First Solar (NASDAQ:FSLR) Series 6 – This is big
This is a synopsis of the 3+ hour investor presentation from First Solar on the new series 6 module. I have watch, listened, to hundreds of similar investor presentations thru the years, but this one was outstanding. First Solar presented a detailed, systematic, well-paced argument that the series 6 module will be the cheapest, most reliable, and most bankable solar module/system for years to come for larger scale solar projects around the globe.
CEO Mark Widmar gave the overall layout of strategy, product road-map, market demand, environmental benefits, and the 3 phases of utility scale solar. CTO Raffi Garabedian was compelling in demonstrating the clear advantage of CdTe over Si- based semiconductor material, as well as the many advantages of the design features of the series 6 module. COO Georges Antoun presented First Solar’s impressive capacity road-map, and the enormous cost reductions of series 6 versus the series 4 modules.
A quick important note about the current cost and position of the old series 4 module emerged during this investor presentation. First Solar confirmed that the current series 4 module has the lowest cost per watt verses all other solar manufactures as of today.
In the Q&A with investment firms, Mark Widmar was questioned about this, since some solar firms claim a cost per watt of 27 cents. Mark did state that these firms do not include freight and warranty (1.5 cents per W), so including this 1.5 cents, he reiterated that the series 4 has the lowest cost. So now First Solar has stated that the current series 4 module has a cost per watt of less than 29 cents. This is important since the presentation compares the cost dynamics of the new series 6 with the current series 4.
In this article, I will lay out the module and system cost dynamics, manufacturing scaling, and the comparisons between CdTe verses Si-based solar systems.
The Series 6 Module
As we can see from the above slide, the new series 6 module has a much larger footprint and wattage. The series 6 module will be 483 watts, versus the 125-watt series 4. These wattage figure include the higher kwh yield that CdTe provides.
One key to CdTe cost advantage is in the scaling of the size of the module. Si-based module are comprised of individual cells, the lower wattage modules have 60 cells, were as the larger 330/350 wattage modules have 72 individual cells. So, when Si-based solar increases the size, there is little module cost advantage since the just linearly increase the number of cells.
First Solar vacuum deposition technology coats the glass at 3 microns thick in one process, so by increasing the size, you get less waste and much lower cost per watt advantage verse Si-based modules.
The above picture demonstrates this larger size scaling advantage by looking at the variable cost differences. First Solar has only 30% variable, and the Si-based competitors have a 60% variable cost. So, when you scale production, First Solar’s cost goes down at a much faster rate.
The above graphic shows the cost reduction roadmap for series 6 vs. the series 4. As stated earlier, the current cost was stated by First Solar at 29 cents per watt, so the series 6 module cost will be about 17.5 cents per watt. But even more import is the full system cost including the balance of systems costs.
Full system cost
The above graphics show the various BOS components, and the independent test results for the actual installation and wiring of modules to the tracking racks. The video of the time lapse comparison is eye opening. In many regions, especially the USA market, labor is a stubbornly high component of the BOS costs. The series 6 will lower the installation labor cost by 55%!
Almost every design feature of the series 6 module is aimed at reducing BOS costs:
- Handles in the frames for easy 2 person carry – lower labor costs.
- The frames interconnect so that the pallets do not need support – lower freight and shipping costs.
- The smaller daisy chain wiring looks ridiculously easy to connect – low labor costs.
- The new size format works with existing tracking and racking systems. First Solar is leveraging the supply chains R&D and innovations.
First Solar is projecting a 40+% decrease in full system cost. My calculation estimates a 45% reduction based on the lower labor costs. Earlier this year utility scale solar dropped below $1 a watt for the first time:
“According to the report, utility-scale solar systems were priced at an average of $.99 to $1.08/watt, a first in the industry.” (Source)
Also, we have seen 2017 bids for PPA’s below 2 cents per kwh: The 1.8 cents bid in Dubai was unsubsidized, so when you back into the project’s cost per watt it is well below $1. First Solar has confirmed they currently have the lowest cost, so the cost road map for First Solar shows a cost per watt of 55 cents per watt on the conservative side.
So large scale ground mounted tracking systems will cost under 1.4 cents per kwh in the sunnier locations of the USA. Areas around Moab, Utah, where I am modeling solar potential would be in this range. This is an unsubsidized number.
With a tax incentive structure like we currently have in the USA, the cost per kwh could drop below 1 penny a kwh. I know this sounds crazy, but this is the stated cost road map. This incredibly low cost is directly linked to fierce free market competition and innovation.
