Does a Solar Panel's Efficiency Really Matter?

Over the past few weeks I've had the chance to talk with some of the most influential executives in solar, and while there are considerable aspects of the solar industry they agree on, there's disagreement as to the role solar panels themselves will play in the future of the industry. SunPower's CEO, Tom Werner, is convinced that efficiency will be key to costs and energy production in the long term, whereas Clean Power Finance's Nat Kreamer and Sunrun's Edward Fenster both say that efficiency doesn't matter much at all and that the panels themselves are a commodity product.

Who is right and how should investors view solar panel efficiency? This could be the most important factor in who will win in the future of solar, so let's look at the role efficiency plays and how it affects the biggest players in the solar industry.

Solar panel efficiency affects cost
It isn't as if efficiency and cost are factors that are mutually exclusive. The efficiency of a module directly influences the cost per kW-hr of a solar system. So, the intersection of efficiency, panel cost, and balance of system costs are what we need to consider.


Sunrun's Fenster pointed out that the panel itself accounts for only about 20% of an installation's cost and that decisions about staffing or racking costs are more important than a few cents per watt here or there. But he doesn't think that the added cost of a SunPower panel is worth it for installers.

It's also important to note that he doesn't think that low-quality, third-tier Chinese panels will be attractive in the U.S. Instead, Chinese manufacturers who can compete on quality, and larger companies like Kyocera, LG, and Sharp, who have strong balance sheets, high quality, and low costs, will be winners instead of those offering premium-efficiency products. There is a minimum quality threshold a company has to meet, but in Fenster's view SunPower's panels are over the top and not worth the cost.

I did ask both Fenster and Kreamer about using First Solar panels, but they're so low efficiency and have little cost advantage over Asian-made panels that they're not worth it. So, clearly efficiency matters, but only to an extent. The degree of that extent's effect depends on where you sit in the industry.

Solar panels by the numbers
So, when does efficiency matter in a solar panel and when doesn't it? Let's look at a table I built late last year to illustrate how efficiency and costs interact. You can see the full list of assumptions used here. Below, you'll find the cost breakdown of three systems with different efficiency levels, with the lowest efficiency also having the lowest cost. There are variable components and fixed components, and the 15% efficient module (a standard Chinese product) is slightly less than 20% of the total installation cost, while the 20% efficient module is 27% of the installation cost.

 

10% Efficient Module

15% Efficient Module

20% Efficient Module

System Size

2 kW

3 kW

4 kW

Module Cost per Watt

$0.65

$0.75

$1.00

Total Module Cost

$1,300

$2,250

$4,000

Variable BOS Cost

$2,500

$3,750

$5,000

Fixed BOS Cost

$6,000

$6,000

$6,000

Total Installation Cost

$9,800

$12,000

$15,000

Annual kW-hrs

3,154

4,730

6,307

Cost per kW-hr (assuming 8% ROI)

24.9 cents

20.3 cents

19.0 cents

These figures should ballpark real-world costs and show that efficiency has a big impact on the final cost per unit of energy. Of course, there are many sensitive components in this analysis; if the 20% efficient module costs $1.25 per watt then it would no longer be cost effective. By the same token, if variable costs play a smaller role then efficiency plays a bigger role. These variables will behave differently depending on where a system is being installed.

In the example, you can see that efficiency matters but only to an extent. A high-efficiency module is only more cost-effective if it's below a certain cost threshold. So, the bigger the gap between Chinese modules and SunPower modules, the less attractive SunPower modules become. This is why SunPower hasn't been able to compete in Europe in recent years. It has much lower BOS costs, and therefore, the cost of the panels matters more.

What's clear is that efficiency does matter but only when the rest of the system's costs and its performance are brought into the equation. If the panel is a small percentage of a system's costs, efficiency matters a lot, and vice versa.

Who will win the solar panel battle?
Installers, particularly those in residential, deal with this conundrum every day, and the industry is changing rapidly. SolarCity has been known to use manufacturers like Trina Solar and Yingli Green Energy , who are two of the biggest manufacturers in the world and compete mostly on cost. Where system costs are low, they will win business.

SunPower, or a high-efficiency module, will win where costs are higher, which is why the company is focused on the California market right now. What would change this equation is if costs came down considerably. If cost per watt for 20% efficient (or greater) panels falls to $0.80, then SunPower will become more attractive.

