In Solar, Strong Project Development Means Everything

Both SunPower and First Solar sell solar panels to third parties. SunPower sells panels into the residential, commercial, and utility sectors through a nationwide network of dealers, distributors, and integrators. And First Solar, which has historically sold panels into the commercial and utility sectors, sells largely to medium- and large-sized developers. 

Manufacturers becoming developers
But changes in both companies since 2011 indicate the solar giants are positioning themselves as much more than make-and-sell panel manufacturers. The No. 1 and No. 2 companies in the U.S. are seizing control of the entire solar value chain, with a particular focus on the downstream segment. 

SunPower has long maintained a presence in much of the value chain, with a hand in the process from ingot to wafer to panel to project development.


Image credit: The Wall Street Flaneur

Recently, it's ramped up efforts in project development, particularly in large-scale projects. First Solar is no different, owing much of its recent success to large-scale solar plants it internally developed. 

Revenue figures from both companies reflect as much. From 2011 to 2013, SunPower's Solar Power Products segment, which largely sells panels to third parties, saw its revenue decline by 32%. Over the same period, First Solar's third-party solar module revenue declined by 75%. Certainly, average selling prices of panels have dropped in lock step with declining costs. But, as price goes down, demand goes up. What the staggering decline really points to is an increased focus on project development, where both companies have seen revenue soar. 

Large projects getting larger
Last year, SunPower sold its 579-megawatt Antelope Valley Solar Project to Warren Buffett's MidAmerican Renewables. The purchase price for the nation's largest solar plant was thought to be $2 billion-$2.5 billion. That came in the wake of First Solar selling its 550-MW Topaz project (at the time the nation's largest) to MidAmerican as well. 

As utilities increasingly embrace solar, not just for PR purposes, but as legitimate additions to their generating asset portfolios, projects are likely to grow in size. But projects of this scale require huge balance sheets as there is a significantly long development period before projects are sold off to third parties.

Projects of this size are a lot for even a player the size of SunPower to take on. As CEO Tom Werner says, "because of the scale of this project, this is not something you start building unless you've got the financing or unless you've sold it. So, the transaction itself means that shovels will hit the ground pretty quickly -- because that's a prerequisite for something of this scale."

That's the same SunPower that is able to tap majority-owner Total's deep pockets for low-cost project financing. Smaller developers are simply unable to compete with these resources. Unsurprisingly, only a handful of players are sufficiently capitalized to compete for the largest projects, and as they grow in size that already small pool will continue to shrink as lesser players are edged out. 

Why project development matters
Cutting out middlemen makes solar more affordable for everyone. If Company X's panels must pass through multiple middlemen with markups each step of the way, Company Y, which develops direct, owns a significant advantage. Company X must adapt or watch its market share wither in an increasingly cutthroat industry.

SunPower and First Solar are already Company Y. Watch for major, new project development announcements as these will be critical to the success of SunPower, First Solar, and any other manufacturer with an eye toward the long-term future.  

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The article In Solar, Strong Project Development Means Everything originally appeared on Fool.com.

Brandon Workman has a long position in SunPower. The Motley Fool has no position in any of the stocks mentioned. 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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