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SolarCity's Silevo Acquisition Doesn't Address the Short-term Problems

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The U.S. solar landscape recently changed due to the trade duties imposed on Chinese solar panel manufacturers. Although the large U.S. players like SunPower (NASDAQ: SPWR  ) and FirstSolar (NASDAQ: FSLR  ) benefit from this development, it adversely affects SolarCity (NASDAQ: SCTY  ) , a residential solar installation company.

SolarCity obtains its solar panels from Yingli and TrinaSolar. Duties were imposed on both of these companies. SolarCity is acquiring a solar panel manufacturer, Silevo, to mitigate the duty-tariff impact. It also agreed to purchase the solar panels from REC Group recently in order to address this problem. The company is going down the road of vertical integration just like its national peers. Silevo holds differentiated technology that can possibly result in cost-savings for SolarCity in the future. However, SolarCity is not in a good competitive position from a short-term perspective.

                                                                                                     Source: Silevo website

The Silevo effect 
The Triex technology of Silevo uses tunneling-junction; a hybrid technology that enables slower degradation of the solar cells, improved temperature coefficients, and high voltage for improved efficiency. Silevo already crossed the 20% conversion efficiency threshold. Higher-efficiency modules will lower the balance-of-system costs. The company uses copper cathodes instead of the silver cathodes, thereby lowering the manufacturing costs. Moreover, the low temperature-coefficient in solar panels will result in less power loss in the high-temperature environments. As a result of the differentiated technology deployed by Silevo, the benefits for SolarCity will be three-fold.

  • The balance-of-system costs, or the BOS costs, will decrease as a result of the improved efficiency. Silevo claims that $0.10 can be saved for every point of efficiency gained. Note that SunPower is ahead in the efficiency department; the BOS costs will be lower for SunPower.
  • The low temperature coefficient of the solar modules will enable SolarCity to compete in high temperature geographies. Moreover, SolarCity will be an attractive proposition for the large-scale projects.





Module Efficiency



Higher is better; saves BOS costs




Lower is better; suitable for high temperature areas





  • The copper-based metallization-scheme of Silevo's technology will result in lower production costs for SolarCity as the cost of silver is expected to rise. It could rise from $0.06/Wp-$0.08/Wp to $0.12/Wp-$0.16/Wp, according to Silevo.  
SolarCity is going to reduce the manufacturing costs and the balance-of-system costs in the future. However, the competition cannot be written off. SolarCity will face stiff-competition from the large U.S. based solar corporations. SunPower, with its market leading panel-efficiency, and First Solar, with its lowering manufacturing costs and improving modular efficiency, are a threat to the future business prospects of SolarCity.

Challenges in the short-term
SolarCity holds the largest share of the U.S. residential rooftop solar market. It recently decided to acquire 100MW-240 MW of solar panels from REC Group to counter the pressure from the increased prices of the Chinese panels. The panels of REC Solar are not as efficient as the new panels of TrinaSolar. SolarCity is trying to avoid the high panel costs, but the lower efficiency of REC Solar will add to the BOS costs. The acquisition of the lower efficiency modules and the imposition of the trade duties will put pressure on the company's margins. A high margin is critical to survive in a growth industry like Solar. SolarCity's declining margin can pose a threat to the going concern assumption of the company in the short term.

Moreover, the capacity of Silevo is almost non-existent (32 MW). SolarCity is planning to deploy 475MW-525MW by the end of 2014. The Giga-Watt factory, SolarCity is promising, will take two years to reach the 1GW capacity. Therefore, SolarCity has to compromise its margin or settle for inferior products. Either way, it benefits the competitors. FirstSolar is continuously improving the efficiency of its CdTe modules, thereby enabling area-constrained deployment such as in the rooftop markets. SunPower produces the highest efficiency solar modules resulting in lower BOS costs. All in all, the next two years are going to be tough for SolarCity.

Bottom line
SolarCity has switched the supplier, and it also acquired a manufacturer of solar panels. These moves are the company's effort to address the problems that arose due to the duties imposed on the Chinese manufacturers. The switch of the supplier does not bode well for SolarCity because of the efficiency concerns.

Margins will remain under pressure, and the competition may exploit this situation to knock out SolarCity. However, if the company stays resilient in the next few years, the benefits of Silevo's Triex technology may prove fruitful for SolarCity. From an investment perspective, at the moment, it doesn't look like the best time to invest in SolarCity. Investors should wait and see how the next year or so plays for SolarCity.

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Sid A.

Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University, and he is an investment analyst by profession. He closely follows several technology industries. You can follow Soid on

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