Residential solar is exploding all over the world, especially in the U.S., and over the next few years, it's expected that the continued growth in demand will start pushing solar manufacturers to add capacity. SolarCity's (NASDAQ: SCTY ) acquisition of module maker Silevo was largely driven by this coming reality. Add in that technical advances, such as GT Advanced Technology's (NASDAQ: GTAT ) Merlin and other advanced manufacturing systems, are helping panel makers both reduce cost and increase efficiency, and there's plenty of reason to believe that the coming generations of panels will be both more efficient, and more cost competitive on a per-watt basis.
And while on the surface the Silevo acquisition might not seem like it has anything to do with GT Advanced Technologies, it's indicative of a larger industry trend that has real repercussions for the company's solar manufacturing systems, and advanced materials business. Let's take a look at what's going on, and how it could affect GT, and the implications for SolarCity.
Move toward increased efficiency panels in residential
As I wrote earlier this week, it's going to be several years before we know how SolarCity's purchase of Silevo will pan out. But what we do know is Silevo's technology is a step toward more efficient panels for SolarCity, versus the low-cost, commodity panels it currently gets from Chinese-based suppliers. If SolarCity is able to scale up Silevo cells -- which are about 22% efficient, which translates to modules upwards of 18% efficiency -- to production levels that support its internal needs, the benefits to lower cost in its supply chain, warranty, and installation could be, if not significant, then at least measurable. But it largely boils down to SolarCity's ability to scale up Silevo and produce panels at a competitive cost-per-watt.
Cost-per-watt has, so far, been the biggest driver in residential solar. Most residential installations have plenty of roof space, which means that higher efficiency panels haven't really been required, and lower-cost, lower-efficiency, largely Chinese-made panels have been the lions'-share of installations. However, with technology improving, and manufacturing scales helping to drive costs down, the benefits of higher efficiency panels are starting to trickle into the residential market.
And this is a boon for GT Advanced Technologies
As I wrote back in March, GT Advanced has positioned itself to reap the rewards of capacity growth in coming years. Silevo uses a proprietary technology to reduce the use of silver in modules, replacing it with copper. Similarly, GT Advanced Technologies' Merlin Metallization and Interconnect does the same thing for panel makers.
What is interesting about GT Advanced's Merlin, is that it can be integrated into existing production lines, and for panel makers like Trina Solar and Yingli Green Energy, among a dozen or more others, being able to implement a proven technology, versus investing in development of something in-house, could be the smart way to remain competitive with higher efficiency panel makers.
Additionally, the company's latest CVD Reactors, FBR, and HiCZ system, are all big steps forward in lower cost to purchase, lower cost of operation, and higher production output, than previous generations. And with the efficiency race ramping up, and the need to produce more panels at a lower cost also becoming a priority, GT Advanced is very well positioned to benefit from the growth in solar over the coming decade. The orders have already started coming in. This March, GT Advanced received a $336 million order for a Malaysian PV plant, and just received a commitment from Qatar Solar Energy to supply its HiCZ systems for a solar manufacturing plant. This plant could be as large as 2.5 gigawatts in size upon completion, so the order could be enormous.
Final thoughts: Early in the game
As much as both SolarCity's and GT Advanced Technologies' stocks have rocketed up over the past year, it's still really early in the solar story. What does seem apparent, though, is the push to integrate manufacturing into its business by SolarCity, and the shift toward higher efficiency panels, combined with the sharp growth in demand for panels in coming years, could lead to very big numbers for GT Advanced Technologies. The company's role as a supplier for panel makers, combined with its industry-leading materials know-how, puts it in a fantastic position. Even with the run-up of the stock, GT Advanced looks like a great buy today.
As to SolarCity, the jury is still out on how its vertical integration move will play out, but I'm hanging onto my shares. So far, management has demonstrated great judgement in capital allocation, and with Elon Musk's insight undoubtedly having some role in this move, I'm prepared to ride out any volatility, as long as the company continues to grow and develop its business.
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