While solar stocks such as First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWRA) have taken a beating of late, a new analysis by Richard Keiser, former analyst at Sanford Bernstein and now President of Keiser Analytics, predicts a significant acceleration in solar PV installations in the U.S. over the next 5 years. The driver of this trend is the continued decrease in solar installation costs.
“While the recent price declines of solar PV equipment are well known,” explains Mr. Keiser, “what is less appreciated is the size and distribution of U.S. electricity consumption. First, the United States consumes approximately 4 trillion kilowatt hours of electricity per year, more than all of Europe combined. Second, the distribution of U.S. electricity consumption begins to increase exponentially at $0.18/kWh. As the cost of distributed solar electricity—i.e., installations on businesses and residences—reaches that level and below, the potential demand for solar PV will also increase exponentially.”
Supply-Demand Balance Key
“The most critical issue facing solar sector investors today is determining how and when the current supply-demand imbalance will be closed,” states Mr. Keiser. “To a limited extend this can come from deferring the start-up of new capacity, but largely, this must come from a pick-up in demand. The United States and China will be critical drivers of that pick-up, and I believe the speed at which this will happen is being underestimated.”
The costs of solar equipment and solar installations have plummeted over the last two years. During most of 2010 and 2011, residential and business solar PV installations cost between $5 and $8 per watt, resulting in an electricity price above the price paid by most consumers. However, as distributed solar PV installation costs trend into the $3-$5 per watt range and below—some business installations are already below $3 per watt—solar electricity becomes increasingly competitive with retail electricity prices. 
“We are about to cross an inflection point for solar PV demand in the United States,” states Mr. Keiser. “Over 300 billion kWh of U.S. electricity—equivalent to 200GW of solar PV capacity—is consumed between $0.15 and $0.20 per kilowatt hour. As distributed solar PV installation costs trend below $4, businesses and residents paying prices in this range will be able to save money by installing solar installations on their premises.”
One or More Solar Companies Likely to Fail
To complete the analysis, Mr. Keiser combined local-level electricity prices from the U.S. Energy Information Association (EIA), with state-level irradiation data from NREL. The data were analyzed segment by segment, state by state, to determine the points at which the NPV of a solar PV investment becomes positive relative to the NPV of electricity purchases from the utility. According to Mr. Keiser, the analysis must be done on a market-by-market basis, because of the wide variation in both retail electricity prices and irradiation.
As far as company picks, Mr. Keiser is not ready to identify winners: “The solar industry is in the middle of a broad shake-up. One or more of the leading solar companies will likely fail, and filling the current capacity gap will take time. When an industry experiences this level of pricing pressure, it impacts all companies negatively, and we need to see signs of stabilization before asset values will increase. The rebound will come, but it will be asymmetrical.”
A copy of the analysis and conference call information is available here: www.keiser-analytics.com/research.Notes: