Does a Solar Panel's Efficiency Really Matter?

Over the past few weeks I've had the chance to talk with some of the most influential executives in solar, and while there are considerable aspects of the solar industry they agree on, there's disagreement as to the role solar panels themselves will play in the future of the industry. SunPower's (NASDAQ: SPWR  ) CEO, Tom Werner, is convinced that efficiency will be key to costs and energy production in the long term, whereas Clean Power Finance's Nat Kreamer and Sunrun's Edward Fenster both say that efficiency doesn't matter much at all and that the panels themselves are a commodity product.

Who is right and how should investors view solar panel efficiency? This could be the most important factor in who will win in the future of solar, so let's look at the role efficiency plays and how it affects the biggest players in the solar industry.

Solar panel efficiency affects cost
It isn't as if efficiency and cost are factors that are mutually exclusive. The efficiency of a module directly influences the cost per kW-hr of a solar system. So, the intersection of efficiency, panel cost, and balance of system costs are what we need to consider.

Sunrun's Fenster pointed out that the panel itself accounts for only about 20% of an installation's cost and that decisions about staffing or racking costs are more important than a few cents per watt here or there. But he doesn't think that the added cost of a SunPower panel is worth it for installers.

It's also important to note that he doesn't think that low-quality, third-tier Chinese panels will be attractive in the U.S. Instead, Chinese manufacturers who can compete on quality, and larger companies like Kyocera, LG, and Sharp, who have strong balance sheets, high quality, and low costs, will be winners instead of those offering premium-efficiency products. There is a minimum quality threshold a company has to meet, but in Fenster's view SunPower's panels are over the top and not worth the cost.

I did ask both Fenster and Kreamer about using First Solar panels, but they're so low efficiency and have little cost advantage over Asian-made panels that they're not worth it. So, clearly efficiency matters, but only to an extent. The degree of that extent's effect depends on where you sit in the industry.

Solar panels by the numbers
So, when does efficiency matter in a solar panel and when doesn't it? Let's look at a table I built late last year to illustrate how efficiency and costs interact. You can see the full list of assumptions used here. Below, you'll find the cost breakdown of three systems with different efficiency levels, with the lowest efficiency also having the lowest cost. There are variable components and fixed components, and the 15% efficient module (a standard Chinese product) is slightly less than 20% of the total installation cost, while the 20% efficient module is 27% of the installation cost.

 

10% Efficient Module

15% Efficient Module

20% Efficient Module

System Size

2 kW

3 kW

4 kW

Module Cost per Watt

$0.65

$0.75

$1.00

Total Module Cost

$1,300

$2,250

$4,000

Variable BOS Cost

$2,500

$3,750

$5,000

Fixed BOS Cost

$6,000

$6,000

$6,000

Total Installation Cost

$9,800

$12,000

$15,000

Annual kW-hrs

3,154

4,730

6,307

Cost per kW-hr (assuming 8% ROI)

24.9 cents

20.3 cents

19.0 cents

These figures should ballpark real-world costs and show that efficiency has a big impact on the final cost per unit of energy. Of course, there are many sensitive components in this analysis; if the 20% efficient module costs $1.25 per watt then it would no longer be cost effective. By the same token, if variable costs play a smaller role then efficiency plays a bigger role. These variables will behave differently depending on where a system is being installed.

In the example, you can see that efficiency matters but only to an extent. A high-efficiency module is only more cost-effective if it's below a certain cost threshold. So, the bigger the gap between Chinese modules and SunPower modules, the less attractive SunPower modules become. This is why SunPower hasn't been able to compete in Europe in recent years. It has much lower BOS costs, and therefore, the cost of the panels matters more.

What's clear is that efficiency does matter but only when the rest of the system's costs and its performance are brought into the equation. If the panel is a small percentage of a system's costs, efficiency matters a lot, and vice versa.

