During 2011, the falling price of solar panels and polysilicon have gotten a lot of publicity. The falling prices have put pressure on solar manufacturers from the U.S. to China, but heading into 2012, we should put more focus on the largest opportunity to cut costs for solar installations: balance of system costs, or BOS.

 While the panels themselves may be the largest single item in a solar installation, it's becoming a smaller percentage of the overall cost. According to a report from Greentech Media and the Solar Energy Industries Association, the average solar system cost $5.20 per watt in the second quarter of 2011. Costs ranged from $6.42 per watt for residential installations to $3.75 for utility-scale solar.

In the same quarter, Trina Solar (NYS: TSL) reported that the average selling price of its modules was $1.46 per watt. That sales price has since fallen to $1.25 per watt, and one competitor, ReneSola (NYS: SOL) , said it was getting just $1.19 per watt for its panels.

So for a utility-scale project during the second quarter, a panel from Trina would have been 39% of the cost, and for a residential project it would have been just 23% of the cost. With Trina's own sales prices down 14% in the quarter, the current ratio would be even lower. So BOS costs are not only a majority, in some cases they are the driver of solar's installed cost.

Cutting out the middleman
There are a variey of ways solar companies are trying to cut BOS costs through the design of their modules. SunPower (NAS: SPWR) and Canadian Solar (NAS: CSIQ) have both announced modules with microinverters built in to allow quicker installation. As an integral part of the solar installation, the inverter will play a major role in lowering BOS costs. That may not sound positive for inverter makers Power-One (NAS: PWER) or Satcon Technology (NAS: SATC) , but it's an opportunity for them to have their products integrated into modules.

Instructions not necessary
On the utility side, SunPower has been the most aggressive in addressing BOS costs. Not only do the company's high-efficiency modules allow a project to use less land, they're being designed to cut costs. The Oasis power plant uses T0 Trackers and is designed in 1 MW blocks that can be put together like a Lego set (ages 18 and up). The C7 Tracker is designed to maximize captured sunlight and claims it cuts costs by 20% versus other technologies.

Stacks and stacks of paper
The largest opportunity may lie in cutting out paperwork and other soft costs that have a real impact on the overall cost of solar power. Earlier this year, SunRun reported that $0.50 per watt could be saved on residential installations by streamlining the process of getting a permit. The Department of Energy recently announced it would spend $7 million to reduce non-hardware costs to support the SunShot Initiative.

Then there are the very soft costs installers of utility scale deal with every day. It seems that new complaints surface constantly about First Solar's (NAS: FSLR) Antelope Valley Solar Ranch One or one of its other projects.

These soft costs are starting to get attention, but there is still a lot that can be done to lower them nationwide.

Foolish bottom line
As the module becomes a smaller piece of the cost to install solar, there will be a continued flight to quality and efficiency for solar manufacturers. This favors SunPower and top-tier Chinese manufacturers. But also keep an eye on who is working to lower BOS costs for their customers. Installers will look at overall costs, not just the cost of the module, and manufacturers who cater their product to an inexpensive solution will win in the solar battle.

Interested in reading more about solar stocks? Add them to My Watchlist, and sign up for My Fool Daily and our solar articles will come to you. It's the easiest way to find solar news while wearing a Snuggie.

At the time this article was published Fool contributor Travis Hoium owns shares of First Solar and SunPower and has also sold puts in SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of Power-One and First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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