Efficiency Is The Priority For First Solar, SunPower

With Germany’s feed-in tariff cuts for the solar industry kicking in from February 2011 and Spain having announced 45% tariff cuts for new solar farms, 25% for large rooftop installations, and 5% for residential systems, solar players are looking at alternative markets for growth. The United States itself offers tremendous opportunity because solar demand is expected to grow 75% over the year in 2011. According to Bloomberg New Energy Finance, in 2009, Germany was the leader in global installed solar capacity with 9.79 GW, followed by Spain with 4.01 GW, Japan with 2.68 GW and the United States with 2.09 GW. But analysts estimate installed capacity within the United States to grow faster than international capacity growth, making it a more dominant market by 2014. Today, 23 GW, equivalent to the needs of 4.4 million households, is already under development in the country.

Further, as part of President Obama’s stimulus for renewable energy sources, the government announced $2 billion investment in two solar projects aimed at building the first large-scale solar plant in the country that will generate and store electricity for future use.

China too offers a major opportunity with that country’s National Energy Administration rolling out a ten-year plan for 15% of power generation capacity to come from renewable energy by 2020. China is also looking at ways to tax carbon to promote renewable power sources.

First Solar (NASDAQ:FSLR) is also looking at diversifying its market. In the recently reported quarter, nearly 50% of its revenues came from Germany. But the U.S. market has grown and is now the company’s second-largest market. First Solar is also expanding operations in China. However, plans to begin construction on a 2 GW plant in June of this year have now been delayed to early 2011.

The company reported Q2 revenues of $58 million with EPS of $1.84, compared with the Street’s projections of $543 million revenues and EPS of $1.61. During the quarter, production grew 19% over the year and 7% over the quarter to 344 MW. Conversion efficiency improved 3 basis points over the year to 11.2%, with the cost per watt falling by 5 cents over the quarter to $0.76. The company plans to improve these metrics and recently launched Series 3 photovoltaic module, an extension of its existing low-voltage platform that improves efficiency, lowers costs, and provides field energy yield advantages relative to polycrystalline or crystalline silicon. Worldwide efficiency levels for thin film solar cells are improving, as was proven by the researchers at the German Centre for Solar Energy and Hydrogen Research, which established a new record efficiency of 20.3% for thin-film solar cells.

For the full year, the company projects revenues of $2.5 billion–$2.6 billion with EPS of $7.00–$7.40. Analysts had forecast EPS of $7.12 on revenues of $2.62 billion.

The stock is trading at $127.85 with a market capitalization of $10.9 billion. It reached a 52-week high of $163.32 in September of last year.

SunPower (NASDAQ:SPWRA) reported Q2 revenues of $384.2 million, falling short of market estimates of $401 million. However, it managed to beat the Street’s projected EPS of $0.10 by reporting earnings of $0.15 per share.

SunPower’s silicon cells are the most efficient ones available, and during the quarter the company established a new world record of 24.2% efficiency. However, costs of power remained high. When adjusted for efficiency to compare with other 11% efficient thin-film panels, power from SolarPower panels cost $0.92 per watt. The company aims to reduce this cost to $0.71 by the end of this year. Compare that with First Solar’s thin-crystal power, which remains one of the cheaper ones at $0.76 per watt.

SunPower is focusing on markets beyond Germany to deal with the feed-in-tariff cuts. It recently announced 20 MW projects for several U.S. government properties and believes it can create over 1,000 jobs for construction of these projects. The company also partnered with Solar Ventures to build three solar power plants to generate 11.1 MW in the Piedmont region in Italy. It also completed Australia’s first and largest T20 tracker installation to power the world’s first high penetration, hybrid solar-diesel power stations, which will generate approximately 1,048 megawatt hours of solar energy per year and will produce 60%–90% of daily electricity needs in Western Australia.

SunPower expects Q3 revenues of $450 million–$490 million with EPS of $0.08–$0.15 compared with the Street’s projections of $0.13. For the year, the company expects revenues of $2.00–$2.25 billion with EPS of $1.35–$1.65 compared with the market’s projected EPS of $1.28. The market was expecting annual revenues of $2.1 billion with EPS of $1.28.

The stock is trading at $10.79 with a market capitalization of $1.1 billion. In October of last year, it touched a 52-week high of $33.70.

As demand for renewable sources of power continues, solar industry players will grow. However, margins will continue to come under pressure as Chinese solar panel manufacturers continue to flood the market with lower priced products. Maintaining higher efficiency for their products, translating to lower costs per watt, will remain critical to these players’ success.