Solar power, like Democracy, stinks. It is costly, converts very little energy from the sun into actual energy, and it mars the aesthetic appearance of many houses. But to paraphrase Winston Churchill, “Democracy is the worst form of government, except for every other system that has been tried”. The same thing could be said of Solar power and its various competitors.
No form of energy generation is perfect, and one unambiguous positive feature about solar is that it keeps getting better. Solar power systems today are less terrible than they were five years ago, and the ones from 2010 are better than the ones from 2005, etc.
Solar City seems poised to continue that aggressive trend of improvement in solar power. The company is in the process of building an enormous $750 million factory in Buffalo, NY that will produce 10,000 solar panels per day, or one gigawatt of power generation capacity per year. Once completed, the plant will be the largest in North America, and one of the biggest in the world. It’s hard to overstate the potential importance of this factory. If done right, the plant could catapult America to be one of the leaders in solar power in the future in the same way that the Rouge River plant made Ford Motor Company one of the world’s leading auto manufacturers. Related: Oil Fundamentals Could Cause Oil Prices To Fall, Fast.
Solar power is not going away and those who think it is are fooling themselves. It’s crucial therefore that America build a leadership role in the industry. America maintains its place as the world’s leading superpower on the back of the technology and profits that its leading companies produce. For all the talk about a rising China, the reality remains that the U.S. is far and away the dominant economic and business power. To continue to dominate new industries, America needs to provide a way for new companies to grow into leadership roles. The Solar City factory shows that the country is still doing a good job on that front.
Solar City’s factory is important because it will fundamentally change the economics of solar production. The company’s panels, once installed, cost roughly $2.84 a watt at present - that figure includes sales cost, installation hardware, the panels themselves, etc. The new factory should lower that cost to at least $2.26 based on back of the envelope calculations and typical volume/cost relationships for OEMs. That $0.58 drop in costs will save Solar City $580 million ANNUALLY if the plant operates at or near capacity. Based on a capitalization rate of 10 percent, it could add as much as $6.8b billion to SolarCity’s enterprise value over the medium term. Related: Oil Plunges As Iran Shuns Production Freeze
What makes the Solar City project all the more appealing is that the project is largely paid for by the State of New York which is understandably eager to do anything it can to help revive Buffalo from its Rust Belt doldrums.
Solar City has been growing like crazy, though not making any money for the moment, but even with that level of growth, it might take some time before the company could actually use all of the capacity its plant will have. Given that, there is a good chance the plant could set up Solar City as an exporter of solar panels to Europe. Chinese solar panels are very cheap, but they only have around 60-75 percent of the power efficiency of Solar City’s panels. For homeowners concerned about total installation costs and the impact of panels on the appearance of their house, that lack of efficiency means more panels are needed and more installation cost is required to install those panels. Solar City’s panels would likely be very attractive to well off solar buyers like those in Europe for instance. (It’s unlikely that Solar City would sell its panels to U.S. competitors unless external circumstances forced it to do so.) Related: Horizontal Land Rig Count Summary 11th March 2016
The concept of cheap solar panels is particularly attractive when one considers the possibility of combining Solar City’s plant with batteries like that of Tesla or Orison (which has the simplest possible batter installation system). If Solar City can combine cheap solar panels and installation with reliable and cost effective battery storage, it could be a true game changer for distributed grid proponents. Only time will tell if the company’s audacious risk will pay off, but the project is certainly one with huge upside for Solar City and its shareholders.
By Michael McDonald of Oilprice.com
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