2013 Is the Year of Solar: SunPower Corporation (SPWR), First Solar, Inc. (FSLR)

Page 1 of 2

We’re on the cusp of something huge, and Wall Street is just starting to figure it out. The most abundant energy source in the history of man has finally become economically viable and will soon become the most installed new energy source on the planet. You don’t have to dig it up the ground, it doesn’t give off harmful gases, and it can even generate power from your roof.

What is this magical power source? The sun.

SunPower Corporation (NASDAQ:SPWR)

How far we’ve come
More than a decade ago, Germany decided it was time to make a big bet on solar. The country heavily subsidized the industry in effort to make it economically viable long-term. The bet paid off — if not for Germany, certainly for the rest of the world.

Today, highly subsidized markets are giving way to unsubsidized (or less subsidized) markets where solar can compete on its own with traditional energy sources. The cost to produce a module has fallen 54% in the past three years, and the cost to produce solar energy is now less than it cost to buy it from the grid in some places. Going green isn’t just a political game anymore — it’s economic reality.

You don’t believe me?
For solar electricity to be economically viable, it needs to be less costly than existing power. We should compare it with new, peak generation, since that is what it offsets, but the industry is held to a higher standard that requires costs to be less than what you pay to power a light bulb. Is solar cheaper than your existing power?

Today, in the U.S., the average residential electricity bill is for $0.12 per kilowatt hour, and in California the cost is more than $0.15 per kWhr. Based on those costs, solar is very competitive.

SunPower Corporation (NASDAQ:SPWR) won a contract to build a 100-megwatt power plant at a $0.104-per-kWhr rate last year. This year, First Solar, Inc. (NASDAQ:FSLR) signed on for a project in New Mexico that will pay a 5.79-cent-per-kWhr rate, or about 8.5 cents per kWhr after incentives. That’s still well below the cost of electricity in the United States.

Where we’re going
Now that costs are competitive with the grid, the sky is the limit for solar. Reduction in panel costs have driven the past decade of overall cost cuts, but the next step is to reduce the balance of system costs, including things such as wiring, inverters, permitting, and land. As these costs come down, so will the cost to install solar from residence to utility.

Just how big the market can become in the next decade is anybody’s guess, but it will be huge. China plans to have 40 gigawatts installed by 2015, Saudi Arabia is eyeing 100% renewable energy and is starting with a $109 billion investment aimed at installing 40 GW of solar, and the U.S. is likely to be a 10 GW-per-year country by the end of the decade. That’s just three countries; imagine what the rest of the world will install.

The next step for panel manufacturers is to return to profitability. We’re starting to see steps in that direction from SunPower, and First Solar is already there. When companies return to profit and the industry sheds the dead weight dragging down prices, we’ll see an explosion in revenue and profits for the winners, which means rising stock prices. I think there will be at least three 10-baggers from the industry over the next decade. The hard part is picking which companies these winners will be.

Page 1 of 2