That's one of the reasons I'm betting on SunPower. The industry has shown time and time again that it's easier to cut costs than to increase efficiency. So, SunPower may not be the most attractive panel for everyone now, but in three years when its costs are lower that may change.

Putting the solar panel battle into context
Maybe the best way to think about efficiency in solar, particularly when comparing SunPower to Chinese manufacturers, is to use a couple of analogies. The performance of a BMW may not be significantly better than a Cadillac, but it costs a lot more money because of brand and perception. The same could be said for Apple products, which focus on design and have very few performance differences than other PCs, even though they cost more.

Right now, SunPower is selling a premium brand, designed with all-black panels, and that comes with a higher cost. The question is how many consumers will pay up for that brand and design if it doesn't save them money in the long run? (Note that SunPower says that when all factors are considered, the energy from its panels costs less long term.)

I'll also point out that when investors think about the analogy above, they should think about the profit made on each car or computer companies make. BMW and Apple may charge more, and it may not be worth it to some, but they definitely make more money per unit than competitors. Will that be the case in solar? Time will tell.

What we know for now is that a solar panel's efficiency matters -- sometimes. 

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The article Does a Solar Panel's Efficiency Really Matter? originally appeared on Fool.com.

Fool contributor Travis Hoium manages an account that owns shares of Apple and SunPower and personally owns shares of SunPower and has the following options: long January 2015 $7 calls on SunPower, long January 2015 $5 calls on SunPower, long January 2015 $15 calls on SunPower, and long January 2015 $25 calls on SunPower. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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6 Comments

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Annie Meyer

At EnergySage we love to see people making the switch to solar, and places like SolarCity and SunRun are definitely a great place to start. In addition, you can use the EnergySage Marketplace (it’s free) to compare this with the other options you may have, giving you more choice and transparency with every decision. Getting multiple quotes allows you to pick the best installer, panels, and financing option for YOUR needs. Try it out here: http://bit.ly/148yg0y Our system only takes about ten minutes of your time, and provides you with valuable information from many installers at once. In the end you may find that SunRun or SolarCity are the way to go, but it never hurts to check out every possibility.

July 26 2013 at 2:29 PM Report abuse rate up rate down Reply
Gumby

Never mind the global warming skeptics,, they can be shot for al lI care..

July 18 2013 at 1:18 PM Report abuse rate up rate down Reply
Gumby

With those said below, Travis, find me a guy who is really serious about global climate issues . I will give you nobody yet.. Everyone is in it only for tax credits not for global climate change. We all have money coats over our tongures..

July 18 2013 at 1:17 PM Report abuse rate up rate down Reply
Gumby

There is many other great solar ideas that get no tax credits at all. They are much more efficient as well as far more EFFECTIVE!! The government is so tunnel visioned toward the utitly side of power generation.. Solar energy is much more than just mere kilowatts... We can get BTUs from solar energy.. Why is there no tax credits offered to solar Btus??? Dont anyone know that we can dry clothes with sunlight, do you ? We can heat homes, offices, etc wtih sunlight, do you ? We can cook food with sunlight, do you ? Solar energy is STILL restricted to protect obsolete industries that is long overdue to be relegated to the horse n' buggy days !

July 18 2013 at 1:15 PM Report abuse rate up rate down Reply
Gumby

Our solar panel industry is in the business to rack up as much kilowatts as possible instead of getting in bed with real estate investment trusts .

July 18 2013 at 1:11 PM Report abuse rate up rate down Reply
Gumby

Travis, you left off the importance of durabilty. Some solar panels lose efficiency rate much faster every year than others. It is like buying a cheap car that lasts only 30K miles instead of 100K miles . Low efficiency ,low quality, etc are fine for kiddie toys not rooftop installations. Moreover, real estate bigwigs would naturallly favor cheapest lowest efficiency (low quality?) solar panels to paper over the wide swaths of future prime land that will skyrocket in value in 20 years. Why buy the best solar panels if all you have in mind is to grab federal energy tax credits from Uncle Sucker and then dispose of all solar panels later on. Acutally , EPA lists specific names and models of Energy Star appliciances that qualify for tax credits . EPA can do the same for solar panels.. It is not for me to decide which solar panel to qualify, but EPA should do it.

July 18 2013 at 1:08 PM Report abuse rate up rate down Reply