What You Need to Know Before You Invest in Solar Energy

Solar energy is one of the greatest investing opportunities of our generation with well over a trillion dollars in annual market potential around the world. But with all that potential comes tremendous risk, particularly as new technologies emerge.

Over the past decade, we've seen solar technologies rise and fall and companies have risen and fallen along with them. Now that this industry is competing with fossil fuels on a cost per kW-hr basis it's important to look at what technologies dominate the industry and what investors should be betting on in the future.

Massive solar farms like this one from SunPower are now competitive with other energy sources on the grid, opening up a huge opportunity for the solar industry. Source: SunPower.

Silicon solar, the leader in the clubhouse
The vast majority of solar panels today are made using silicon semiconductor technology. At its core, this technology has been around for decades, it just hasn't been efficient or cheap enough to be economically viable versus the grid. But that's changed in the last few years as panel prices have plummeted below $1 per watt.

Inside a silicon solar cell the sun's energy excites the semiconductor, knocking an electron loose. If properly built, a cell then captures that electron and turns it into a voltage potential and electric current.

Solar cells like this one make up around 90% of all solar panels produced each year. Source: U.S. Department of Energy.

There are three main types of solar cells made from silicon: multi-crystalline, mono-crystalline, and mono-crystalline back contact cells.

  • Multi-crystalline: The lowest cost and lowest efficiency silicon solar cell. This is currently the most common solar cell in the world, made by Yingli Green Energy, Trina Solar, Canadian Solar, and many others. The panels are fairly standard between suppliers and they use similar equipment to make panels. Cost leaders are approaching $0.50 per watt and efficiencies average 14%-16% for a solar panel.
  • Mono-crystalline: Silicon that is in a more pure form is used to make mono-crystalline solar panels, which are growing in popularity because they provide higher efficiency and lower cost per hW-hr of energy. Panels made with this technology are typically more expensive than multi-crystalline cells but they typically make panels that are 15%-18% efficient.
  • Mono-crystalline back contact: High end solar panels are made using a contact on the back side of the panel, which reduce shading, improves connection between cells, and improves durability. SunPower (NASDAQ: SPWR  ) is the leading manufacturer of mono-crystalline back contact solar cells, producing panels that are up to 21.5% efficient. These are the most difficult silicon solar panels to produce, but Trina Solar and others are putting effort into manufacturing this technology.

SunPower's back contact construction makes a more efficient and visually appealing panel. Source: SunPower.

There haven't been any major step change advancements in silicon solar, even in the past decade, but the cost of the technology has been reduced to a level that's now economically viable. This is a technology that has and will continue to see incremental gains in both cost and efficiency in coming years, which manufacturers are betting will keep it ahead of other technologies.

Thin-film solar cells
Five years ago, thin-film solar technology was supposed to be the future of the industry. Cadmium telluride, or CdTe, was the lowest cost technology per watt and Cadmium indium gallium selenide, or CIGS, was even higher efficiency with promising cost cutting plans. But neither really lived up to expectations and First Solar (NASDAQ: FSLR  ) is the only major manufacturer who uses thin-film technology today.

CdTe and CIGS technology proved too difficult for most companies to commercialize and today even First Solar's industry leading efficiency of 14% isn't competitive with silicon panels in anything but very large scale power plants.

Thin-film solar isn't dead, but it's on life support in the future of solar.

Concentrated solar thermal power
One of the oldest technologies for solar on a utility scale basis is concentrated solar power. For more than two decades the 354 megawatt Solar Energy Generating Systems, or SEGS, in Southern California was the largest solar-power system in the world.

Ivanpah Solar Power Facility's 3 power towers seen in the distance. Source: Ivanpah.

Ivanpah Solar Power Facility is the latest to hit the grid in the U.S., gaining some attention for allegedly frying birds with intense solar rays near its power towers. But while this technology was viable as recently as a few years ago, its costs are now out of line with the market. Ivanpah cost $2.2 billion for a 392 megawatt facility, which is $5.61 per watt, about triple what it costs to build a silicon or thin-film solar system.

Solar thermal power may grab the attention of some in the media, but it's all but dead in the solar industry because costs are too high.

New technologies
In solar, there are always new technologies popping up. Amorphous silicon, CIGS, and CdTe solar cells have all been the future of solar at one point and one by one have flamed out.

One technology that has garnered a lot of attention this week is a transparent solar collector that could be incorporated into window glass or cover screens for smartphones or tablets. This is another example of incredibly cool technology that's probably not going to be commercially viable anytime soon. Laboratory efficiencies are only about 1%, 1/20th of leading solar panels, and there's no telling how much these clear solar collectors will cost.

New solar technologies can make for great headlines but investors need to be wary of putting too much stock in their future. Until something proves to be economically viable the best bets are technologies that are tried and true in the field.

Workers build a utility scale solar project for First Solar, one of the most profitable companies in solar. Source: First Solar.

How investors should view solar
As investors, the challenge is finding ways to make money on solar without taking too much risk at the same time.

With new products popping up every week how should investors look at the solar energy industry? Here are four keys I've developed after years of covering the industry.

