SolarCity's (SCTY +0.00%) decision to acquire module manufacturing start-up Silevo for up to $350 million is a transformational shift for the company but it's also a massive risk on a business many have failed at. The module manufacturing business is littered with companies who started with immense promise only to be tripped up when moving from pilot plants to full-scale production. SolarCity plans to take Silevo from a 32 megawatt pilot plant in China to a 1 gigawatt production facility in New York, a massive leap of faith.
There are three main ways that SolarCity could be tripped up in its audacious goal to become a module manufacturer. If anyone can do it, it's an Elon Musk backed company but investors should know where the pitfalls lie. On Friday, I'll be back to show why this will be a good move for SolarCity, but today I'll focus on the risks.
Large community solar installations like this one will benefit from more efficient installations. Source: SolarCity.
Efficiency is key for SolarCity
The first question on my mind is whether or not SolarCity can reach the 24% cell efficiency goal it set out by the time production ramps up in two years. Today, Silevo makes cells that have "already crossed the 20% conversion efficiency threshold" but that's a long way from the goal two years from now.
SunPower's X-Series black module, an aesthetic look SolarCity will try to top. Source: SunPower.
If Silevo can hit 24% efficiency, it will be able to install modules for a lower cost per kW-hr by packing more power onto a roof and come close to the technology advantage SunPower (SPWR +0.00%) currently enjoys.
Since Silevo doesn't have much of a history of producing modules, much less at scale, there's the possibility that 24% isn't hit in two years, a huge technology risk. But outside factors need to be considered as well that could make the perceived efficiency advantage moot by that time. SunPower is already producing 25% efficient cells that will be scaled up when its new production facility is completed next year and GT Advanced Technologies (NASDAQ: GTAT) is launching equipment that will increase efficiency as well.
Qatar Solar Energy recently ordered 200 HiCz monocrystalline furnaces from GT that are expected to produce wafers for cells that exceed 22%. GT Advanced Technologies was one of the main equipment suppliers building out China's supply in the late 2000s, so it is making technology advancements that carry low technology risk, unlike SolarCity's Silevo process.
Not only is there a risk that SolarCity doesn't hit its own efficiency goals, there's a risk that the industry catches up by the time scale is built. Without an efficiency advantage, SolarCity might as well just buy modules from high efficiency suppliers through long-term supply agreements.
Can SolarCity build scale quickly and efficiently?
Costs will come from building out capacity and running the plant, which I see as two different risks for SolarCity. The initial risk is simply building out scale, something that isn't trivial, especially in the U.S.
Silevo says it can make efficient panels and can do so at a low cost, but what happens when you scale up from a 32 megawatt plant to a 1 gigawatt plant? The equipment gets bigger, the process becomes more complex, and costs can often get out of control as a result.
If SolarCity is successful, the company will make installers even more efficient. Source: SolarCity.
Going from 1 gigawatt to 10 gigawatts alluded to on the conference call earlier this week is even more audacious.
From a budget side, SolarCity said equipment would cost between $0.35 and $0.40 per watt of capacity -- meaning $350 million to $400 million for 1 gigawatt of production -- and that's before constructing a building or buying wafers, which aren't initially going to be made in-house.
That's a lot of investment into manufacturing capacity that neither Silevo or SolarCity have experience building at that scale. Meanwhile, SunPower, First Solar, Trina Solar, and many others already have capacity in place and are making incremental improvements on cost and efficiency.
The execution risk in just building capacity in a timely manner, within budget is the biggest risk SolarCity will initially face. GTM Research reported in a recent podcast that the deal with New York to subsidize a 1 gigawatt manufacturing plant is far from a done deal and every day it's delayed pushes back construction and puts efficiency and cost advantages in question.
Silevo's costs must be low or there's no point
Building a plant is one thing, but running it efficiently is another. The downfall of most ambitious solar module companies is in the cost structure of running a manufacturing plant. Solyndra thought it had great technology as well as low costs but before its plant was complete the price of silicon and traditional solar panels dropped like a rock, making its technology more expensive than competitors.
A similar story has played out for new technology like CIGS, amorphous silicon, and even new processes like the one Evergreen Solar once thought would lead to lower costs per watt. Silevo isn't completely reinventing the solar module, but its Triex technology isn't proven at scale and needs to make panels at or below the cost of buying them from another supplier.
That's not a trivial task considering the fact that some module manufacturers are building panels for less than $0.50 per watt and sale prices are lower than $0.65 per watt for commodity panels. Companies have taken years to hit those costs and SolarCity is hoping to be in the same ballpark from day one.
SolarCity and Silevo don't need to be lower cost than competitors if they're higher efficiency but they need to be close. Not impossible, but a big risk.
A high risk bet for SolarCity
At a minimum, SolarCity is going to spend $550 million to buy Silevo and build out capacity and there's no guarantee that the technology can be executed as planned, scale can be built efficiently, or that costs will be competitive with existing manufacturers when a plant is built.
At the very least, it's a big bet and for investors there are companies that already have capacity built and an established technology advantage.
I'll be back tomorrow with reasons why this is a great move for SolarCity. Stay tuned because there are always two sides to the story.
