the table -- although details are scarce right now.

Just $1 per watt may be a little aggressive, but manufacturers have demonstrated that large scale cost cuts are possible. In the next six years, we may have to rely on regulators and installation efficiency to play a bigger role in cutting cost from the system.

There will always be winners and losers
SunShot isn’t designed to pick company winners -- but no matter how funds get doled out, there are winners and losers. A few weeks ago, I highlighted the Department of Energy’s backing of thin-film solar in grants so far. That puts First Solar in the mix but leaves out some of the fastest growing companies in solar. In particular, Chinese companies will have to find ancillary benefits.

LDK Solar (NYSE: LDK  ) , Trina Solar (NYSE: TSL  ) , and JA Solar (JASO) are all cutting costs quickly but will likely be left out of direct benefit from the SunShot Initiative. Unless they build U.S. manufacturing facilities, they will have to count on lower BOS costs to help sales.

Innovation at product suppliers will also help manufacturers across the board. Suppliers like 3M -- which makes Ultra Barrier Solar Film -- are getting grants to explore cost-reducing technologies. The separation between manufacturers may come in the lab, where engineers are trying to come up with the next great solar idea and leverage new products from suppliers.

First Solar and SunPower have proven the ability to innovate and spend on research and development -- $27.6 million and $49.1 million, respectively, in 2010. As Chinese firms like Yingli Solar (NYSE: YGE  ) and Suntech Power (NYSE: STP  ) increase sales and build R&D departments, they may improve their competitive positions.

It’s also possible that the biggest innovations will come out of a company that is currently privately held. So investors should keep an eye on a company’s ability to make large acquisitions if the opportunity presents itself. Again, I point to First Solar and SunPower, which have $766 million and $722.9 million, respectively, on their balance sheets. Trina and Yingli also have the ammunition to make acquisitions if complimentary technology is available. 

Foolish bottom line
Keep an eye on innovation, a strong balance sheet, and continuously falling costs to see who will benefit most from solar costs falling to $1 per watt.

The $1 per watt goal itself is a stretch, but SunShot improvements in BOS costs and regulatory costs should help all solar manufacturers. First Solar and SunPower are this Fool’s pick, but Trina Solar and Yingli Green Energy are among the Chinese manufacturers providing investors plenty of value in solar.

Who do you think will benefit most from the SunShot Initiative? Leave your thoughts in our comments section below.

Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

3M is a Motley Fool Inside Value selection. First Solar is a Motley Fool Rule Breakers pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2011, at 1:15 AM, sailrick wrote:

    Even though I have several PV solar stocks, I think technology breakthroughs are inevitable. Disruptive technologies that will eventually make solar very cheap. It will pay to keep ones ear to the ground and be ready to shift.

    For example:

    One company I read about says they can cut the cost of silicon wafers by 40%. Instead of casting ingots that are then sliced into wafers, they cast the wafers themselves, vastly cutting waste and manufacturing steps.

    You're right though, they biggest cost savings have to come from BOS.

    Photovoltaics combined with capturing the heat of the sun in the same system would be more efficient conversion of sunlight to power. Two companies use Concentrated PV Solar this way. - Zenith Solar of Israel, and Cogenra.

    "Cogenra's 'Hybrid' Solar System Captures 80% of the Sun's Energy to Generate Electricity and Hot Water"

    Zenith Solar claiming over 70% solar utilization efficiency

    Even solar thermal could see big efficiency gains over the years. Better heat storage systems based on carbon are being researched for example. Heat could be stored at up to 1800C or about 3200 F. That's much hotter than the 450C with molten salt heat storage now used in solar thermal plants.

    And a company called Shec Energy, originally focused on solar powered hydrogen production, has developed solar thermal technology they say can reach 800-900C verses the 450C temps in existing designs. - doubling the power at half the cost and allowing for higher temp heat storage. They concentrate sunlight 5,000 times, with mirrors that they can mass produce very quickly.

  • Report this Comment On April 27, 2011, at 1:26 AM, sailrick wrote:

    None of which explains why solar stocks are so lowly valued in the stock market. I've watched several other emerging technology sectors that change rapidly, yet have very high stock valuations. Biotech, electronics, telecommunications, data storage technology, etc; all of which could change in a heart beat when innovations comes along.

    Never forget that the comparisons of solar or wind costs with fossil fuel costs

    is a false comparison. Hidden or externalized costs of fossil fuels are several hundred $billion a year in the U.S. And subsidies as high as $49 billion a year.

    Environmental costs are beyond economic calculation. Health, national security, military costs, acid rain damage, loss of biodiversity, global warming, ocean acidification, mercury. Most Canadian oil imported into the U.S. is the dirtiest oil in the world, tar sands bitumen actually. It's CO2 emissions are about 3 times that of normal oil production. They use large amounts of fresh water and store heavily contaminated water in earthen ponds, kind of like how coal ash slurry is stored. They use large amounts of relatively clean natural gas to process the tar out of the earth that they dig up. It adds more impact on one of the biggest and most important biosystems on earth, the Boreal Forest and the Athabascan River watershed. Pipelines to carry it into the U.S. are suspected of being vulnerable to the acidic nature of this high sulpher bitumen, which is not really oil. If there is a spill, it is much harder to clean up than oil.

    All our current methods of getting more fossil fuels are increasingly dangerous to the environment and our health. Hydraulic fracking for gas, mountain top removal for coal(not to mention the long long list of harm from coal), deep water oil drilling, Arctic oil drilling, shale gas.

    Shale gas

    "Natural gas is mostly methane, which is a much more potent greenhouse gas, especially in the short term, with 105 times more warming impact, pound for pound, than carbon dioxide (CO2), Howarth said, adding that even small leaks make a big difference. He estimated that as much as 8 percent of the methane in shale gas leaks into the air during the lifetime of a hydraulic shale gas well -- up to twice what escapes from conventional gas production.....

    "What we're hoping to do with this study is to stimulate the science that should have been done before. In my opinion, corporate business plans superseded national energy strategy."

    Am I the only one who finds it ironic that the very oil companies who's products are hastening the melitng of Arctic sea ice, now want to drill there for more oil?

    Economics that doesn't consider all this is a joke.

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