Who will win the solar panel battle?
Installers, particularly those in residential, deal with this conundrum every day, and the industry is changing rapidly. SolarCity (NASDAQ: SCTY  ) has been known to use manufacturers like Trina Solar (NYSE: TSL  ) and Yingli Green Energy (NYSE: YGE  ) , who are two of the biggest manufacturers in the world and compete mostly on cost. Where system costs are low, they will win business.

SunPower, or a high-efficiency module, will win where costs are higher, which is why the company is focused on the California market right now. What would change this equation is if costs came down considerably. If cost per watt for 20% efficient (or greater) panels falls to $0.80, then SunPower will become more attractive.

That's one of the reasons I'm betting on SunPower. The industry has shown time and time again that it's easier to cut costs than to increase efficiency. So, SunPower may not be the most attractive panel for everyone now, but in three years when its costs are lower that may change.

Putting the solar panel battle into context
Maybe the best way to think about efficiency in solar, particularly when comparing SunPower to Chinese manufacturers, is to use a couple of analogies. The performance of a BMW may not be significantly better than a Cadillac, but it costs a lot more money because of brand and perception. The same could be said for Apple products, which focus on design and have very few performance differences than other PCs, even though they cost more.

Right now, SunPower is selling a premium brand, designed with all-black panels, and that comes with a higher cost. The question is how many consumers will pay up for that brand and design if it doesn't save them money in the long run? (Note that SunPower says that when all factors are considered, the energy from its panels costs less long term.)

I'll also point out that when investors think about the analogy above, they should think about the profit made on each car or computer companies make. BMW and Apple may charge more, and it may not be worth it to some, but they definitely make more money per unit than competitors. Will that be the case in solar? Time will tell.

What we know for now is that a solar panel's efficiency matters -- sometimes. 

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  • Report this Comment On July 17, 2013, at 11:09 PM, chrisceeaustin wrote:

    Efficiency matters when you have five acres and you want to produce as much energy off of those five acres as possible. Land near big cities is expensive, so if solar is to compete, it must be quite efficient.

  • Report this Comment On July 18, 2013, at 12:52 AM, luckyagain wrote:

    The hardest part of calculating the value of solar panels is trying to determine future cost of a Kw-hr. Does anyone really believe that the cost of electricity will be cheaper or the same in 10 years? The cost of the solar panel becomes fixed at the time of installation but it will probably be producing a higher cost unit of electricity in the future. Since the cost of sunlight will not increase while other sources of energy will probably be more, the advantage of the solar panels will increase with time.

  • Report this Comment On July 18, 2013, at 2:11 AM, OldenAtwoody wrote:

    What a terrible chart. The panels are producing significantly different amount s of electricity, which, when compared to the cost of that from the local provider, is a big, big difference.

    1. What’s the SAVINGS between Cost per kW-hr of a panel (at varying efficiencies) versus the cost to BUY outright in typical localities? Phoenix, Denver, LA, Boston, Seattle, Atlanta?

    2. What’s a cost to own the panel over its lifetime, or, does it pay for itself at some point?

    You waste four rows in the chart discussing the statistics of variable and fixed costs (“The sparkplugs in these three autos fire at differing temperatures… OMG!”) while ignoring the consumer ROI over the life of the unit (“does this car get good mileage driving to the supermarket”).

    I guess if you were old enough to have owned a single family home, these concepts would have come more naturally.

    Geekiness is not an attractive attribute, as I’m sure you’ve already discovered at the local singles bars, Travis.

  • Report this Comment On July 18, 2013, at 2:40 AM, jtinsj98 wrote:

    Of course! I read 3/4 of the way through this article and figured out that it was Travis Hoium who wrote it once I saw the slant toward Sunpower. "... brand and perception" - yup, SPWR has done a goo job here. Of course, this is primarily due to people like you who classify "Sunpower" vs. "the Chinese panels", which gives the lay person the idea that SPWR panels are an American made product. In fact, they are not. They are also made in Asia - Malaysia and the Phillipines.

