To really understand how the solar industry works, investors need to understand its cost dynamics. Cost-per-watt numbers may catch headlines, but efficiency is equally as important. And the dynamic between the two isn't explained well by companies who want to disclose enough information that investors can understand them -- while withholding enough so that competitors can't gain an edge.
So that leaves us to try to parse through the mumbo-jumbo to try to explain who has a competitive edge and the reason why.
All the cards on the table
We've established that cost per watt and efficiency are two of the three most important words in solar, along with bankability. If we start with efficiency we can break the companies into three categories. First Solar
Cost per watt is relatively simple for the manufacturers who provide this number explicitly. I am using Trina Solar's
Balance of system costs is a little more complicated and requires a few assumptions by anyone making a model. I've assumed that First Solar's balance of system cost per watt is $1.50, and others are adjusted based of efficiency (with 10% of BOS costs fixed). Efficiency is a good adjustment because land would be a significant portion of BOS costs and can be used to approximate other costs.
After that I make the assumption that a development costs $3.50 (based on published data), back out margins and double-check that they are reasonable, based on company financial data (they are). And that gives us the chart below, which should be in the right ballpark.
The margin would have to be shared between panel manufacturers and developers, but they're in line with what you would expect from each company. First Solar has the highest margin followed by Chinese manufacturers and SunPower.
So what?
Now that we understand the basics we can see how these dynamics might change in the future. Costs are falling for most manufacturers but at different rates. That will change the competitive landscape going forward.
In recent quarters Chinese manufacturers like Trina Solar, JA Solar
Company |
Q4 2009 Cost |
Q4 2010 Cost |
CPW Momentum |
---|---|---|---|
First Solar |
$0.84 |
$0.75 |
10.7%/year |
Trina Solar |
$1.24 |
$1.16 |
6.5%/year |
SunPower |
$1.91 |
$1.71 |
10.5%/year |
Over the next year the biggest change may happen at SunPower where the company is planning to cut cost per watt from $1.71 to $1.48 in 2011. That 13.5% drop in costs should help improve margins and put SunPower in a better competitive position. And if SunPower's plan to cut costs to $1 per watt by 2014 comes true it will put more pressure on manufacturers like Yingli Solar
Foolish bottom line
Picking solar stocks can be tricky but the first step is understanding a company's competitive position. First Solar is definitely the leader right now and its industry leading margins are a show of its power in the industry. But the dynamics will change as time goes on and efficiency leader SunPower has an opportunity to move ahead of Chinese manufacturers if they can't cut costs or improve efficiency.