Solar Cells Info

by Brian Womack /Investor’s Business Daily / Dec 27, 2006

source: investors.com
http://www.investors.com/editorial/IBDArticles.asp?artsec=16&artnum=1&issue=20061227

The math isn’t complicated for the solar energy sector.  The industry wants to cut solar prices by roughly half to compete against traditional power utilities without government incentives.  SunPower, (SPWR) a major solar panel maker, has been a leader in this effort and recently announced one of the biggest acquisitions in the industry’s history to help the San Jose, Calif., company reach that goal.

The company plans to buy PowerLight, a firm that installs solar panels, for about $330 million. The cash-and-stock deal should close early next year, pending approvals. Together the companies will hold a stake in the key parts of the industry, from design through manufacturing to installation. With that breadth, the company hopes to find new ways to cut costs more quickly.

“I think it’s going (to be) a very powerful combined entity,” said Pierre Maccagno, an analyst with Needham. The firm said before the deal was announced that it wants to halve costs by 2012, an aggressive goal. The acquisition won’t push back that date, says Julie Blunden, vice president of external affairs for SunPower. It should help the company meet the deadline.

Installation Costs

The installation process makes up half or more of a final product’s cost. “It allows us to innovate faster,” Blunden said. SunPower makes arguably the most efficient cells in its market. The company uses cells to make solar panels.

The company’s technology wrings out of a cell 22% of the potential power the sun provides. The industry standard is 14% to 17%, analysts say. That means SunPower can use fewer cells to produce the same amount of power. SunPower, which dates back to the 1980s, spent 15 years focused on research and development of a solar technology that’s still not commercialized.

In 1996, the company made cells for a Honda (HMC) car used in a race with other solar vehicles. That helped push management toward the mass-produced, efficient cells the company markets today. SunPower has established itself in the residential market with sleek, simple designs that blend in with residential roofs. PowerLight claims a stronger commercial market position. It installs, but does not make, solar cells.

Jeff Bencik, an analyst with Jefferies & Co., has reservations about the merger. He says operating margin for installers can be about half of what manufacturers get, though it isn’t clear what PowerLight’s margin is. Although SunPower intends to boost PowerLight’s margin to match its own, Bencik will wait and see.

“It’s a concern for them,” Bencik said. “The proof will be in the pudding.” Blunden says the deal delays SunPower’s stated goal of 30% adjusted gross margins by late 2007 until late 2008 or early 2009. In the third quarter, adjusted gross margins were 25%. She says the merger is different from two competitors teaming up. Instead, PowerLight is SunPower’s customer.

That means SunPower already has received its thick margin from the panels PowerLight buys. Combine that operating profit with the installation piece and the margin stays intact. Of PowerLight’s sales, 20% should come from SunPower this year. That could rise by as much as 50% next year, Blunden says.

Rob Stone, an analyst with Cowen & Co., likes the deal. He says PowerLight has distinguished itself in the market for its intellectual property. “PowerLight got started by developing some unique products,” he said.

One product enables solar installation on a flat roof that also acts as insulation — and without putting holes in the roof. Another device efficiently points the panels toward the sun as it moves across the sky. The acquisition also puts SunPower in front of customers so it can gain knowledge about how to better design its products, says Stuart Bush, an analyst with RBC Capital Markets.

Another factor: The installation business is largely fragmented, with a lack of standards and small mom-and-pop shops. SunPower and PowerLight can cut waste by unifying the installation process. All this is crucial to halving costs. “They eventually make the whole cost of the system cheaper so that it eventually will be an attractive alternative,” Bush said.

California Solar

Germany and Japan started incentive programs back in the 1990s that helped jump-start the industry. Then a few years ago, states, including California and New Jersey, started spending billions of dollars on incentive programs. California’s program will continue for roughly the next decade.

In 2005, Congress passed a federal program that will extend to 2008. Together, those programs get the cost per watt down to rates more typical of utilities.

Stone says prices could fall 40% and possibly be competitive. Users might sign up for solar because of its environmental benefits and stay with it for price stability. Still, it’s difficult to know exactly how much prices must fall for solar to be competitive. It’s not certain what will happen to the price of power from traditional utilities.

SunPower has been cutting costs by using less silicon to produce the same number of cells. Its new line cuts cells from silicon wafers that are 190 microns thick, down from 240 microns a year ago.

Another factor: The raw cost of silicon is expected to come down as more manufacturing capacity is created in the next few years. Nevertheless, the industry is happy the incentives have given it a solid chance, Blunden says. “The industry as a whole is just turning the corner,” she said.

The acquisition could herald more consolidation in the industry, a sign of maturation, says Rhone Resch, president of the Solar Energy Industries Association, a trade group. “Solar is moving from niche market to mainstream,” Resch said.