The Big Strategic Shift Coming to the Solar Industry in 2017

The solar industry has been through a lot of strategic changes over the past decade as cell manufacturers moved to making panels, panel manufacturers started building power plants, and power plant companies began moving into financing. In many ways, vertical integration was the name of the game.

But the past year of turmoil has shown that vertically integrating into every part of the solar business might not make sense. There's no fundamental advantage an installer like Tesla Motors(NASDAQ: TSLA) has in financing solar versus a bank, and in many ways it may have a disadvantage. And solar manufacturers may not be the best at building massive power plants, something utilities and independent power producers have decades of experience doing. So, what's the trend to watch in 2017? Solar companies are offering an integrated product design that customers can install more efficiently than the piecemeal designs of the past.

Image source: Getty Images.

Backing away from the finance game

One of the broad trends over the past five years in the solar industry is that solar companies began to finance more of their own projects. Small-system installers like Tesla's Solar, Sunrun (NASDAQ: RUN), and Vivint Solar (NYSE: VSLR) could offer simple lease or power purchase agreement (PPA) financing with $0 for customers and then aggregate the tax benefits and payments in large financing projects. For bigger projects like whatFirst Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR) were building, self-financing eliminated a discount buyers demanded for taking on project risk and allowed them to take advantage of falling financing costs.

If there was one broad finance trend in 2016, it was that solar companies financing their own projects began to backfire. Small projects began to be financed through loans as more banks and small lenders emerged, lowering the cost of capital for customers. And rising yields on yieldcos like 8point3 Energy Partners (NASDAQ: CAFD) made self-financing less attractive because the price a yieldco would pay for a project began to decline. For large developers, holding projects on the balance sheet suddenly became a bad thing and now they're looking to sell projects before construction even begins, leaving financing risk to a company better suited to accept that risk.

Designing entire systems will be the name of the game

In response to these financing trends, major solar companies are beginning to design off-the-shelf solutions for solar developers and utilities. The developer will then take care of things like financing and securing power purchase agreements, while the solar company concentrates on designing solar systems to maximize energy production and lower cost. In some cases, they're even adding services beyond solar, like energy storage.

Image source: SunPower.

This shift can be seen in First Solar and SunPower's product line changes. First Solar is upgrading from Series 4 solar panels to Series 6, which is a full panel and racking system with the option of adding energy storage and functions all the way to transmission. SunPower's Oasis system is a complete solution from site selection to building a power plant with trackers and the P-Series solar panels. Both solutions are essentially off-the-shelf offerings the companies will provide to a variety of customers around the world. And it means in many places they'll be backing away from bidding on projects themselves in many locations.

SunPower's residential and commercial solar solutions follow along the same lines. Known as Equinox and Helix, respectively, they are a solution installers can buy pre-designed and just install on a rooftop.

Tesla has been moving to this model for years. It bought Zep Solar to bring a racking product in-house, bought Silevo to begin manufacturing solar panels, and now Tesla's acquisition of SolarCity brings both products together with energy storage. Now, Tesla will be making most of the valuable components of the solar system. And it's moving toward more sales through loans, backing away from leases and PPAs.

Solar solutions are the next big thing

Moving toward more complete solutions makes sense for the solar industry because it helps move more cost from the field to the factory, where components can be built efficiently and designed to work seamlessly together. The days of piecemeal design of solar systems are coming to an end.

The companies that can combine solar solution design with differentiated products like high-efficiency solar panels will be well positioned for the future. Bottom line: SunPower, First Solar, and Tesla have a leg up on the competition in building out the solar product solutions of the future.

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Travis Hoium owns shares of 8point3 Energy Partners, First Solar, and SunPower. The Motley Fool owns shares of and recommends Tesla Motors. 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.