Are First Solar’s Thin-Film Panels Falling Behind?

Price has always been a key selling point for First Solar’s (NASDAQ:FSLR) panels. The firm uses thin-film cadmium-telluride (Cd-Te) technology and its panels have typically cost at around 20% less than comparable polycrystalline panels. Over the past two years however, the firm has seen its price advantage practically erode as stiff competition among Chinese manufacturers as well as lower polysilicon costs have driven down the prices of silicon-based panels sharply.

What is quite concerning is that First Solar’s panels are actually less efficient and don’t offer too many other advantages to justify their similar (or higher) price points compared to polysilicon panels. This has reflected on the results of the firm’s panel business as well. Panel sales to third parties declined from around $1.5 billion in 2011 to around $325 million in 2012. ^[1] Here we examine the implications of the closing price gap for the company and what it is doing to stay competitive.

First Solar’s Panels Have Lost Their Price Advantage And Still Have Lower Efficiency

The prices of polysilicon, the primary raw material used to manufacture polycrystalline solar panels, have dropped from around $475 in 2008 to current levels of below $20. This combined with competition among Chinese manufacturers has resulted in polycrystalline panel prices falling by over 75% over the last four years. Last year alone, polycrystalline panel prices fell by more than 30% to under $0.70 per watt. In comparison, First Solar’s panel cost per watt has declined from around $0.73 to around $0.67 (barely 10%) over the past year.

Polycrystalline panels now have prices that are similar to First Solar’s panels and they still hold an edge in terms of conversion efficiency and durability. First Solar’s panels have an average efficiency of 12.9% compared to 14%-15% for typical polycrystalline panels. Higher efficiency panels convert more sunlight into electricity and have a smaller size (surface area) for every watt of rated power output, meaning that they occupy less ground or rooftop space. Conversion efficiency has also become the most recognizable specification of a solar panel and is an important factor in marketing and advertising.

Around five years ago, solar panels accounted for about two-thirds of a solar power system’s cost but now as prices have fallen, panels account for just about 30% of a system’s cost. ^[2] The remaining 70% of the costs come from structural components, electrical equipment and labor and other soft costs. Balance of systems (BOS) costs are a function of the size of the panels. This means that First Solar’s larger and less efficient panels would require more structural and mounting equipment which would drive up the overall systems cost.

What Is The Firm Doing To Stay Competitive?

Improving Its Panel Technology: In all fairness, if we compare First Solar to other thin-film manufacturers, its progress has been impressive both on cost and efficiency fronts. The firm’s conversion efficiency improved from around 12.2% to around 12.9% over the last year and the firm also holds the world record for Cd-Te silicon cell efficiency. However, this is not enough since First Solar has to compete with various technologies in the marketplace and consumers ultimately care about cost and performance and not the technology on which panels are built.

Over the last year, the firm has upgraded its manufacturing process by incorporating procedures such as laser scribing and improving semiconductor deposition technologies, which should help improve efficiency. It also entered into a two-year collaboration and licensing agreement with Intermolecular Inc. (NASDAQ:IMI), which is a research firm focused on the semiconductor space. The two companies will work together to develop new approaches to improve conversion efficiency. (See Also: First Solar Partners With Intermolecular To Boost Panel Efficiency)

Building Large Scale Solar Power Plants: First Solar has been focusing on building large scale solar power plants by providing panels as well as services such as design, engineering, procurement and construction. Since these solar farms are built on large swaths of land, space is not really a constraint and efficiency is unlikely to be a key criterion for buyers who ultimately care about the plant’s performance and its price per megawatt of generation capacity. The shift to building power plants has worked out quite well so far and this business is now the primary driver of the firm’s panel sales. Overall system sales (including panels used) was around $3 billion in 2012, up from around $1.25 billion in 2011.

However, it still remains to be seen whether the firm can sustain its edge in the power plants business since many of the projects for which revenue is being recognized currently were negotiated a few years ago at attractive rates when conditions in the solar market were relatively bright. If silicon panel prices continue to fall, First Solar could find it difficult to compete with other developers who use silicon panels since thin-film panels would become more expensive and would also have greater balance of systems costs driving up the overall cost of its projects.

Entering New And Emerging Markets For Solar: First Solar’s panels do have certain advantages. They perform well under a variety of lighting conditions and also have a performance edge in extremely hot climates since their output holds up better compared to silicon-based panels which experience some performance degradation as temperatures soar. While this attribute of Cd-Te panels is unlikely to be much of a selling point in First Solar’s primary markets such as North America and Europe, it could give the firm an advantage in markets such as Africa, the Middle East and India. These markets currently account for less than 5% of the company’s business and could provide some opportunity for growth.

We have a $27 price estimate for First Solar which is around 7% below the firm’s current market price.

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