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Over the last couple of years, Canadian Solar (CSIQ 3.06%) has made an impressive transition from being simply a solar panel manufacturer to a more vertically integrated energy supplier. A big part of that was buying Recurrent Energy early last year, bringing 4 GW of pipeline to the solar panel maker.

Long-term, buying Recurrent Energy isn't enough for the company to be successful. It has to use the development arm to win and build projects on its own. That will help create captive demand for solar panels and potentially bring more cash flow and gross margin to the company. And one win, in particular, highlights where Canadian Solar may be going.

Mexico is a big opportunity for Canadian Solar

In April, Mexico conducted an auction for new energy, including renewables and fossil fuels. Solar energy won three-quarters of the contracts at just $0.51 per kWh unsubsidized before adders based on location and other factors. The cost of energy would be competitive in almost any country around the world, and Canadian Solar was one of the winners in the Mexico bid. 

Canadian Solar will build 63 MW of projects in Mexico with a 15-year power purchase agreement and 20-year Clean Energy Certificates, with connection to the grid expected to be September 2018. The contract was officially signed in August.

What's key about this contract is that it was a competitive bidding process and shows how low Canadian Solar has brought its prices. That competitiveness and the vertical integration of the business are good signs for the company's long-term success.

Work left to do

Winning bids in competitive markets is big, but the next steps might be even harder. Solar panel manufacturers need to start designing panels that are integrated with racking and inverters for residential, commercial, and utility markets.

Canadian Solar has taken a step in that direction with AC modules with microinverters and residential solar kits. What still needs a major step forward is the utility scale solution for ground mounted systems. SunPower and First Solar (FSLR 10.78%), major competitors in the markets Recurrent Energy competes in, both have pre-engineered power blocks, with next generation versions coming soon. They'll easily be able to design power plants with standardized components to lower costs.

First Solar, in particular, has designed its next generation power plant to be more efficient and even offer the option of energy storage. This will help the company lessen the variability of energy sent to the grid, increasing its value to utilities. And SunPower has developed a robotic cleaning solution that lowers water usage and increases energy production.

These may seem like small improvements on existing designs, but every little improvement is key in solar energy. A 1% or 2% difference in energy production or bid prices can be the difference between winning a contract and not. Canadian Solar took a step in the right direction winning the contract in Mexico earlier this year; now it needs to keep that momentum and develop the capabilities that will keep it competitive for years to come.