Solar 101

It's no secret that the energy equation is changing. Demand in all forms is growing and will continue to rise for the foreseeable future. Electricity usage is increasing at twice the rate of overall energy use, and analysts expect it to go up 76% by 2030. China's booming economy and the threat of peak oil have driven up prices and increased volatility in the oil market. And with convenient fossil fuel supplies dwindling and threats of climate change building, renewable energy has attracted more attention and funding as a solution to these problems.

As a clean abundant resource, solar power has become a key piece in the renewable energy portfolio, but does that mean it's good business? With that question in mind, I set out to learn a few things about the solar energy industry: how the technology works, who the major players are, and what the market forces tell us about its future.

A little background, please
For a brief history of solar power, let's take a look at the timeline below:

Source: Department of Energy.

As we can see, human beings have been harnessing the power of the sun for more than 2,500 years. The ancient Greeks even used its reflective properties to set fire to invading Roman ships.

More recently, as the chart below shows, solar PV (photovoltaic) capacity has grown dramatically from just 0.7 gigawatts in 1995 to 40 in 2010.

Source: REN21.

Despite that recent growth, however, photovoltaic technology is actually quite old. Entire industries have come and gone in the time since Alexandre Becquerel first discovered the sun's ability to generate electricity, and the technology still remains mostly peripheral.

How it works
Solar power comes in multiple forms, such as heat and as a source for power plants, but for this article series, we will focus on solar photovoltaics, since that is of most interest to investors.

Solar modules, or panels, are a collection of solar cells that convert light into electricity. Traditionally, the cells are made from silicon crystals derived from sand. Trace amounts of the elements boron and phosphorous are then added in a process called doping. The n-type (boron-doped) and p-type (phosphorus-doped) combine to form what's called an n-p junction, which establishes a permanent electric field. When sunlight hits the solar cells, electrons are ejected from the atoms, and the electric field generates a direct current (DC), which then must pass through an inverter to become the alternating current (AC) that we use in our homes.

There are two major forms of solar cells: traditional crystalline silicon and thin film. Crystalline silicon has historically dominated, but a newer thin-film technology -- produced primarily by First Solar (Nasdaq: FSLR  ) and made from a variety of compounds -- has gained traction in recent years. Despite its recent growth, however, thin film actually lost market share in 2010, declining from 17% to 13%.

There are a number of differences between the two technologies. Thin film is cheaper to produce and more aesthetically pleasing, but is less efficient. Its conversion rates -- the percentage of light converted to electricity -- are only half that of crystalline modules. Thin-film technology is more heat-resistant, but it takes from six to 12 months to reach stable levels of output, while crystalline cells stabilize right away.

The big picture
According to global energy information firm Enerdata, worldwide electricity production passed 20,000 terawatt-hours (or 20 trillion hours) in 2010. With just 40 gigawatts (40 billion watts) of capacity available in the same year, the solar industry still has a long way to go to become a mainstream energy source. The good news is that there's plenty of sunshine available to support the world's energy needs. In the U.S., just one square meter of sunlight can potentially generate on average a kilowatt of power an hour. On a global scale, the sun radiates more than 6,000 times the world's energy needs every day. In other words, we need less than 0.02% of the sun's energy to power the world.

In the U.S., average residential electricity costs are about $0.12 per kilowatt-hour, and prices for solar power have been declining rapidly in recent years. Since there are no fuel costs and minimal upkeep, the expense comes from the initial investment. In 2011, a residential solar system in the U.S. cost $5/watt, but a larger utility scale system cost only $3/watt. For a comparison, the unsubsidized installation cost of a residential system would be equal to about 40 years' worth of traditionally sourced electricity at today's prices. Based on the levelized cost of energy -- a metric that allows for cost comparisons between different forms of energy -- and assuming a potential 15% decline in solar PV LCOE, solar electricity will become cheaper than nuclear, coal, and natural gas by 2015, as the graph below shows.

Source: Solarcellcentral.com.

Photovoltaics are already cheaper than natural gas peakers, power plants that are mainly used in the summertime to fill excess demand.

The players
As the chart below shows, Germany dominates the $29 billion user market for PVs with 44% of the world's capacity.

Source: REN21.

