Falling Costs Are Pushing SunPower and Others Forward

Subsidies are critical tools to bring new technologies to market, but they cannot last forever. For most products to be sustainable, they must be able to exist without government subsidies. It has taken residential solar a number of years, but recent first quarter 2014 findings show that a full one third of residential PV came online without any state incentive. This is a great sign for the future growth potential of SunPower (NASDAQ: SPWR  )  and First Solar (NASDAQ: FSLR  ) .

Federal solar subsidies 
Solar subsidies are varied with a number of local and national policies, but one of the most important policies is the Federal Solar Investment Tax Credit. This 30% tax credit for residential and commercial systems is subject to political whims, and there is no guarantee that it will be renewed before the end of 2016. 

Positive numbers
Thankfully falling prices reduce the necessity of subsidies. From the first quarter of 2013 to the first quarter of 2014, the cost per watt of U.S. residential solar systems fell 7% while commercial systems fell 5.7%. Falling prices played a role in pushing up residential installations 38% year over year.

Still, the majority of new installations came from utilities. With reports of new utility installations selling their power around $0.05 per watt, it is not surprising that the utility sector continues to grow.

Even with falling prices manufacturers are able grow their overall sales. In the first quarter of 2014, SunPower grew its non-GAAP revenue 19% to $684 million with a healthy gross margin of 22%. The news about falling dependence on state subsidies is a big positive for SunPower, as the company is focused on smaller rooftop systems. It expects that residential and commercial systems will account for just under 50% of recognized MW in 2014.

First Solar posted even stronger growth. From the first quarter of 2013 to the first quarter of 2014, it pushed up its net sales 25.8% to $950 million with a gross margin of 24.9%. In the same time frame, First Solar was able to boost its average conversion efficiencies from 12.9% to 13.5%, but it still needs to get its latest developments out of the lab to bring its panels closer to SunPower's efficiencies.

Is China rebounding?
The bankruptcy of Suntech was great news for the global solar industry. It showed that Beijing is not going support its solar industry at any cost. Even Chinese solar manufacturers need to turn a profit eventually.

Suntech's struggles have helped clear out access capacity and improve pricing. As a result, JinkoSolar's (NYSE: JKS  )  first quarter 2014 sales grew 73.1% year over year as total product shipments increased to 581 MW. Even though JinkoSolar's gross margin was 24%, the company carries a significant amount of debt. Its total debt to equity ratio is 2.68, and eventually it will need to upgrade its manufacturing operations to keep up in the global market.

Trina Solar (NYSE: TSL  ) had similar first quarter 2014 results, with its net sales increasing 70.9% year over year with a gross margin of 20.6%. Trina's total debt to equity ratio of 1.16 is better than JinkoSolar's, but it is still high compared to U.S. competitors.

Trina solar is a massive firm. It hopes to ship 3.6 GW to 3.8 GW of solar modules in 2014. Upgrading such a huge manufacturing operation will be very expensive, but Trina Solar will have little choice if it wants to keep up with SunPower.

China's solar industry is coming out of the doldrums, but there is a good chance that future manufacturing upgrades will weigh down Trina Solar's and JinkoSolar's balance sheets. Even as the U.S. market improves there are China-specific issues to be aware of.

The U.S. solar market is plowing ahead
The first quarter of 2014 was a great quarter for the U.S. solar market with more residential systems moving away from subsidies. This is very encouraging for SunPower and its rooftop-focused business. At the same time, First Solar continues to benefit from falling prices and growing sales. 

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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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