Google Inc Likes This Investment Option

The solar industry has been plagued by the effects of oversupply in the recent past. Oversupply affected the average selling price of solar panels, and the industry incurred losses as a result. However, the industry is recovering from this downturn, and 2013 proved to be a positive year as many companies returned to profitability. According to a senior research director at IHS, the global solar industry is on the rebound and is set to grow in 2014 and beyond. This resurrection has attracted investors from across the board, but none as celebrated as Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) . The search ad giant is investing heavily in renewable energy, especially solar power. The company recently inked a deal with SunPower (NASDAQ: SPWR  ) for consumer rooftop financing.

The three determining factors for the solar industry are demand, manufacturing costs, and growth (adoption rates). Demand and manufacturing cost predictions are positive, while the module ASP outlook is not favorable. Let's look at these factors individually.

The European Photovoltaic Industry Association expects the global annual PV market capacity to increase to 48GW in 2017 under a pessimistic scenario. Under a policy driven scenario, it could reach 84GW.

Source: EPIA

IHS, on the other hand, believes that global installations will reach 40GW-45GW in 2014. GTM and SEIA predict a 26% growth for U.S. solar in 2014.

Manufacturing costs
The U.S. Department of Energy predicts manufacturing costs of $0.50 per watt by 2020. On the other hand, GTM Research indicates that manufacturing costs will decrease to $0.36 by 2017. First Solar's (NASDAQ: FSLR  )  cost roadmap reveals that the company expects to reduce its manufacturing costs to around $0.35 by 2018. Considering these forecasts, the DOE's cost projections seem high, and they should lie in the range of $0.30-$0.35 per watt by 2020. Whatever the exact figure may be, it is a certainty that costs will follow a declining trend going forward.

IHS believes that the average selling price of solar modules will decline by 10% in 2014 and will have declined by up to 40% by 2020 (as compared to 2013's prices).

Source: GTM research

Despite improved demand and a market recovery in 2013, the ASP remained flat at best. IHS' prediction appears to be spot-on because supply is not expected to decrease, as all major companies are adding production capacity and, even more importantly, because solar energy has to achieve parity (i.e. comparable or lower costs) with conventional energy-generating sources.

To review, the demand situation is improving, the costs of panel manufacturing are going down, and ASP is expected to decrease in the future. As the demand situation is correlated with ASP, declining ASP will result in increasing demand going forward. The decline in ASP will be partially offset by cost reductions, and large players will be in a position to gain market share and sustain margins to some extent. The margins will decline, or at best remain flat, for solar panel manufacturers.

Profitability can be achieved by offering downstream services, rather than just selling panels. Hence, rooftop installation with financing, like SunPower is doing, and building and leasing utility-scale projects along with related services, like First Solar is doing, will be the profitable models in the coming years. Solar energy is expected to grow, though the margins will vary in different segments of the value chain. One fact that strengthens this thesis is Google's interest in renewable energy, especially in the solar and rooftop market.

Google and renewable energy
Google believes that an investment in renewable energy is sensible business. The company's head of corporate finance commented on the recent partnership between Google and SunPower. Under the program, Google and SunPower will contribute $100 million and $150 million, respectively, for residential lease projects. Regarding the mechanism of the deal, a Google official said that the fund will, essentially, be used to purchase solar systems and lease them to homeowners at a cost that is lower than the average electricity bill.

If this claim is true, the future holds promise for the rooftop market. This is an important disclosure because, at current manufacturing costs, solar systems can be provided to consumers at a lower cost than conventional electricity. Furthermore, the expected decline in cost per watt in the future can make solar energy an economical alternative to conventional methods. Clearly, Google is optimistic about the future of renewable energy.

Google's Solar Interest




KKR investments $80 million; Mountain Signal $103 million;

Recurrent Energy $94 million; Bright Source $178 million

Rooftop Market


SunPower $100 million;

SolarCity 280 million; CleanPower Finance $75 million

Cumulative Capacity



Investments ($)

>$1 billion


Source: Press release and Google green

Bottom line
The solar industry had a few bad years that resulted in an atmosphere of uncertainty regarding future prospects. However, last year, the industry started recovering thanks to increased demand. Forecasts for the future are also healthy and reveal increasing demand and lower cost per watt. Downstream businesses are expected to be more profitable in coming years amid constricted margins in the panel market. The interest of big corporations like Google indicates that the industry will grow in the future, and the company's heavy interest in rooftops supports the thesis of downstream business growth. The industry will surely grow, but companies with more downstream business models, such as First Solar and SunPower, are more likely to succeed.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2934405, ~/Articles/ArticleHandler.aspx, 9/3/2015 5:29:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Muhammad Saeed

Today's Market

updated Moments ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:00 PM
FSLR $48.29 Up +0.33 +0.69%
First Solar CAPS Rating: ***
GOOG $606.25 Down -8.09 -1.32%
Google (C shares) CAPS Rating: ****
GOOGL $637.05 Down -7.86 -1.22%
Google (A shares) CAPS Rating: ****
SPWR $23.66 Up +0.71 +3.09%
SunPower Corporati… CAPS Rating: ****