    So, you are betting on SPWR since the industry has proven that it is easier to cut costs than increase efficiency? Well, don't you think that the low cost leaders (or, as you call them "the Chinese companies") will further reduce costs as just as SPWR might. C'mon!

    Oh, and by the way, panel costs are actually ticking up at the moment. Uh oh.

  • Report this Comment On July 18, 2013, at 2:48 AM, Thorsland77 wrote:

    Efficiency is only important when you can't offset all the power used in the home. Your table implies that the roof is maxed out w a 3 kw 15% panel. Not the case most of the time.

  • Report this Comment On July 18, 2013, at 4:54 AM, gotaub wrote:

    Travis, how are you calculating cost per kilo-watt hour?

    Also are you considering the capacity factor of solar panels? My understanding this that the capacity factor for most panels is around 10 to 20%.

    I have also read that while First Solar's thin film panels are less efficient as measured by NREL, (which measure efficiency as percent of power output over available energy under ideal conditions) they have a higher capacity factor as they perform closer to their maximum efficiency under non ideal conditions.

  • Report this Comment On July 18, 2013, at 9:43 AM, energyforecast wrote:

    1. As you admit in your article, installers are using Trina and Yingli panels. Wanna know why? Because they know what they are doing.

    The stock symbols are TSL and YGE.

    2. Smaller projects are never as cost-effective as larger scale projects. Even the village idiot knows that. Comparing 2 and 3 kw projects to a 4 kw is ridiculous.

    3. TSL and YGE are running factories at a fraction of their production capability. China just announced 35 KW of domestic projects to fix that, Thus, the cost/kWh of TSL and YGE panels is going to fall significantly once those factories run at capacity in 6 to 12 months time.

    4. Last but not least, GTAT is offering HiCZ this year which will boost the power output of the TSL and YGE panels by 25% for the same cost. Companies like SPWR and FSLR cannot benefit from this due to the type of panel they produce.

    Consider any one of these four points, let alone all of them, and you would buy TSL and YGE stock while the two are still inexpensive.

  • Report this Comment On July 18, 2013, at 10:05 AM, TMFFlushDraw wrote:

    @gotaub

    I used a capacity factor of 18%.

    To calculate cost/watt I've multiplied the required rate of return of 8% by the overall cost (ex. $9,800 x 8% = $784) then divided that by the kW-hrs produced in one year ($784/3,154 = $0.249). I hope that helps.

    What you say about FSLR is true. Thin film generally performs better in non-ideal conditions but this still doesn't make up for the efficiency gap in many locations.

    @energyforecast

    #2 - The example I used is a single rooftop with the same number of panels. A 10% efficient system with 10 panels would produce half the power of a 20% efficient system with 10 panels. That's why the kW size is different.

    #3 - I think you mean cost/watt. We'll see if higher utilization means a profit for these companies. I have my doubts.

    #4 - I talked to GTAT CEO a few months ago and Chinese companies aren't buying HiCZ. They don't have the capital because Chinese banks have stopped the free flow of money to expand manufacturing. Instead, he said the demand for next generation HiCZ is in the Middle East and Eastern Europe.

    Travis Hoium

  • Report this Comment On July 18, 2013, at 10:38 AM, jeffhre wrote:

    Sun Power makes (some) panels in the US.

    Urban land is expensive, though utility scale installations are valued on power production not land costs. Don't believe it? How does a manager of urban rooftops value value roofs that are only used to cover the contents of a building?

    South facing unshaded real estate can be limited for rooftop installations. More so in the case of very small solar plants. Simply because many small residential and pitched roof buildings may be oriented in other directions or become shaded at points in time, making high efficiency paramount.

    kWh = kilowatt hours

    So, on your scantron mark every answer C. For sometimes!

  • Report this Comment On July 18, 2013, at 11:02 AM, jamesdan567 wrote:

    of course efficiency matters. how could anyone be so stupid as to even question this?

    net cost of array installed

    --------------------------------- = cost per kwh

    kwh produced over the

    life of the array

    the denominator depends on efficiency and other factors.

    any other stupid questions, author?

    efficiency doesn't matter? so you people don't mind driving

    a car that gets 1 mile per gallon?