Commodity cost risk of Si-based solar
“A shortage of polysilicon in China has triggered a 35% price spike, as the cost per kilogram rose from $14 to $19 over the past four months, causing difficulties for solar manufacturers who have already reported a marked decline in profit.” (Source)
After reading thru many Si-based solar firms quarterly reports, this topic was clear. Surging poly demand is causing much higher prices. This is yet one more cost dynamic where First Solar has the edge.
The future of CdTe cost dynamics
As a final note on the cost trends for CdTe, the above graphic demonstrates further cost reduction potential not even included in the current cost road map.
The manufacturing capacity road map
The above 2 graphics show the new capacity road map – I was blown away! By extending series 4, and adding in 2 new series 6 factories in Vietnam, the capacity will grow to around 6 gw’s by 2020. From a cost perspective this is a great use for the Vietnam assets that First Solar already owns. One factory has already been built, and they have the land for two more duplicate factories on that property.
Another eye opener was the large reduction in capex required to scale. Less than 50% of the capex required vs. the series 4, which is already the lowest in the industry. This gives First Solar a huge advantage compared to the other Si-based firms when it come to growing production, which of course creates the lowest cost structure in the industry.
This above graphic also points to another big advantage that First Solar has over its competitors when it comes to scaling production. First Solar will scale up above 6 GWs from existing cash flows, and also they have a $2 billion net cash position.
How will Canadian solar and Jinko (NYSE:JKS) solar scale? With more debt, and higher and higher debt service expenses. With interest rates rising around the globe, this will be another advantage for First Solar on the cost side.
First Solar‘s market demand
In this article, we have focused on the cost and technical advantages First Solar has over Si-based solar firms. First Solar has been mainly in the utility scale solar space. Now they have also stated that the commercial and industrial (C&I) space will be another market for them. I will break down these two markets.
During the investor presentation, First Solar did a great job showing the evolution is utility solar:
We are currently still in solar 1.0, that is driven by renewable portfolio standards in individual states, and the power purchase agreements that are focused on the kwh’s produced.
Solar 2.0 is coming up fast in California due to the duck curve issue during the spring. As more and more solar is connected to the grid, utilities will have a harder time with balancing.
This above study by CAISO is very important. It shows that larger scale solar arrays, with existing inverter technology can also benefit to grid, and help utilizes manage the grid. First is the fact that with solar you can have instantaneous curtailment – you just stop converting the DC to AC. This can be done to entire arrays, or smaller sub-sets as needed to help with load following.
In fact, the study shows solar can ramp and load follow better than the best natural gas peaking plants. Also of note – solar is better at frequency and voltage control. This new dynamic will allow utility scale solar projects to also get paid for this. This will drive utility scale solar into new markets over the next decade.
Fully dispatchable utility scale solar – the holy grail! This is not the present, but maybe the near-term future. First Solar CTO did answer questions on the topic of utility scale storage, and he has the same view I have – we are not there yet. Li-Ion storage will work for residential and commercial solar projects, but may not be able to scale to utility scale storage.
The CTO stated he and his R&D team are looking for new technologies beyond Li-ion, and when it makes financial sense, First Solar will invest. I am a bit more optimistic about large scale Li-ion, as we still have not seen the cost reductions from scale yet. If we can get below $25 per kwh, then solar 3.0 may come to fruition.
Commercial and Industrial demand
As a corporate buyer, the above factors are big. These large firms like Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Wal-Mart (NYSE:WMT) need to know these are cost effective, turnkey, warrant-able (backed by a strong balance sheet) projects. But now when I talk with companies looking at solar to help them with their sustainability programs, another factor is your manufacturing pollution footprint.
First Solar has this environmental advantage over the Si-based solar firms. CdTe technology uses far less energy and water to produce than Si-based. This huge energy demand to produce polysilicon, forces these firms to areas in China were power is cheap – mainly coal based electricity.
60 GW’s from just these firms, and we are just staring to develop this largely untapped market.
First Solar is a global firm and wants to grow internationally as well as in the USA. I have been impressed that First Solar has not chased international revenue at the cost of profits. That’s why First Solar has a small footprint in China. Here are the markets First Solar gave as a focus during the presentation:
Bookings and gross market trends
Earnings guidance 2018 – 2020
My 2017 – 2020 projected earnings per share
Based on 2017/2018 numbers, and projected capacity and gross margins I have put together some very rough estimates:
2017=$2.45 EPS – First Solar’s number
2018=$1.5 EPS – First Solar’s number
2019=$5.5 EPS – my estimate
2020=$7 EPS – my estimate
Using the capital asset pricing model for valuation in a low interest rate environment, one needs to look at least the next 10 years of earnings and cash flows. Beyond 2020 no one knows, but First Solar has the advantage in every conceivable category for large scale solar IMHO.
Disclosure: I am/we are long FSLR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.