A combination of falling cost and increasing efficiency is turning solar into a genuine contender for the fuel source of the 21st century.
That’s the technology angle. Look at it from a different point of view, like the long-term consequences for the energy market and the geopolitical implications it has, and it turns into a totally different story.
And one that cannot be ignored.
Andrew Lockley gives a more detailed look at the solar industry below – to explain exactly how it works, the key trends you need to understand and the companies involved.
More efficient panels won’t change solar’s economics – here’s what will
Solar is going to eat the world. It’s the must-have energy technology for your portfolio. Here, we’ll be taking a deep dive into the technology and its market. We’ll be looking at some individual firms, too. It’s not my intention to provide specific recommendations on which stocks you should or shouldn’t buy, but I hope you’ll find this article useful when it comes to evaluating the market as a whole.
Solar panels are becoming ubiquitous. Even in cloudy northern Europe, they’re still a viable power source. The UK is generating up to 16% of its electricity from solar – a figure which will only increase as more are sold – because panels rarely go wrong (especially well-made ones). However, whether quality is worth paying for is moot – prices are falling so fast that it may be best to think of panels as essentially disposable items. The current market for solar panels consists of a confusing array of panel manufacturers. Picking through this muddle is tricky, so below we’ll go through the basic economics of the products and the market.
Firstly, we need to get to grips with a key concept – efficiency. This has nothing directly to do with the cost of a solar panel. It’s all about how good it is at turning sunlight into electricity. It’s impossible to make a solar panel that turns all light energy to electricity – but if you could, it would be 100% efficient.
Existing solar panels are fairly inefficient. The problem is, they can only “see” in one colour and that’s red. Red light doesn’t have much energy – which is why you don’t get sunburn when you’re wearing factor 50 sun cream, no matter how sunny it is.
As far as a solar panel is concerned, any light that’s towards the blue end of the spectrum gets “seen” as red. Despite all the extra energy of blue light, the solar panel never generates any more electricity than it would if all this light was red. It’s like throwing away the leftovers after every meal – regardless of whether that’s a few crumbs or 3/4 of a turkey. This leads to a colossal waste of energy – at least 66% in theory, and around 80% or more in practice.
Another way to think about it is like a parking meter that only takes one coin. You have people trying to pay with all kinds of denominations – from 1p to £2, and you have to try and capture the most money with your parking meter. Set the parking too cheap, and everyone can pay – but you get very little money. Too expensive, and only people with the biggest coins can pay. In our model, the most common coin would be around about 10p – towards the lower value (red) end. So that’s the size that panels are “tuned” to.
The key to fixing this is producing 3rd generation solar panels that can “see” more than one colour of light. By using the extra energy in the bluer colours, they become far more efficient. We’ll look at these technologies in a subsequent article, but first let me explain why (paradoxically) efficiency isn’t a big problem for many investors.
Below, you can see a graph of the drop in prices of solar. As you can see, the price is falling in a predictable fashion as the technology scales up.
You can also see the decline is steep – and therein lies the problem for those chasing efficiency. Even if we assumed that the efficiency of a solar cell was at the theoretical maximum (of 86%) then the maximum gain from efficiency-tweaking is only 4x from today’s prices – and falls far beyond this are expected already. Fundamentally, it doesn’t matter what the efficiency is as long as the price compensates.
The message is pretty clear: manufacturing/install costs, not panel efficiency, is the driving force behind solar’s unstoppable march. As long as the price keeps falling, solar PV will still eat the world.
Why? Because solar has the highest total capacity of all forms of renewable energy. There’s an awful lot of sunlight – far more than wind. Furthermore, costs are falling faster than with other technologies.
Solar’s pretty expensive. But that’s just not important. It’s the slope that matters. Geothermal energy is lovely if you’re in Iceland, but not only is it fairly hard to find, it’s actually getting more expensive – not less. By comparison, solar is on a near-vertical drop – and it’s that which foretells the future.
Let’s take a brief look at the current technology available. There are three different types of solar panels at present, and they all look different to a trained eye. After reading this, you should be easily able to spot them on people’s roofs.
You can recognise the monocrystalline cells (these are more expensive/efficient) as they’ve usually got clipped corners and a black finish. This is because they’re cut from a single, cylindrical silicon crystal – just like a computer chip. These are unfussy about temperature, making them ideal for sunnier climes and big temperature swings. However, they are fussy about light quality and need to be oriented carefully to get the best out of them.
By contrast, the rectangular, bluish ones are normally the cheaper ones (known as multi or polycrystalline). An example manufacturer is Canadian Solar (who produce in China). These are less efficient but the price roughly makes up for it – keeping the market in broad balance.
Thin-film panels are generally even less efficient – despite being known as 2nd generation – and these have largely fallen out of favour, particularly in small installations (where space and lifetime are an issue).
However, they’re available in a variety of different chemistries – and despite their recent weak performance (see graph below), they’re improving markedly. An example thin-film firm is First Solar. Its low-efficiency technology is cheap for great big solar farms. However, when it comes to scale, you need to look out for supply constraints to the esoteric doping element (Terrilium) it uses – which is as rare as platinum.
First Solar has recently taken a battering from the Chinese, so has retrenched to improve efficiencies.
(An important note, here – the 2nd generation film technologies are probably much more suitable for mass production, and it’s only a matter of time before someone gets this “roll-to-roll” process cracked, meaning solar cells can be made like newspapers and are printed.)
What are the investment implications?
If you’re investing in utilities, then the choice between these technologies really doesn’t matter. Solar farms will just buy whatever is good value. Progress in efficiency for pure utilities isn’t critical – as panel costs are only one component of total costs (panels are now less than half the total cost).
As far as utilities are concerned, the price will fall regardless of whether efficiency progresses and regardless of what technology wins out.
Secondly: in the near term, it’s genuinely difficult to call which of the panel technologies is likely to be the winner. Assuming no rapid breakthroughs, my personal view is that the superior performance of monocrystalline systems will lead to economies of scale and thus downward price pressure. But, quite frankly, I could easily be wrong – and any price falls could see competing technologies forced to innovate too. For a real breakthrough, you’ll have to wait for the roll-to-roll processes to be developed. Once this technique becomes commercial, it’s going to turn the market upside down.
In conclusion: don’t get hung up on panel efficiency – cost matters much more. There are plenty of great firms in the existing market, and it will take a long time before any breakout firms become a threat (we’ll look at why, later). In reality, anyone with particularly efficient technology is more likely to get bought (or just help the whole market grow) than they are to become a direct threat to utility or integrated firms.
I’d be interested to get your views here. I’ve genuinely struggled to choose between firms with a fundamentally differing approach, here. Thin-film solar has huge potential, but at present it’s just not facing up to crystalline silicon when it comes to raw economics. Even when choosing between the two crystalline technologies, it’s very difficult to work out who’s got the edge.