  • Report this Comment On July 18, 2013, at 11:04 AM, jeffhre wrote:

    A) 2, 3 and 4 kW systems don't differ much in efficiency.

    B) China just announced 35 GW of domestic demand.

    The scales here (A to B) are several orders of magnitude different. The units are important.

    kW = 1000 watts, the power of a hair dryer or microwave oven.

    MW = 1,000,000 watts, utility scale power, a small GE commercial wind turbine

    GW = 1,000 MW = 1 GW, a nuclear power station.

  • Report this Comment On July 18, 2013, at 11:27 AM, jeffhre wrote:

    Efficiency does not equal cost / power / hours.

    jamesdan567, somethings are missing there. Balance of system costs. Suitable space available for PV system. We can even avoid the name calling and just identify all of the variables that would make questions of efficiency valid or not.

    The analogy to a car has a big problem when translated to stationary systems. It is possible to make stationary plants larger at a lower cost, using less efficient methods. That's not possible with a car.

    For a mobile power plant, like a car, larger less expensive systems rob efficiency with added weight and size problems. For a stationary system, unless there "ARE" size and weight concerns, less efficient cheaper systems are better. Unless that increases balance of system costs!!!!

    Like needing to go on a house roof one extra time to place one extra solar panel. Or simply running out of room for panels. Happens on urban roofs a lot. On desert lands with room for MW installations not so much :)

  • Report this Comment On July 18, 2013, at 12:06 PM, RickRickert4MVP wrote:

    Let's not forget that while Travis has been pumping SPWR (over the last year or so) it's up about 485%, compared to YGE +67% and TSL +20%. Maybe he's not as big of an idiot when it comes to the solar industry as you guys think....

  • Report this Comment On July 18, 2013, at 1:52 PM, yovinman wrote:

    Once again I would like to interject some real-world experience as a solar designer and installer. Efficiency matters a lot and will matter even more in the future. Why? California is about to adopt state-wide in 2014 the Cal-Fire recommendations for setback clearances on the roof for photovoltaic systems. This means all PV systems going on a roof in California will need to have a 3-foot clearance from the ridge and sides of the roof. Depending on the roof, this can be a reduction of up to 50% of the usable roof area. Many jurisdictions in California already have this requirement. Palo Alto is a good example. What this means is the company with the most efficient panels that makes the most electricity in a very limited amount of roof space will win. When you take into account vents, skylights and shade challenges, SunPower's 345-watt panel will do much, much better than a Yingli 245 watt panel since most customers want to reduce their utility electric bill to the lowest possible level. So yes, efficiency matters a lot particularly if other states follow California's lead.

  • Report this Comment On August 06, 2013, at 5:35 PM, jeffhre wrote:

    yovinman : your comments make perfect sense, but still leave the question of price almost entirely out of the equation. If I can get more panels in a tight space because of a 15% gain in efficiency I will do it.

    ...If the pricing makes sense. If the 15% more efficient panels are 15% more expensive it makes sense. If they are 1000% more expensive, I'll put up with lower efficiency.

  • Report this Comment On March 29, 2014, at 10:07 PM, solardude wrote:

    as a professional engineer, solar homeowner and solar executive, i can unequivocally say that a kW is not a kW. these ratings are flash tests and are only an approximation to real world kWh production. SunPower modules outperform kWh/kW every day - all day to any medium efficiency modules - solarworld, suniva, lg, etc. Further, one simply needs to hold a robust back contact SPWR cell in one hand and a flimsy conventional cell with ultra thin screen printed solder lines to know we are NOT talking about the same goods at all - not even close. so it could be that in addition to footprint that efficiency brings, investors of all walks and system sizes realize the value that SPWR brings with its most certain long term reliability and its increased kWh production over its 30 years.

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