SunPower's and SolarCity's Best Days Are Ahead

Bloomberg New Energy Finance has released its 2030 market outlook, and it's a good mix of optimism and realism. Instead of making hyperbolic predictions about the immediate end of traditional fuels, the authors see fossil fuels' share of power generation falling slightly over the coming decades. Solar walks away the real winner. Bloomberg expects solar's share of power generation will rise from 2% to 18% from 2012 to 2030.

Look at rooftop growth
Rooftop solar is expected to see up to 20% of global capacity additions until 2020. SolarCity (NASDAQ: SCTY  ) is expensive, but it is one of the few focused rooftop-solar plays. It is worth noting that according to its first-quarter 2014 data, if the majority of its customers will renew their contracts, the current value of future cash flow is only $1.3 billion.

The good news is that SolarCity's purchase of the high-efficiency manufacturer Silevo will help to diversify its revenue. Eventually Silevo should help SolarCity avoid any new import tariffs on Chinese panels.

The big manufacturer SunPower (NASDAQ: SPWR  ) has its own rooftop-installation business. Its residential energy solutions only booked 6 MW of capacity in Q1 2014, but over the lifetime of the program, SunPower has been able to acquire 172 MW of bookings. The benefit of using SunPower to play the solar market is that it has established positions throughout the residential, commercial, and utility market. 

To help decrease the impact of reductions in net-metering programs or excessive grid surcharges, SunPower is rolling out energy storage solutions in California. Meanwhile, SolarCity is partnering with Tesla to help consumers reduce demand charges through its own energy storage solutions.

New pressures on the industry
The rising importance of rooftop PV will put pressure on First Solar (NASDAQ: FSLR  ) to speed up the development of higher efficiency products. Panel efficiency really matters for rooftop customers with limited real estate. First Solar's thin-film technology puts it at a disadvantage relative to other players like SunPower, but First Solar is doing everything possible to close the gap. 

From Q1 2013 to Q1 2014, First Solar managed to increase its top-line efficiency 1.2% to 14.2%. In its lab, First Solar has recorded thin-film efficiencies of 20.4%, but boosting its production panels to such levels will be no easy feat. More importantly its 2013 acquisition of the crystalline silicon manufacturer Tetra Sun will give First Solar the power to compete with SunPower on more equal footing.

Even the Chinese manufacturer Yingli Green Energy  (NYSE: YGE  ) confirms the rise of direct generation (DG) demand. Utility purchases as a percentage of its U.S. sales have fallen, thanks in part to rising distributor and residential demand. In addition Yingli saw growing Latin American DG demand in Q1 2014. Latin American DG demand is more important now that Yingli has been slapped with U.S. tariffs.

Yingli is a step behind its U.S. competitors with a 13% gross margin that is less than half SunPower's or First Solar's respective gross margin, but it is worth keeping an eye on this large Chinese manufacturer.

Buying realistic growth
Trying to gauge renewable energy's future by listening to extreme anti-fossil-fuel projections is problematic. It is safer to take an approach where the positives and negatives of every energy source are examined. Bloomberg's future of coexisting fossils and renewables is quite balanced, and its rosy rooftop PV numbers are a great vote of confidence for SunPower and SolarCity.

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