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The Issue Lurking Behind Utility Solar

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If you look at the levelized cost of electricity (LCOE) utility solar is far cheaper than natural gas peakers. This is great news for the solar industry, but there is a big issue lurking in the background. Solar is competing with peaker plants to fuel the grid during times of peak demand. The problem is that peaker plants are ready at a moment's notice, but solar is only available when there is sunlight. 

The numbers  
Current battery technology offers little help. It is not designed for the gigawatt scale that grid operators require. Beyond this issue, batteries are expensive with an LCOE around $216 to $329 per MWh. Considering that natural gas peakers have an LCOE of $179 to $230 per MWh a utility scale solar system with battery backup would be very expensive.

Companies are hard at work trying to bring battery costs down, but the numbers are still too high. EnerVault estimates that its LCOE should be competitive with natural gas peakers, but it is only nearing completion of its first commercial-scale flow battery. Current and near-term grid scale battery storage technologies make sense for islands and remote locations, but it's still difficult for them to compete in traditional markets. 

What does this mean for the solar industry?
The storage problem is a big issue. The International Energy Agency expects that the annual growth rate of world solar PV electricity generation in terms of annual terawatt hours (TWh) generated will fall from 61% in 2012 to 16% in 2018. The solar industry is still expected to continue growing in terms of the absolute number of TWh generated, but storage challenges limit its rate of growth.

First Solar (NASDAQ: FSLR  ) is heavily exposed to the utility industry, and the storage problem will be one of its biggest challenges in the decades to come. The point will come where utilities need to maintain their expensive natural gas peakers for their dispatchable characteristics. The upside is that First Solar and the solar industry may be able to encourage government mandated energy storage targets like those found in California, forcing companies to construct energy storage facilities. 

First Solar is still a promising company even when you recognize the background risks. Between Q3 2012 and Q3 2013 it managed to increase its advanced projects AC pipeline from 3.0 GW to 3.7 GW. It will be critical to see if First Solar can keep expanding or at least maintain its pipeline in coming years. A shrinking project pipeline would signal that First Solar's bread and butter is drying up. 

SunPower (NASDAQ: SPWR  ) has a big focus on the distributed generation market with quality consumer products. The downside is that SunPower has traditionally had slimmer margins than First Solar. In the recent two quarters SunPower's EBITDA margin of 16% is less than First Solar's EBITDA margin of 23%.

At first glance SunPower's high price-to-sales ratio of 1.48 makes little sense. If you take a look at the ability of SunPower and First Solar to take advantage of current advances in the energy storage market, then things become a little clearer.

Smaller scale energy storage is becoming noticeably more economical. Diesel generators have an LCOE of $297 to $332 per MWh and up to $404 MWh with high fuel costs. If you combine a cost effective subsidized rooftop solar system and a battery system then both the solar system and the battery system can be cheaper than a diesel generator. A SunPower distributed system with battery backup can be a great set up for smaller and more isolated consumers.

SunPower has its advantages
SunPower's focus on distributed generation systems leaves the company more exposed to the volatile consumer markets, but it also means that SunPower will have an easier time benefiting from current battery advances.

SunPower's X-Series panel is 21.5% efficient, giving it an advantage over Chinese manufacturers. Trina Solar's (NYSE: TSL  ) panels offer up to 15.7% efficiency and JA Solar's (NASDAQ: JASO  )  panels offer up to 17.15% efficiency. SunPower's extra efficiency helps consumers decrease their total system costs and gives the company more pricing power.

In the recent quarter Trina Solar had an operating margin of 1.1%, JA Solar had an operating margin of -1.8% while SunPower enjoyed an operating margin of 13.3%. With second rate efficiencies and small profits it is best to hold off on Trina Solar and JA Solar for now.

Final thoughts
A lack of cost effective grid-scale energy storage and slow progress in battery technology limits solar's ability to supplement natural gas peakers. Pumped hydro storage (PHS) is an effective storage solution, but it is unclear how many PHS preliminary permit applications will turn into real construction projects.

Investing in profitable solar manufacturers is still a great way to grab a piece of the growing renewable market, but it pays to be aware of the challenges related to energy storage. First Solar is making good money selling utility solar systems, but eventually it will need to address the energy storage issue. SunPower is in a slightly better position as its focus on distributed solar helps it supplement expensive diesel generators with current battery technology.

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Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

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 January 30, 2014, at 11:44 AM, overelysium wrote:

    Consider that peak power typically occurs during the cooling period of the day when the sun is doing it's magic. Would you agree?

  • Report this Comment On January 30, 2014, at 12:30 PM, BMWK75s wrote:

    Peaker power production is about 187GWh.

    Solar is 4.3 GWh

    Peaker Gas: 187.x GWh (approximately)

    Solar: 4.3 GWh

    Perhaps there is still room for growth in solar vs. peaker power.

    Source: Peaker power-

    "So how big is the Peaker electricity market? The total US electricity market in 2010 was 3,750 billion kilo-watt hours (b-kWh) according to the US EIA. The peaker portion is generally accepted to be 5% of the total market. So 5% of the total is 187.5 b-kWh."

    Source: Solar Utility power-

    How about total addressable gas generation market?

    Gas fired energy productin in 2012: 931.4 Gigawatt Hours GWh

    Solar energy production (utility only) in 2012: 4.3 GWh

    Gas: 931.4 GWh

    Peaker Gas: 187 GWh

    Solar: 4.3 GWh

    I think there is a little bit of room for growth in utility solar.


    Disclosure: I just bought a bunch of FSLR stock. P/E is about 10. Company is profitable and has a healthy pipeline and lots of cash. Jeez, what do you want in a stock?

  • Report this Comment On January 30, 2014, at 2:27 PM, energyforecast wrote:

    The world is moving to use solar for baseline energy, and natural gas for peak energy. Most importantly, Sunpower is NOT as cost-effective as Trina. Sunpower's panels are more efficient, but they cost WAY more, so it isn't worth it. Furthermore, Trina's efficiency will be matching Sunpower's panel efficiency soon and at far better costs. I suggest you buy Trina (stock symbol TSL) now given the massive installations in China, smog issues there, and TSL's tendency to announce exceeded forecasts about 3-4 weeks ahead of the earnings call (which is about now). Good luck all.

  • Report this Comment On January 30, 2014, at 2:35 PM, energyforecast wrote:

    To clarify, baseline energy can be considered the energy that is known to be required (fundamental daytime needs for example). The smaller portion - nightime needs, the peak hours, and cloudy/stormy days) is what will eventually be handled by natural gas. Keep in mind that the cost of fossil fuels climb annually while solar costs continue to fall and unbelievable rates. Think of how expensive big screen tvs used to be, then apply it to solar panels, and it's all happening now. Recommendation, buy TSL stock asap.

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Joshua Bondy

Joshua Bondy works in the energy and materials sector. He works hard to bring to light the underlying forces that drive prices and move the market.

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