Residential rooftop solar energy has become a booming business in the U.S., making companies like SolarCity (SCTY.DL) and Vivent Solar (VSLR) into household names. But did you know that residential solar is only a small fraction of the solar market?
It's actually large, utility-scale solar projects that dominate the solar industry. SunPower (SPWR -8.41%), First Solar (FSLR 2.17%), and SunEdison are building massive projects everywhere from deserts in the Southwest to fields in the Midwest. It's this market solar investors should be keeping an eye on.
Large solar projects like this one dominate the solar industry. Source: SunPower.
How big is utility-scale solar?
According to GTM Research, during the first half of 2014, 61% of all solar installations in the U.S. were utility scale. The other 39% was almost evenly split between commercial and residential installations.
While SolarCity may have 36% of the residential solar market, and Vivint Solar has 15% of the market, they're fighting for about 20% of the overall solar market. In fact, First Solar just completed the 550 MW Topaz project, which is bigger than all of SolarCity's installations in 2014 combined. Next year, SunPower will complete the 579 MW Solar Star project.
Incredibly, this disparity between small solar systems and large, utility-scale systems is expected to continue. GTM Research predicts that utility-scale market share will fall only slightly to about 55% by 2016. One big reason is cost.
Source: First Solar.
Why this is the solar energy you should be paying attention to
If you're looking for low-cost energy, there's no better place to go than utility-scale solar. The latest figures from GTM Research and SEIA say it costs about $1.69 per watt to build a utility-scale solar system, less than half the $3.74 it costs to build a residential system. Even if we compare to SolarCity's industry-leading $3.03 per watt cost, the utility-scale system wins by a mile.
It's true that utility-scale systems have other costs to the grid, like transmission and distribution lines and spinning reserves, but the far lower cost per watt makes up the difference.
From a business standpoint, utility-scale projects are also lower risk because they don't depend on policies like net metering, which is being fought by utilities across the country. Most large solar systems have a power purchase agreement before the project is built, meaning there's little risk for project builders or investors.
Conversely, SolarCity and Vivint Solar are relying on positive policies and incentives to keep demand growing in the future.
Differentiation in large utility projects
What's key for solar companies is finding a way to differentiate themselves in the utility-scale market. First Solar's thin-film CdTe product works well in harsh environments, making it attractive in certain locations. SunPower is welling higher efficiency solar panels than competitors and has lower degradation long term, meaning more power produced from the same amount of space as competitors.
These advantages are something I talked about with CEO Tom Werner in a recent interview, which can be seen in its entirety here.
Utility-scale solar is a huge opportunity for solar companies, and it'll dwarf the residential market for the foreseeable future. That means some under-the-radar companies like SunPower, First Solar, and SunEdison are worth monitoring on your solar watchlist.