1. Make manufacturers prove it! Winning the press release battle is great for headlines but a "hero cell" made in a laboratory is not the same as a cell made on a production line, just like promising a certain cell efficiency or cost structure in a presentation doesn't mean you can do it in real life.

In today's solar market there are many manufacturers who make competitive solar panels that are cost effective. Start with companies who have a track record of building panels and selling them for a profit before putting your faith in a company making big promises. Solyndra was supposed to be the next big thing, and remember how those promises turned out?

2. Bet on cost reductions over technology improvements. If there's one lesson I've learned the hard way over the past decade following the solar industry it's that you don't want to bet against cost reductions. Efficiencies may improve incrementally and at unpredictable times but costs are coming down across the board and faster than most of us could have anticipated.

Rooftop solar is now a growing part of the industry. Source: SolarCity.

To see just how much I've learned, look at this article from over three years ago where I predicted that thin-film solar (particularly CIGS) would be the winning technology long-term. Boy was I wrong, but I learned my lesson and now I'm betting on companies with efficiency leads and room to cut costs instead of the other way around.

3. Understand the risk a company is taking. Research and development in solar can be a black box to investors. Companies tout eye-popping cell efficiencies in press releases only to see actual module production fall well short of their advertised values. So, understanding what risks you're taking in a company's R&D is important.

For example, when SunPower makes claims it can incrementally improve its cell efficiency with a new manufacturing process, it's a low risk bet and something the company has done year after year. On the other hand, when First Solar bought TetraSun or SolarCity (NASDAQ: SCTY  ) bought Silevo, both unproven solar manufacturers, and made grandiose claims about the efficiency and cost of panels they'll be able to make, it's a much higher risk investment.

Even further up the risk scale is laboratory research coming out of universities around the world. These are incredibly interesting technologies but they have a very low chance of seeing the light of day as a commercially viable product.

The bigger the challenge a company is taking on, the lower the likelihood they'll succeed. Keep that in mind when looking at solar stocks.

4. Remember the bottom line. Putting solar cells on your windows or being able to use the sun's power at night with energy storage are great concepts for the solar industry, but if they're not economically viable they'll never survive as long-term businesses.

The bottom line in solar today is cost per kW-hr of energy. That's the price solar energy is competing with on the grid and it's the way utilities, consumers, and investors should judge the companies and technology they're looking at.

Few companies give explicit costs per watt but one way to see how competitive a company is versus traditional energy is to look at their gross margin. High gross margins mean they make a product that can command a high price in a competitive industry, and low gross margins mean they're less competitive.

A massive opportunity with big risks
The solar industry has literally trillions of dollars in potential but with that potential comes risk. Dozens of solar companies have gone bankrupt in the last five years trying to chase the solar dream, so investors need to be cautious about where they're putting their money.

If you use the information I've outlined above you'll be on your way to building a profitable solar portfolio. And I'll be here on fool.com with updates for you anytime there's a development investors need to know about in solar.

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Read/Post Comments (3) | Recommend This Article (4)

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  • Report this Comment On August 25, 2014, at 4:40 PM, rayfrombristol wrote:

    "More than half the new electric power in 2009 and 2010 came from renewable energy. The more clean energy we build, the more reliable it gets." http://clmtr.lt/c/LjT0BaP0cMJ

  • Report this Comment On August 25, 2014, at 7:09 PM, Waldo wrote:

    As far as investing in solar companies, First Solar trades at around $70 right now as does Solar City. However, the thin film cells that FSLR uses are no match for the cells that SCTY uses. Solar City buys from different suppliers and companies like Canadian Solar sell some of their panels to Solar City. Canadian Solar trades at around the mid 30s right now, but should have major upward momentum now that the tariff issue for them has been resolved and they are back to the Taiwanese rate from before this round of tariffs were being considered. Major disappointment for Solar World, the company that brought the complaint in the first place. And on an ironic note, Solar World now has to recall 1.5 MILLION panels because of faulty installation. They have a hard time competing in the world economy henceforth the tariff complaint.

    For my money, I would say go long CSIQ and SCTY. The Chinese based companies like Renesolar, Trina Solar and the rest are good, but the fact that they are all open to any future tariff war makes me leery. SCTY is U.S. based and CSIQ is based in Canada.

  • Report this Comment On August 27, 2014, at 2:06 PM, TMFFlushDraw wrote:

    @Waldo

    CSIQ is a Chinese company. It just has a name with "Canada" in it.

    Per their 6-K foreign issuer filing with the SEC their office is at:

    No. 199 Lushan Road

    Suzhou New District

    Suzhou, Jiangsu 215129

    People’s Republic of China

    (Address of principal executive office)

    This isn't to say that they don't have a Canadian office, just that it's a holding company for the real assets/company in China.

    They can get around the U.S. tariffs with about 500 MW of module capacity in Canada, but the supply from China is still subject to tariffs.

    Two major companies won't have to pay tariffs: First Solar and SunPower. CSIQ's panels are about 15%-17% efficient and SunPower's are 19.5%-21.5% efficient, so if you're interested in efficiency that's a company to look at.

    Travis Hoium

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