Image source: SolarCity.
Global solar demand is expected to grow about 25% this year to as much as 57 gigawatts as the solar boom continues to take hold. That's great for most of the industry but could create problems for those who rely on others for critical solar components. Manufacturing capacity is starting to be stretched and solar panel prices, which were once dropping like a rock, could rise this year.
For SolarCity (SCTY +0.00%) and Vivint Solar (VSLR +0.00%), who buy most of their panels from China, this could undermine their efforts to cut costs in 2015 and beyond. Here's what to watch for from these two and others in the industry.
Costs are dropping
Over the past few years, one of the most remarkable things about SolarCity (SCTY +0.00%) and Vivint Solar (VSLR +0.00%) has been their ability to cut costs. In the case of SolarCity, the cost to install a watt of solar panels has fallen from $4.73 in 2010 to $2.86 in the fourth quarter. A lot of that savings came from lower solar panel prices.
Image source: SolarCity Q4 2014 earnings presentation.
To continue to grow their installation base and overcome a likely reduction in tax subsidies in 2017 they'll have to continue to cut costs going forward. But one thing that may make that difficult is solar panel prices.
The solar industry has gone from being massively oversupplied with solar panels to being constrained in some parts of the market. SunPower (SPWR +0.00%), for example, has been on allocation for over a year and is building two major capacity expansions right now just to meet demand.
For SolarCity and Vivint Solar, they're reliant on market prices for solar panels remaining low. But key suppliers like Trina Solar (NYSE: TSL) and Yingli Green Energy (NYSE: YGE) may start seeing more demand than they can handle and also see lots of benefit in building projects themselves. At the very least, the cost of solar panels is starting to be a concern for installers.
Will solar panel prices jump in 2015?
In 2014, we started to see the effects of increasing demand on the solar manufacturing industry, but solar panel prices stayed flat for the most part. According the GTM Research and the SEIA's 2014 Solar Market Insight Report the cost of panels rose slightly from $0.72 per watt in Q4 2013 to $0.73 per watt in Q4 2014. Next year, demand is expected to increase up to 25% to 53 gigawatts-57 gigawatts, so there could be further pressure on prices and 2016 could be even worse if demand continues to grow.
Offsetting some of this increased demand will be increased production from some of the manufacturers with the financial ability to expand. JinkoSolar (JKS 3.70%), Canadian Solar (CSIQ +0.48%), Trina Solar (NYSE: TSL), and SunPower are just a few who are expanding capacity in 2015.
The question is whether or not demand will grow faster than supply, especially for the highest quality suppliers, which could lead to higher prices. Long-term, we're likely to see demand grow more quickly than supply and companies are starting to plan for the higher prices that could bring.
Adapting to a changing market
The solar industry has seen the shortage of modules coming for some time. In fact, SolarCity chairman Elon Musk pointed to it as one of the drivers of SolarCity's Silevo acquisition last year. It's why SolarCity is building a one gigawatt factory in New York as quickly as it can.
It's also why SunPower finally felt comfortable enough last year to expand its manufacturing capacity. In November, the normally conservative company announced plans to triple manufacturing capacity (including concentrated products) in the next five years in anticipation of growing demand and higher panel prices and margins. Part of those growth plans include investing in the U.S. residential solar market, meaning greater competition for SolarCity and Vivint Solar.
Image source: SunPower Analyst Day presentation.
If the cost of third party panels does rise, the increased competition from SunPower and other panel manufacturers could eat into SolarCity and Vivint's margins. They'll have to adapt and SolarCity is doing so by further vertically integrating.
What to watch this year
Investors should keep an eye in reported costs and retained value per watt for leases at SolarCity and Vivint Solar in 2015. If they're not able to lower costs to stay a step ahead of the competition they'll see lower value generation per watt and that could hit their highly valued stocks hard.
Meanwhile, higher module prices could be a boon for SunPower, Trina Solar, JinkoSolar, Canadian Solar, and others who manufacture panels and sell them to installers. The balance of power changes rapidly in solar and this year I'd rather be on the side of the manufacturer, which is gaining the upper hand as demand for their products increases.
