SolarCity's (NASDAQ:SCTY.DL) announcement that it would acquire privately held solar panel maker Silevo was greeted as a positive by Mister Market, with the stock price shooting up almost 19% following the announcement. Is SolarCity trying to be more like SunPower (NASDAQ:SPWR), which both manufactures and installs panels? What does this mean for low-cost panel makers like Trina Solar (NYSE:TSL)? The real question is, how will this play out?
I'll go ahead and spoil the surprise, and tell you the reality: Nobody knows, and anyone that claims that they do is wrong. There are implications for the larger solar industry, though, and we can draw some reasonable conclusions. Let's take a closer look.
Shifting winds in the solar industry
As Foolish colleague Travis Hoium wrote, this is part of a larger industry trend of verticalization, but there's more to the story. This acquisition corresponds to a number of shifts in the solar panel market, most notably the recent introduction of tariffs from 18% to more than 30% for panels made in China. Just a couple of weeks ago, SolarCity began diversifying its panel sources, with a purchase agreement with REC Solar.
With SolarCity having historically sourced its panels from Chinese panel makers like Trina Solar and Yingli Green Energy, diversifying its panel sources makes sense. The Silevo buy looks like an extension of that, with a plan to build a panel plant in New York that could support significantly more panel output than SolarCity needs today. But as Travis wrote, this is also part of the larger trend of specialist solar companies integrating more upstream capabilities, to become more competitive in a changing landscape.
Benefits of more efficient panels affect entire operation
What makes Silevo interesting is how its panel efficiency -- in the 18% range -- separates it from the panels that are typical of a SolarCity installation. Most SolarCity installs use panels that are about 15% efficient. While it doesn't sound like that much of a difference -- it's only 3% more efficient, right? -- that's actually not the right math. Silevo panels generate about 20% more power than the typical panels SolarCity uses. Even if the cost-per-watt is slightly higher, SolarCity will get a number of benefits, because each installation would require 20% less panels:
- Installation time and costs would be incrementally lower.
- Fewer panels needed means reduced shipping and inventory expenses.
- Fewer installed panels means less panels to fail and replace, reducing warranty expenses over the 20-year contract.
In short, the benefits of being able to use more efficient panels would flow through every part of SolarCity's operation, reducing cost and adding to the bottom line. And I would guess SolarCity wouldn't be buying Silevo if it wasn't convinced the cost-per-watt won't be similar, or even less, than it is paying today.
Trying to become SunPower? Probably not
SunPower is a leading panel maker which also installs panels for large commercial customers. This segment of the business is driven by its incredible high-efficiency panels (typically over 20% efficient), which can be expensive. But for a utility-scale installation which needs to eke every possible watt of power from the available space, efficiency wins out.
For residential customers and small local and regional installers, this isn't always a priority. SunPower's residential installations are not handled by SunPower directly, but by third-party installers (which often also carry other panel brands as well), so SolarCity and SunPower don't compete with one another directly. Add in that SunPower has a large international presence -- and is majority owned by French energy giant Total S.A. -- while SolarCity only operates in the U.S., and there's not a ton of overlap between these two companies today.
Could that change? Sure it could. SolarCity's entrance into higher efficiency panels, and ownership of a panel manufacturer, could change the game. But the reality is that that wouldn't happen for many years to come, if SolarCity chose to go that route. The New York plant is still at least a couple of years away from being a reality, and until Silevo's production capacity can support SolarCity alone, further speculation is a wasted exercise.
Non-integrated panel makers like Trina likely losers
Like Trina and Yingli. The reality is, global production capacity is still greater than demand, though with the rate of adoption in both residential and commercial/utility scale solar, that will change in the coming years. And while growing demand is good for panel makers, vertical integration in areas like the U.S. where demand is strong will only make panel pricing more competitive.
Trina Solar is making efforts to differentiate itself with more efficient modules like its recently announced Honey Ultra modules, which it claims achieve 24.4% efficiency. If this corresponds to panels that are more than 20% efficiency -- and at a reasonable cost-per-watt -- Trina could be in a decent position. However, further vertical integration like SolarCity's acquisition of Silevo will make it nearly impossible for Trina -- or Yingli -- to remain a preferred vendor for these integrated customers.
Again, it's impossible to tell how this will play out for SolarCity, but I don't expect this to lead to SolarCity becoming a focused panel maker like SunPower. SolarCity's focus is squarely on the residential U.S. customer, with some commercial installations, and I expect that to remain the case. The Silevo acquisition is probably just a step toward securing a supply of panels for the long-term, and utilizing its more efficient panels to drive other costs out of its operations.
Game changing? That may be a stretch. A smart move? Almost definitely. Only time will tell if it can integrate Silevo into the business, and not lose the advantages that seem apparent.