Like much of the rest of the world, the Germans subsidize solar energy, using a process known as feed-in tariffs. They mandate that utilities buy renewable energy at a higher cost, which then gets passed on to customers in the form of a more expensive electric bill. The extra fees go to the owner of the clean energy generator.

As far as production, the PV industry is highly fragmented, with no single company holding more than 6% of market share. Backed by government incentives, Chinese companies have gained the upper hand, with 10 of the 15 largest PV makers now based in Asia. China and Taiwan alone accounted for 59% of production in 2010. Listed below are the five biggest PV producers, all of which are Chinese, except for First Solar:

Company

2010 Production (megawatts)

Market Cap

P/E Ratio

Suntech (NYSE: STP  ) 1572 $586.79 million 42.21
JA Solar (NYSE: JASO  ) 1464 $289.79 million 2.70
First Solar 1411 $3.65 billion 6.94
Yingli Solar (NYSE: YGE  ) 1062 $669.16 million 3.95
Trina Solar (NYSE: TSL  ) 1057 $566.35 million 3.27

Sources: Yahoo! Finance, PVinsights.

With the exception of Suntech, these stocks all look incredibly cheap. The easy explanation for that seems to be that investors don't fully understand this nascent industry and have little faith in the stream of subsidies needed to prop it up. We'll discuss that question further in "Solar 201," and go into detail on industry dynamics, competition, and future prospects, as well as current news items such as German solar policy and the U.S.-China trade wars. Stay tuned.

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Fool contributor Jeremy Bowman holds no financial positions in the companies above. The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. 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 (16) | Recommend This Article (32)

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  • Report this Comment On February 06, 2012, at 4:02 PM, hrametz wrote:

    2011 was another great year for solar, adding 28GW, up from 18GW in 2010. Please add this to your chart. It continues the hyperbolic trend line.

    Yingli, a Tier1 supplier, is selling modules for $0.97/W and expects their prices to drop to $0.90/W by the end of the year. This is WAY BELOW the $1.25/W mentioned in your article.

  • Report this Comment On February 06, 2012, at 4:20 PM, devoish wrote:

    I think that solar is a much better investment on your rooftop than in your portfolio.

    You get tax credits from your Gov't.

    You don't buy electricity, mostly at peak rates much higher than the 12cent average you mentioned in the article. And there is absolutely no risk of "saving money" going out of business.

    I think a Foolish investor should consider putting the first $5000 they have to invest inside their ceiling as insulation, the second $30,000 onto their roof, and then the heating and electric bill savings, into their portfolio.

    Take the guaranteed money first.

    Best wishes,

    Steven

  • Report this Comment On February 10, 2012, at 12:36 PM, MossyTrail wrote:

    Great advice, Steven. However, for us small-potatoes types, who do not own our own homes, but can put a little into our IRAs, an up-and-coming industry may be just the thing for our portfolios. I have already bought several different alternative energy holdings, not just solar, but wind and geothermal, too. It makes sense, as environmental concerns, politics, and the resultant rising prices of oil, will drive people eventually to turn to other power sources.

  • Report this Comment On February 10, 2012, at 1:17 PM, mgcasella wrote:

    The Greeks didn't use solar rays to set fire to Roman ships - this is impossible. There's an interesting episode of Mythbusters that debunks this.

  • Report this Comment On February 10, 2012, at 4:10 PM, Zhivago314 wrote:

    Disappointed in your numbers. Which is it: "20,000 terawatt-hours" or "20 trillion hours"? A terawatt-hour is 1-trillion watt-hours. "20,000 terawatt-hours would be 20,000 trillion hours or 20 petawatt-hours.

    And 'mgcasella' is correct, the legend of setting Roman ships on fire using solar energy is a fable.

  • Report this Comment On February 10, 2012, at 4:13 PM, Walt42 wrote:

    "The Greeks didn't use solar rays to set fire to Roman ships - this is impossible. There's an interesting episode of Mythbusters that debunks this."

    In fact the Mythbusters performed the experiment 3 times, the last time at the request of President Obama,. and it failed all 3 times.

  • Report this Comment On February 10, 2012, at 5:50 PM, FreshThought wrote:

    This is a good 101 and I'll be keen to see more on why you think the majority of the Chinese solar panel producers are so cheap.

