First Solar’s (NASDAQ:FSLR) photovoltaic (PV) solar systems business has grown from strength to strength over the last year, outperforming the modules division in terms of both revenues and profits. The business is strategically important for the firm, enabling it to carve a niche for itself by building large scale solar solar farms, moving away from the increasingly commoditized solar modules market. Here we provide a brief summary of the business and its prospects going forward.
Background Of The Business
First Solar began focusing on the systems business just a few years ago through a series of acquisitions beginning in 2007 that gave it access to engineering, procurement and construction (EPC) resources as well as relationships with large electric utility firms such as Pacific Gas & Electric.  The systems business provides end-to-end solutions for building and maintaining large scale solar power plants, with services that include identifying land for projects, getting necessary approvals and providing EPC services. The firm uses its Cd-Te thin-film modules in projects that it builds while outsourcing the balance of systems equipment like inverters and switches.
Strategic Importance of The Business
- Why We Reduced Our Price Estimate For First Solar
- Why Have Solar Stocks Been Underperforming This Year?
- Reviewing First Solar’s Q1
- First Solar Q1 Preview: Bookings & Efficiency Improvements In Focus
- Why We Are Bullish On First Solar
- What Is First Solar’s Fundamental Value Based On Expected 2016 Results?
The business is attractive to the firm on two fronts. For one, it is very profitable. Secondly, it provides an attractive avenue for the firm to sell its modules. Cd-Te thin-film modules have a disadvantage in terms of efficiency and are becoming a hard sell in rooftop applications as the price difference with higher efficiency polycrystalline modules continues to narrow. However, Cd-Te modules are better suited for utility applications due to their strong performance in a variety of climatic conditions, making them an ideal fit for First Solar’s systems business. (See Also: A Comparison Of Solar Technologies And What They Mean For Companies) Given that the firm provides a packaged solution that includes modules and EPC services, it helps to offset the efficiency disadvantage that the firm faces in selling standalone modules.
Firm Can Capitalize On Rapidly Growing Market
Utility scale solar projects have relatively short construction lead times and are seen as the quickest way to add large-scale electricity generation capacity. This gives them an advantage over coal and natural gas fired plants which require more time to build due to engineering and regulatory complexities. Additionally, solar power is also becoming more affordable. Utility scale systems prices in the US have fallen by nearly 30% since Q3 2011 to around $2.40 per watt. In markets like Hawaii that have high electricity prices, solar power has already reached grid parity. These factors have contributed to solid growth in utility scale installations. As of December, global utility-scale PV installations for 2012 touched 8.5 GW, more than double the capacity installed in 2011.
The firm’s track record in delivering large scale projects and its sizable manufacturing capacity make it the go-to contractor for large scale solar farms in the United States. At present, it is constructing 5 of the 10 largest utility scale solar projects in the country.  Given the rising number of plants under maintenance, First Solar recently opened a centralized control center in Arizona for monitoring and controlling solar farms. The firm has a project pipeline of around 3 GW, located primarily in the United States.
Performance And Rivals
As of Q3 2012, the division clocked around $1.5 billion in revenues, growing around 200% year-over-year. Gross margins for the business were more than 35% in Q3 2012, compared to slightly negative margins for the modules business. Competitors in the utility scale solar space in the US include SunPower (NASDAQ: SPWR), a manufacturer of monocrystalline modules and EPC contractors like Quanta Power Generation.Notes:
- Quick Take: First Solar’s Acquisition of Nextlight, Greentech Media [↩]
- List Of Top 10 U.S. PV Projects Under Construction Dominated By First Solar, Seeking Alpha [↩]