Where is the Value in the Solar Cell industry? (Hint: It's not the cells)

A few weeks ago it was announced that First Solar's CEO, Rob Gillette, left the company abruptly. This is never a good sign. It usually means that either 1) something really negative was unearthed at the company, or 2) the board and the CEO had a major falling out that was so serious that the board was forced to dismiss him immediately, which is usually over something that fits into 1) First Solar (Nasdaq: FSLR) dropped 25%  in response, and is down 75% from its high of $170 earlier this year. First Solar has been under pressure for the last several months because of the free fall in PV panel prices this year, which have dropped over 40% due to plummeting polysilicon prices and excess inventories of PV panels being dumped in the market. First Solar, which makes CdTe thin film PV panels, which operate at lower efficiency (13-14%) than silicon PV cells (20-22%) but are less expensive to manufacture and install, are directly affected by price changes in the silicon PV market, and has had to cut the prices of its panels and seen its profit margins decline just like the silicon PV companies.


The massive price declines in the PV panel industry after the huge increases during the polysilicon shortages of 2007 - 2008 got me thinking about the relative value in the PV marketplace and in the supply chain. The analogy that struck me as that PV cells themselves are like DRAMs in the semiconductor industry; the PV panels are like memory modules, while the PV panel array is more like an electronics system. You could compare the PV array to a PC, or a disk drive array, or a solid state storage device, it really doesn't matter. The point is, the PV cell is a commodity product whose price is largely dependent on supply-demand imbalances and there is very little value derived from intellectual property. Sure, some companies might be able to extract a small premium for slightly better efficiency, or some novel form factor that makes the panels easier to fabricate and install, just like DRAM companies that offered a special organization, or were the first out with a particular package or module configuration would get a small premium in the DRAM market, but there is a lot of historical data on DRAM prices (and DRAM company profit margins) that shows how volatile and cyclical they are, and the volatility is driven mainly by supply-demand imbalances.


If you take the analogy one step further, think about who made the most profit in the electronic systems that incorporate DRAMs as their major memory component. Putting aside Intel's effective monopoly in the microprocessor market, because there is no analog to Intel in the PV industry, the companies that have captured the highest profit margins in the electronic systems markets have been the companies that added intelligence, communications, and specialized processing capabilities to increase the performance and functionality of the systems. It was the companies that developed PCI Express, SATA, InfiniBand, and FiberChannel, that developed WiFi and LTE wireless networking, that developed 10G and 40G Ethernet controllers, or 3D graphics accelerators. I think that the companies that will eventually capture the most value and have the most successful business models in the PV industry will be the companies that add intelligence and improved performance to PV arrays.


One of the areas where companies are adding value to the PV industry are microinverters and panel optimization devices, which change the architecture of the PV array from serially connected (think Christmas tree light strands) to parallel connected, which can compensate for variations in individual panel output caused by clouds, dirt, temperature, or other environmental variations, to optimize power harvesting and operate the array at is maximum power point (MPP) even as the operating environment changes. The economic payback derives from the enhanced power output from the PV array over time, which more than pays back the incremental cost of the additional panel electronics. Companies that provide microinverter solutions include Enphase, a pioneer of microinverters that is in registration for its IPO, and several venture-backed private companies such as SolarBridge, Enecsys, Involar, Direct Grid, and ArrayPower. Microinverters convert each panel's DC power output to grid quality AC power, compared to the legacy method of using a single inverter to convert the DC power output of the entire PV array to AC power at the connection to the grid, known as a grid-tie inverter. Performing the DC-AC conversion at the individual panel level provides greater flexibility in optimizing the power output of the entire array even if some of the panels are not operating at peak levels. Some microinverter companies like Enecsys incorporate wireless and wired communications into their solution to provide data collection from individual panels, enabling remote monitoring and troubleshooting to add further value to the array owner or operator.


There are several venture-backed private companies developing panel optimization solutions including SolarEdge, Tigo Energy, Azuray, and eIQ Energy. Panel optimizers do not perform DC-AC conversion at the panel, but rather perform DC voltage conversion to an optimum DC level so that the grid-tie inverter can efficiently convert the array DC output to grid-compatible AC power. Panel optimizers track and optimize the output from each panel in the array and thereby adaptively optimize the maximum power point (MPP) of the entire array, even with rapidly changing conditions like variable cloud cover. The panel optimizer is integrated into the panel or installed at the panel, and often features remote panel monitoring and communications to enable the array operator to monitor, troubleshoot, and control panel performance in real time.


These companies are generally early stage except for Enphase, and are establishing the market for their products. But if their solutions provide the performance and cost benefits they claim, they should be able to increase their penetration of the PV market and command pricing and margins that reflect the uniqueness and benefits their products provide.


Another area of added value for PV panels are performance enhancement products such as tracking systems and lenses for PV concentrator systems. Several companies are developing novel low cost concentrator optics that can be integrated into a PV panel and create higher power output levels or comparable output levels using fewer PV cells, thereby lowering the levelized cost of energy (LCOE). Some of the companies developing these products are Solaria, Banyan Energy, Skyline Solar, SolFocus, Energy Innovations, Morgan Solar, Covalent Solar, Prism Solar, and Stellaris. Again, the opportunity is to add value through increased power output and lower cost of power by integrating an innovative feature onto the PV panel or PV array that adds a relatively small incremental cost.


The point is that there are products being developed that can improve the efficiency and power output from a PV array that are separate from the PV array. They are symbiotic with the PV array, and may actually benefit from falling PV panel prices since that ultimately helps drive PV electricity closer to parity with grid electricity and expand the PV installed base. As long as the products provide significant benefits and can be improved to maintain competitive differentiation, they can capture value and remain somewhat insulated from PV panel price swings. The innovator can extract reasonable and defensible profit margins from the PV array "system" even if the cost of the PV panels themselves continue to decline. From an investor standpoint, these are the types of solutions that are worth considering and have the potential to generate outsized returns. These may be the companies that become the next Linear Technology of the PV industry rather than the next Micron.