    It's clear that subsidies play a major part just by looking at which countries have the highest installed base: Germany and Czech Republic are hardly known for their sun yet feature prominently. Is it really worth it for them to be buying expensive solar capacity.

    And one more thought: everyone loves talking about CAPACITY. That is beside the point. What's the PRODUCTION? The industry seems to hide that statistic. If its dark and cloudy for most of the year, the two will be very far apart and the economics very different.

  • Report this Comment On February 10, 2012, at 9:41 PM, wrawkit wrote:

    Interestingly enough, with solar, when its cloudy out, electricity is still being made, just at a lower rate as compared with full sun. Also, the various types of solar cells that are out their, some do better under cloudy skys than others do under the same conditions. Its my understanding that one of the attributes with First Solars technology is that their cells dont lose as much output under less than ideal conditions than other types under the same conditions. Also, if the U.S. electrical grid was better suited for alternative energy, there would always be somewhere in the country, during the day, that had ideal weather for producing lots of pv generated power. Finally, while our current grid system leaves alot to be desired, it's capable enough to send intermittent sources of electricty around the country- my understanding is that up to 15-20 percent of our electricty can come from intermitent sources (wind and solar mostly) without storage- much more than that, electrical storage systems become very important- dont buy the arguement that alternative power wont work in the U.S. because the power cant be stored- IT CAN!! we just havent had the need to do it on a large scale. Probably the most cost effective power storage, that is easily scaled up is compressed air storage.

  • Report this Comment On February 11, 2012, at 10:31 AM, ajstudebaker wrote:

    Where did the earnings used in calculating the P/E ratios? According to Yahoo Finance, TSL, YGE, and STP are likely to lose money this year.

    I believe another part of the easy explanation is that wafer and panel prices have declined sharply in the last couple of years. The decline is great news for those of us who look forward to the day unsubsidized solar reaches cost parity with the grid, but lousy news for investors in the companies mentioned in this piece.

  • Report this Comment On February 11, 2012, at 10:32 AM, ajstudebaker wrote:

    I meant to say

    Where did the earnings used in calculating the PE ratios come from?

  • Report this Comment On February 11, 2012, at 11:50 AM, hjs51 wrote:

    Okay, so let's ask some other questions.

    1. How reasonable are the projections of reductions in costs for solar energy? Is this 15% reduction by 2015 based on massive subsidies or would that happen without the subsidies?

    2. The time to pay back the cost of installation of a residential installation of 40 years seems quite high. Donald Trump said, in an interview on Fox News, that the payback time even with subsidies was about 25 years. He also said that the calculations don't take into account that the hardware will deteriorate over that time and require replacment, so you don't even get to payback before stuff needs to be replaced. How does that work economically?

    3. To commercialize solar and use it for powering cities how big would the generating plants have to be? Where can we put them? What are the environmental impacts of those plants?

    Solar energy is not a pie in the sky. Unsubsidized, it does not compete with other forms of energy for years to come. It is fine to keep on working on solar energy. We need to increase the conversion rate for solar cells significantly to make them economic, however.

  • Report this Comment On February 12, 2012, at 8:32 PM, daramarkbbb wrote:

    If you want to talk about comparing energy sources you need to consider unsubsidized costs vs unsubsidized costs. If you factor in the costs of climate change, increased health insurance costs, wars to protect financial interests and trade routes, lives of soldiers, damage to the environment, transportation and more, the unsubsidized cost of electricity generated from coal "could be between a few additional cents per kWh to a whopping ¢26.89 extra per kilowatt hour" (Dylan Ratigan's new book). We've been subsidizing the coal and gas industry for over a century and, although they are far from a new, innovating industry, they still benefit from more subsidies than renewables ever have or probably ever will. If we compare apples to apples, solar is already competing with other forms of energy right now in some areas and is a huge boon for areas that are off the grid. As for Donald Trump on Fox News - his numbers are just plain wrong. Depending on where you live, with subsidies the payback on a residential PV system can be as low as 8 - 10 years now. Yes - that's with subsidies, but again - if you want to take away the subsidies for solar and look at the "real cost", then you also have to do the same for the alternative...and the numbers still look good and are looking better each year.

