Not All Solar-Panel Makers Can Shine Brightly

Jay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Solar-panel makers probably saw the worst of their industry in 2012. While increased solar-panel supply resulting from more companies entering the market caused unprecedented price declines, demand for solar-panel installation in residential homes and commercial buildings did not pick up accordingly. Even with lowered costs, upfront investments for solar energy are still considered high, if not totally unaffordable, by average consumer standards. Such market dynamics can really work against solar-panel manufacturers, putting pressure on selling price but leading to no effective sales increase. The net effect has been weakened revenue performances for many solar-panel makers. However, in the backdrop of all this industry overcast, some solar-panel makers may have found a bright spot to shine by teaming up with power generators.

Among solar-panel makers, SunPower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR) and Suntech Power (NYSE: STP) have become more reliant on supplying their solar panels to solar-power projects developed and owned by either traditional utility companies or other emerging alternative-energy generators. As much as there is a bright prospect for solar energy in the long run, electricity generated from solar energy at present time, and likely for a foreseeable future, is at best supplementary to what can be reliably generated by coal- and gas-fired power plants. The lack of reliability may have somehow tainted the reputation of solar energy, especially in the case of self-generated electricity from solar panels installed by end customers, residential or commercial.

When using solar energy, to keep the lights on at night or on a cloudy day, there has to be backup electricity from traditional power sources. For now, rooftop solar panels still seem to be an incomplete energy solution. Without effective battery-storage technology to save and hold unused solar-generated electricity, customers currently have to depend on a practice called net metering, mandated by some state governments, to sell back their solar-generated electricity not consumed at any given time to a power company’s grid. With controversial government policies favoring one party over the other at times, it becomes difficult for solar-panel makers to predict solar-panel uses by individual consumers who may be discouraged by the complexity of adopting solar energy, not to mention financial affordability.

Therefore, it may work out better for solar-panel makers and their business if power companies can play a larger role in generating solar-powered electricity. Instead of letting customers crank out their own solar-powered electricity, power companies can build and connect their solar-powered generators to their existing electrical grid and have solar-generated electricity transmitted the same way to customers’ homes or offices. Some traditional power companies have indeed started developing their own solar-power projects, often referred to as solar farms. The goal is to generate solar-powered electricity that can account for a certain percentage of the total electricity capacity. Compared to how much individual customers may spend on rooftop solar-panel installation, power companies will most definitely order and consume solar-panels on a much larger scale.

Up to this point, solar-energy initiatives have been pushed forward mostly with solar-panel companies marketing directly to residential and commercial customers for rooftop solar-panel installation. The practice has had its impact, perhaps both socially and economically, but seems to have hit a snag as evident by recent anemic demand for solar panels. To make solar energy a viable, long-term business, solar-panel companies may have to go beyond selling solar panels to retail customers and their installation contractors and get more sales from power generators. There can be a clear advantage of supplying solar panels to power generators in terms of sale quantity, and potentially pricing.

SunPower, a smaller player relative to other notable names, has recently jumped ahead with the signing of a $2.5 billion worth, long-term contract to supply solar panels for two solar-generator projects to be owned by MidAmerican Energy, an alternative energy generator that sells electricity to traditional power generators, and part of Berkshire Hathaway. First Solar, the largest in the field, seems to have turned around the steep decline of its stock price likely by chasing sales to solar farms, including performing project building and maintenance for power companies. Suntech Power, the second largest solar-panel maker in terms of total assets, had the most sales revenue last year. The company has always structured its business to separately serve utility-scale power-plant customers in addition to retail-level consumers.

Solar-panel makers that fail to secure supply relationships with power companies may one day find themselves in the shadow of a potentially bright solar-energy business. While investing in solar-panel companies may be a bright idea as a general theme, individual investments may not all shine through if investors are unable to identify companies that have the ability to be strategically involved in generating large-scale solar-powered electricity, a task naturally belonging to power companies.


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