Solar farms like this one are becoming more standardized, which helps lower the cost of installation. Image source: Getty Images.

The solar industry has long been a disunified mass of suppliers, installers, and financial sources that somehow still managed to make their complex systems work. There's also typically been very little standardization among solar power systems: The makers of solar panels, inverters, optimizers, and other components are rarely integrated with each other. As a result, suppliers have risen and fallen over the years as their products have gone in and out of favor.

Now, with the industry maturing, and consolidation or bankruptcy leaving fewer players that have a growing list of capabilities in-house, the system is squeezing even more efficiency out of its processes. And the latest trend is assembling the components of solar power systems, not on site, but on the factory floor. 

SunPower's Equinox system includes micro inverters on solar panels and a pre-engineered racking system, saving installation time. Image source: SunPower.

Taking on the balance of system cost challenge

Over the past decade, a lot of the cost savings in the solar industry have come from the rapidly falling cost of  panels. For example, Canadian Solar (CSIQ -1.87%) recently said that its panel costs have fallen from $1.32 to $0.41 per watt in the last five years. That has helped make solar more cost competitive, but panels are now a smaller percentage of the cost of each installation.

The other big category includes what are called balance of system (BOS) costs: items like sales, permits, inverters, wiring, and labor. These costs vary, but they're anywhere from $0.50 to $2.50 per watt depending on the project size.

What solar companies like First Solar (FSLR 1.53%) and SunPower (SPWR -13.37%) are doing today is tackling the BOS cost challenge by moving labor from the field, where wiring and installation was often done by hand and designed specifically for each project, to factory floors and pre-engineered systems, where it can be standardized. This is what SunPower is doing with Helix, Oasis, and Equinox systems; First Solar is doing something similar with its Series 5 module.  

Ironically, this may increase the cost of each solar panel on a per watt basis, but it can lower the overall cost of a system. Take the example below, which assumes a 33% reduction in BOS costs for this type of solar system, and an increase in solar panel cost of 50%.


Traditional Example

Integrated Solar Panel Design

Panel Cost

$0.50 per watt

$0.75 per watt

Balance of System

$1.50 per watt

$1.00 per watt

Total System Cost

$2.00 per watt

$1.75 per watt

Example by the author.

Moving costs to the factory floor will reduce overall system costs and make solar energy more competitive long term. And it will help build the competitive advantage solar companies are looking for.

The new sales avenue in solar

In recent years, SunPower, First Solar, and Canadian Solar leveraged their panel production to move downstream into project development. This gave them the test platforms needed to build the engineered systems I highlighted above. It may also allow them to be more opportunistic in full solar project development, since they can sell pre-engineered systems to customers.

This is likely what we'll see in 2017, based on comments from both SunPower and First Solar. Particularly in international markets, they'll be selling pre-engineered solar systems, which bring in more revenue than just selling solar panels, but have less revenue and risk than building and financing full solar projecst.

Engineering the full solar solution also provides them with bigger differentiators from competitors. As smaller, less integrated rivals fight to buy commodity components, they won't see the same  cost savings as more integrated suppliers, giving an advantage to companies moving more labor to the factory floor.

This is why First Solar and SunPower are two of the leading solar companies. They're well ahead of competitors in developing the solutions the industry needs long-term. And that's where investors should be focusing their capital in this high-potential space.