    Dara Bortman

    http://www.exactsolar.com

  • Report this Comment On February 13, 2012, at 11:29 AM, Gknows990 wrote:

    To Hjs51 ...

    You really need to get your news from other sources... unfortunately FOX capitalizes on propaganda!! And once agin has mis-led the American public... Trump -shame on him!--he should educate himself FIRST before commenting on a subject!! Solar payback never was 40yrs.. well maybe in 1800's ! Gee you mean Fox did not go out and find an opposing view point? This misinfirmation is a diservice to our country and well being of Americans...

    1) Reduction in solar energy costs....

    I remember selling cell phones at Radio Shark back in 1986 ... It costs $2999 --and that was lowest price cell phone at time .. phone time charges $2 min! incoming AND outgoing calls! And the thing was so big it had a bag with a shoulder strap to carry it ... Now cell phones are common place , lighter , smaller and costs lower than a landline phone!!--This is due to technology advancements which allowed lower costs and other improvements. I only sold 3 phones in 1 year back in 1986 but as time went on as cell phones went down in costs and other advancements the phones became main stream... --imagine if we gave up and said no cell phones cost too much?!-that's what politicians want to do with solar!

    Well we have same thing happening in solar ... solar is becoming more effeicient --about 4 times more than 1970's and getting better every year.. costs coming down...every year .. ie solar PV (Solar electric) panels have dropped approx. 70% in past few years!!! As prices go down and panels and related equipment get more efficient solar will become more mainsteam and reach "grid parity'--the electric generation rate that is less then buying from a utility without subsidies.

    2) Payback --the time in which you save enough money on electric costs that your electricity generated is free... Like Dara said depends on where you live --incentives, electric utility costs, amount of sunlight all vary around country... but Dara is correct about 8-10 yrs -with subsidies about 12-13 without subsidies but these numbers are going down as solar equipment costs drop, become more efficient, and fossil fuel prices remain high...

    3) The generatng plants could be put on roof tops or open land ... size-that is something that has to be determined by amount of electricity needed--load and balancing with various generation facilities.. Solar and wind generation is small but fast growing it will supplement other resources.. Solar a lot better for enviroment --ie coal releases dangerous murcury in air and pollutes water, nuclear power .. used fuel rods radioactive for centuries and look at what happened in Japan with a nuclear power plant failure!!

    America normally leads world in innovation .. but sadly because of politics.. some political party-guess who .. is willing to just give this growing industry to China!! We need these jobs in America!!

    America is not only one adopting Solar and wind power ... China is projected to double there solar energy installed capacity this year!--Yes they are heavly subsidizing the industry to do it!!! Europe, Japan, Isreal ,S. Korea, Austrialia, also doing subsidies --all these countries realize what great benifit Solar and wind energy have... and day soon --as soon as 2015 some project solar will reach widespread grid parity.

  • Report this Comment On February 13, 2012, at 12:59 PM, jonesmtta4 wrote:

    My solar payback time is going to be less than 3 years. I live in So. Cal. and I leased a solar system. Since I paid for my entire lease upfront, I cut my lease payments AND payback time in half. Sungevity (my solar company) keeps the incentives and covers all the maintenance over the next 20yrs. I'm generating more electricity than I'm using. I only get charged $11/mo in service charges from DWP. Leasing solar is a no brainer. (I went with Sungevity, but there are lots of solar leasing companies out there. i.e. Solar World and Solar City - which is owned by Elon Musk and his cousins)

  • Report this Comment On February 15, 2012, at 12:58 PM, 5000Collett wrote:

    Great Article. Very Informative. The solar industry has two big hurdles ahead-government and utility subsidies, and in the next few years, the for-profit utility companies are going to offer solar directly to customers without the long term contracts through a PPA/”Roof Leasehold.” There is some more interesting information on solar at www.solarpanelspv.net.

    Adam @adamjlevine.com

  • Report this Comment On February 25, 2012, at 5:45 PM, levelplayinfield wrote:

    GKnows, youre not another one that pathetically follows the kindergarten networks are you? Open your eyes, if you were a goose you'd be cooked by now. Some of these kindergarten networks are actually owned by a conglomerate that makes and sells green power.

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