Just a few years ago, First Solar (NASDAQ:FSLR) was the fallen star of the solar industry. The company's low-cost solar panels had been overtaken by Chinese commodity silicon solar panels that were more efficient, and suddenly the same price, or even lower, on a per-watt basis.
But in the last year or two, the company has refocused on R&D, and the investment is starting to pay off. Efficiency is improving, and an announcement earlier this week that First Solar had achieved an 18.6% efficient solar module was just the latest sign that the company's competitive position has changed.
Efficiency is the name of the game in solar
At the beginning of 2014, First Solar was producing solar modules that converted 13.5% of the sun's light into energy. This was well below the 14%-16% of multi-crystalline solar panels from Chinese solar manufacturers like Yingli Green Energy, Trina Solar, and JinkoSolar, some of the largest manufacturers in the world. First Solar had also lost its cost lead over Chinese manufacturers.
By the middle of last year, the company was still able to make money building solar projects, some based on contracts that were signed years earlier, but the stock and net income were in long-term decline as a result of stronger competition.
Management at First Solar knew they had to improve their product or risk the company failing. So in 2013 they bought the intellectual property General Electric had developed in thin-film solar and began rethinking their own solar technology.
The result has been simply astounding. In the first quarter of this year, average fleet module efficiency was 14.7% and the best line ran at 15.6%. That put it in line with competitors. But its trajectory toward higher efficiency has continued -- the best line in April produced 16.3% efficient modules, and this week's announcement shows that 18.6% efficiency is just around the corner.
To be clear, it will take time to rework manufacturing to increase fleet average efficiency to over 18%, but the roadmap is there. Given First Solar's expertise building solar power plants, the improved efficiency should help keep the company competitive for years to come.
Extracting value in solar
The efficiency improvements come just as First Solar is developing a new way to extract value from solar projects: a yieldco.
First Solar and high-efficiency partner SunPower (NASDAQ:SPWR) will soon launch 8point3 Energy, a yieldco that will buy their solar projects and own them long-term. A structure that gives the two sponsors incentive distribution rights allows them to collect more than half of the cash flow from these projects long-term (after including dividends from the shares they own).
Having a higher-efficiency product that will make First Solar more competitive in future project bids will allow it to push more assets down to the yieldco and grow payouts long-term.
It should come as no surprise that First Solar's partner in the yieldco, SunPower, is the highest-efficiency solar panel manufacturer in the world. These two are arguably the two best solar technology companies in the world, and that leadership is starting to show in the marketplace and on income statements right now.
The resurgence of First Solar
For years, I've been raising questions about First Solar's ability to stay competitive, but the recent efficiency improvements dispel most of those concerns. The future looks to be very bright for this solar manufacturer, and the yieldco will only help show that value to shareholders.
I think First Solar should be a consideration for any solar portfolio, and it's a stock I'm looking to add in coming weeks. That's a big turnaround from a company I thought was falling behind competitors not too long ago.