The solar market has finally reached something of a steady state now that energy from the sun doesn't need to be subsidized to the level it was five or 10 years ago.
So, now that solar energy is competitive with the grid, we should see an explosion of growth in the industry. Once solar is the most cost effective form of energy, the demand curve should shoot higher, and margins should expand as well. But how big can solar be?
A bold prediction of solar growth
Solar industry research firm Solarbuzz recently predicted that solar installations will grow from 37 GW in 2013 to a whopping 100 GW in 2018, a 22% compound growth rate.
This isn't out of the realm of possibility, and continues growth projections of 40 GW to 45 GW from HIS late last year. It's impossible to know exactly how much solar will be installed in any year, but it's important to know how the industry will meet its growth goals, and who will win in the process.
Keys to growth
If the solar industry is going to grow to 100 GW and beyond, it will have to continue to lower costs. There's still room to squeeze costs out of the panels themselves, but the bigger opportunity will be lowering soft costs through easier permitting and increasing efficiency to squeeze more out of each inch of space.
On the soft-cost side, SolarCity (SCTY.DL) is trying to standardize rooftop racking with its acquisition of Zep, and has lowered installation time in the process. First Solar (FSLR 0.43%) has already lowered soft costs enough to build projects for less than $2 per watt.
Everyone is working on efficiency, and that'll be a differentiator for manufacturers. SunPower (SPWR -1.51%) already makes a 21.5% efficient panel, and will launch a 23% efficient model next year. First Solar is one of the least-efficient manufacturers today, but plans to make 19.5% efficient modules by 2017. In China, JA Solar (NASDAQ: JASO) recently announced cells that passed 19% in conversion efficiency.
As costs come down, efficiency becomes more important, and keeping up will be a key for every manufacturer and a driver of growth.
Who wins in solar
If explosive growth takes place, the industry will go from a demand-driven market to a supply-driven market. In short, that means that bargaining power will shift from buyers or installers of solar panels to the panel producers themselves.
The power shift makes sense because about 70 GW of solar capacity exists today, and it's just over 50% utilized. But if installations grow to 100 GW in 2018, demand will exceed current supply, and even more capacity will be needed. Since China is no longer handing out debt by the billions to build solar plants, it's unlikely a flood of new panels will hit the market unless the economics are there, meaning higher margins.
With that dynamic in mind, I think panel makers who have the ability to be installers will be in the best position. The ability to build downstream assets will also lower risk.
SunPower and First Solar have the largest downstream exposure, and SunPower's efficiency lead is strong. So, they're solid bets for a growing market.
JA Solar and Trina Solar (NYSE: TSL) are two of the better Chinese suppliers, and they're profitable without drowning in debt. If panel margins go up significantly, we could see a sharp rise in profits.
A rising tide will lift most solar stocks, but still look for the highest quality players to maintain a lead on competitors. Quality is a key to financing solar projects, and that's not going to change as the industry grows.