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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Solar Power Is About To Get MUCH Cheaper

Solar Power Is About To Get MUCH Cheaper

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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  • RON on March 14 2016 said:
    What are you talking about? $2.26 per watt is high for all in costs. Our all in installed cost is less than $1.90 a Watt.
  • David Hrivnak on March 14 2016 said:
    Ugly??? I love the look of solar panels as it means I power the house and BOTH plug-in cars sustainably.
  • Twolf on March 14 2016 said:
    Seems to me that Solar City is at the trough licking up tax dollars from the state of New York, who is putting up the money to build the factory. If, and this is the crux of it, the factory was able to run using the technology that it produces without being connected to another electricity source, there would be reason to believe that their technology was truly innovative. Until such a time, the industry will continue to profit only as long as the subsidy dollars keep coming.
  • Normbo on March 15 2016 said:
    Oh, WOW, one gigawatt with of panels produced each year? So in FORTY FIVE YEARS it will make enough just to meet California's peak demand? Another article said US installed 14 gigawatts of new solar last year, so there must be a lot of other capacity out there.
  • Mulp on March 15 2016 said:
    The difference between investing is fossil fuel pillage and plunder and investing in wind and solar is the value and price of the fossil fuel investment declines as the natural capital is extracted and burned, while investing in factories and solar and wind harvesting farms, the value remains almost constant even if the price of the investment falls.

    If alternatives to wind and solar, like natural gas, become cheaper, the price of the factory manufacturing solar panels falls, but the factory keeps making panels and turbines which get sold at lower prices and bought by investors expanding their existing wind and solar farms to boost output to keep revenues going up even as the price they can charge goes down. Just because the price of electricity goes down, that doesn't mean the output of the solar panel goes down because the sun keeps shining.

    Note that the reason nuclear power has been "cheap" is the plants went bankrupt or were sold off to power generation utilities at prices below their construction costs. The "factories" turning out the nuclear power plants were effectively government industries, tied closely to the military nuclear weapon industry. The choice of nuclear reactor design was intended to produce lots of plutonium that would be separated to to make more nukes. And the government is still totally controlled in the reactor fuel production and processing once it's used up as designed for producing plutonium for nukes. But with the change in policy to reduce the number of nukes, the nuke factory system as of 1970 was effectively shutdown. While molten salt total fuel burning reactor designs were demonstrated by the government "power plant factories", all were shutdown, and only the plants already planned by the mid-70s getting built at ever increasing costs as the nuclear reactor factory was replaced by blacksmiths and custom artisan builders.

    Bottom line, non fossil fuel energy sources keep producing energy even if the price is forced down because they only slow consume their capital which is the biggest cost of all energy production. Fossil fuel energy works by burning the primary capital asset, the natural capital in the ground: oil, coal, and gas.
  • Jeff on March 16 2016 said:
    Soon as I read the first paragraphs saying they were building solar panel manufacturing in NY I knew there must be government money handed out because otherwise it makes no sense. Sure enough later in the article it says the state will pay.

    The whole solar industry is about grabbing a share of huge sums of taxpayer dollars and tax credits. The business models don't make sense otherwise.
  • R. L. Hails Sr. P. E. (ret.) on March 16 2016 said:
    It occasionally snows in Buffalo NY. Solar panels under 4 ft. of snow do not work well, unless Harry Home owner crawls up on his roof and sweeps them off. Otherwise he has no juice. He can do it again tomorrow.

    This will be true unless there is another grid, which sits idle waiting for the night he chooses not to climb on his roof. On that happy night, he can flip a switch and his furnace will work. An extra grid costs money.

    The key to energy production is to achieve the lowest cost at Harry's meter. Currently, with the smart grid, the government goes through his house shutting off things when there is not enough juice to go around. They call that smart in the government.

    There is an eternal shell game ongoing in energy, "Where is the pea?" The game is to lay the costs of my technology on every body else. It makes me rich. Solar, wind, coal, gas, nuclear, wound up rubber bands, all have their sales pitch. Few are competent and honest. They seek your money, or with subsidies and our debt, your unborn grand kid's money.

    I engineered a score of nukes and two score fossil fuel power plants, held a handful of degrees and Professional Engineering licenses. I learned, did not accept, that US energy policy is actually set by buxom actresses in low cut dresses who testify in Congressional meetings, during the day.

    My recommendation to the nice people in Buffalo is to learn Mandarin, not how to make solar panels. If they want a future career. if they want to survive.
  • CapitalistRoader on March 16 2016 said:
    "What makes the Solar City [sic] 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."

    Really? New York taxpayers paying the expenses of a for-profit business is "all the more appealing"? For who? Certainly not the poor taxpayers who had no say in having their hard earned money snatched away from them to pay for a speculative business deal. In reality only two small groups of people find this deal "all the more appealing": The owners and shareholders of SolarCity who are the recipients of that taxpayer largess, and the New York State politicians who get campaign contributions from SolarCity executives.

    It's called crony capitalism. Quid pro quo. Socializing the risk. Even the lefty New York Times is embarrassed by this sleazy, unsustainable deal:

  • Fireofenergy on March 16 2016 said:
    I'd be proud to help pay taxes for that worthy cause. However, i live in California. I can't believe all the people complaining about a few pennies a month, here.
    Soon, solar/battery material will be printed for even cheaper, so yeah, we need to build demand for solar energy because out had the potential to blow FFs away!
  • Bullfrog on March 16 2016 said:

    You already owe the state of California $21,000 in unpaid state debt for government programs. Every taxpayer in California is over $20K in the hole to pay the $240B in state debt from such programs. These kinds of deals add up to more than "a few pennies a month".
  • Wallace on March 24 2016 said:
    Thanks Michael for a very thoughtful article. I am very surprised by the various comments especially the projected view that the Solar City factory only makes sense because it’s being built on "state money". In a way, I am able to understand such comments especially if they are coming from the affected tax payers. Tax payers around the world have various perceptions and thoughts of how government should run treasury etc. However, I firmly believe that it’s a matter of time and Solar will be the next revolution to power the world. I think solar power efficiency and indeed uptake is more of a thinking problem than financial shrewdness. Innovations are expensive in the beginning and so is ignorance or inertia in the long term... fossil fuel is one big LIE! I like the leadership of innovation coming from Ambri lead by Prof. Donald Sadoway of MIT or the Tesla lead by Elon Musk. To me, the answer to future energy needs is Solar, therefore, the research problem should be how to make that efficient, storable and affordable. And thus my conclusion that it’s a thinking problem not financial characterization. Power storage needs to be demystified and the future is as bright as the rays.... Otherwise, I am born and live in Africa and I know how the revolution is taking shape........ I wish the Gigawatt factory is being built in Africa by some African government!

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