SunPowers Comeback Plan in Utility Scale Solar

By Travis Hoium Markets

Over the past two years SunPower Corporation's (NASDAQ: SPWR) stock hasn't done so well, due almost entirely to a weak utility scale solar business. The company has faced headwinds from aggressive developers, low prices for commodity solar panels, and a lack of demand for solar projects from utilities in the U.S.

Continue Reading Below

To combat these trends, SunPower has shifted strategies away from its high efficiency solar panels, and we're starting to see the strategy play out in the market. Here's what the strategy looks like, and what to look for going forward.

Image source: Getty Images.

P-Series is SunPower's big bet on utility solar

One of SunPower's problems over the past two years is that it's had a solar panel that's higher cost -- albeit also higher efficiency -- than the panels offered by commodity solar panel competitors. Given the rapid decline in costs for solar components, the company's efficiency advantage was no longer an advantage in utility solar; it was actually a weakness thanks to the costs associated with higher efficiency.

To remedy the problem, SunPower bought a company called Cogenra Solar, which had the technology to make a shingled solar module design. Instead of solar cells connected with silver bus bars, the shingled design allowed commodity solar cells to be turned into modules that were slightly more efficient than a traditionally produced module with the same cells.

Continue Reading Below

The bet on this technology does a few things for SunPower:

  • The P-Series allows SunPower to ride the wave of cost reduction in cells from Asia, something SunPower was fighting against with its back contact design.
  • The P-Series product can be made with multi-crystalline, mono-crystalline, or even mono-PERC cells as long as they are front contact designs. So as cell efficiencies improve, SunPower can ride that wave as well.
  • SunPower can also plan its cell purchases as little as a month in advance of when it needs to make modules. This is lower risk than the company's years long supply agreements to buy polysilicon and other components to make back contact cells and modules.
  • Maybe most important is the fact that capital outlays to build P-Series panels are only about $0.05 per watt. For $100 million, the company could build 2 GW of capacity. For its back contact panels, the same capacity buildout would have been at least $1.5 billion, if not more. This lowers the risk associated with building out capacity, a risk that has brought down many solar manufacturers.

When combined, SunPower hopes these factors lead to what I call a "Commodity-Plus" product with low capital deployment and low risk in fundamental cell technology. If the industry plays out right, SunPower could even take advantage of where cells are oversupplied, and therefore at the lowest relative price, and build a utility business on top of those weak points in supply.

Oasis is the second leg of the stool

Selling panels isn't really the end goal for SunPower: it wants to supply larger solar solutions. And the Oasis power plant design is central to that pitch to developers and utilities.

The Oasis system really starts with the Oasis GEO System, a drone that can optimize power plant designs, accounting for different solar panels, efficiencies, and other costs. A tracker design that allows for more MW installed in less space is really the key to the design, and builds off years of power plant design experience. Finally, a robotic cleaning system squeezes a few percentage points more electricity from Oasis than competitors and uses water more efficiently.

SunPower's goal is to be a design partner with developers and use Oasis to sell power plant designs using P-Series, E-Series, or commodity panels, depending on which is most economical.

The third leg of the strategy

What SunPower has changed in the past year is that it's no longer focusing on developing projects itself. The company used to buy land, develop a bid for the utility, and own the project until completion. Now, it's putting less emphasis on the full development of projects, and wants to switch to offering solutions to developers or utilities that want to own their own solar projects.

This strategy shift is going to take time because the development timeline for a solar plant can be between 2 and 5 years. So customers that may be interested in SunPower's Oasis system and P-Series may not see much progress until late in 2017 or into 2018 given the lag between the strategy shift and customers buying SunPower's solutions.

The risk here is that SunPower won't develop the kind of customer relationships it hopes as developers build out their own engineering capacity. And given the competition already present in the engineered solution space, SunPower may be facing low margins (10%-15% at best) even if the strategy is successful.

Is SunPower set up with a winning utility strategy?

Given the realities of solar panel prices and where SunPower's technology has an advantage (mostly in small, space-constrained systems), the move to P-Series and a more solutions-focused strategy is probably the right move for SunPower today. What's unclear is if the strategy will stick in a highly competitive environment.

Given SunPower's development history, it's plausible to see how the company can leverage experience and stability to be a preferred supplier for third party developers or utilities. But I'd like to see traction in the form of hundreds of MW of contracts and evidence that customers will choose SunPower's solution before fully buying in.

SunPower has a chance to regain its mojo in utility solar, but it has a lot to prove before investors will believe in the upside ahead.

10 stocks we like better than SunPower
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and SunPower wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.