Perhaps the high-quality, luxury jeweler, Tiffany & Co., provides an apt metaphor for the SunPower brand positioning and business model. SunPower produces a high quality product that appeals to a very sophisticated customer. Travis Bradford with the Prometheus Institute states, “SunPower makes a damn fine product, but the sales process requires a bit of nuance to get the full value from customers.”

Julie Blunden, Executive Vice President for Public Policy and Corporate Communications, seemed pleased with the comparison of her company to one of the world’s most recognized global brands, yet added “we have to make a product that is within people’s grasp. Perhaps a better comparison is the old, reliable IBM.” So SunPower wants to be high quality, but not an elite, once-in-a lifetime purchase.

Perhaps SunPower is a mix of IBM and Apple—a company that is known for innovation and quality as well as premium prices.It is common to hear the following about SunPower: “Great Product, High Price.” And like Apple purchasers, many customers are willing to pay the higher prices. Currently SunPower is #1 in U.S. market share for both residential and utility scale installations and has the greatest number of installations as part of the California Solar Initiative.

Need to Reduce Costs
To increase and hold its customer base, SunPower is working aggressively to reduce manufacturing and installation costs through:

• Creation of Oasis Power Plant system. The “power plant in a box” allows rapid, efficient installation at rates of faster than 1 MW per day. According to the August 10, 2010 investor call, Oasis reduces balance of system cost by 25 percent.

• Construction of Fab3 manufacturing facility. Fab3 is expected to triple panel output and allow SunPower to meet customer demand. SunPower is currently sold out of panels and has strict product allocations among 1,000 worldwide dealers and its utility business.

• Vertical integration. SunPower is a fully integrated company with manufacturing, residential, large-scale commercial, and utility business units. Vertical integration raises SunPower’s absolute gross profit. The “May 11, 2010 Earnings Call Transcript” reported absolute gross profit can exceed $1.70 per watt for deployment of a fully integrated system in Italy. That would translate into $600 million gross profits by the end of 2011 for its 360 MW Italian pipeline.

Cost of Panel Does Not Equal Cost of System
SunPower also wants people to know that the cost of a panel does not equal the cost of a system. With 50 percent more efficiency and quicker installation times, the customer will benefit from shorter payback periods and greater returns on the investment such as higher internal rates of return (IRR) and higher net present values (NPVs).

But, where high efficiency really pays off is in places of limited or expensive square footage. This is why SunPower won a bid for 200 of the 250 MW of Southern California Edison’s distributed generation rooftop program. Gil Alexander, spokesperson for Southern California Edison, said, “when leasing roof space, one of the business interests is to get the biggest bang for the buck. In the end, SunPower’s high efficiency panels and rapid installation penciled out as the best product for our needs.”

Future Plummet or Profits?
With all these advantage, why is the SunPower stock in the basement?

To start with, 2009 was a tough year for SunPower. On top of the economic crisis that prevented SunPower from hitting its 2009 targets, SunPower had to restate its 2008 earnings. Investors are also cautious about the large bet SunPower is placing on the 100 MW European pipeline primarily coming from its purchase of SunRay. According to Julie Blunden, the stock price is also suffering from “a large amount of unrealized revenue for 2010.”

So it would seem to be a good time to buy SunPower stock if you believe:

• Fab3 begins producing panels by the end of 2010 as expected.

• SunPower can get costs down as predicted.

• SunPower will permit, finance, construct, and realize revenue for all 360 MW of its projected utility pipeline in Italy.

• The Italian Parliament will pass the pending bill that holds the feed in tariffs at a price that is attractive and in line with SunPower’s economic forecasts. Bloomberg cited that “the [June 2010] decision leaves the rates Italian utilities pay for solar power among the most attractive in Europe and may trigger a rush by developers to build solar plants in Italy.” With the 2010 SunRay acquisition, SunPower is poised to be first in line for these profits.

Built to Last?
The challenge with solar is that it currently has the glitz of a dot.com era iPod but requires the longevity of a 30-year home mortgage. Putting a solar system on a roof or in the desert is a 30-year commitment. You want to make sure that the parts last, the system has long-term warranties, and the company will be around to honor those warranties. SunPower is a company that is planning for a long future. If they can get their costs down, SunPower is a company that will be here to provide high quality solar services for a long, long time.

The Solar Energy for Rural Electrification project in the Philippines has impacted over 6,000 homes and schools that sorely need reliable electricity. Launched in April 2010, Phase 3 of the project will reach an additional 135,000 students in 150 schools and 12,000 homes. The program is a partnership with regional nonprofit groups and the U.S. Agency for International Development, the Philippine Department of Energy, and Winrock International.

According to Alyssa Newman, the Foundation Director, “The foundation projects are also a great way for our employees to have a chance to participate in solar installations and give back to the world.”

Solar installers and developers agree that a big barrier to industry growth is the need to educate consumers. Recurrent Energy CEO Arno Harris said, “SunPower has done more than any other company to educate customers and make the case for strong solar policies.”

The SunPower Foundation also provides resources to students and schools. The 100 People Under the Sun lesson plan references the fact that if there were only 100 people in the world, 24 would have no access to electricity. The curriculumprovides activities to help students understand their carbon footprint, renewable energy, and how solar power creates electricity from the sun. At the conclusion of the lesson plan, students get the opportunity to nominate someone in their community who is actively engaged in and implementing solar energy solutions.

Smaller Is Better

Keynote speaker Pat Wood III, former chairman of the Federal Energy Regulatory Commission (FERC) and now with Wood3 Resources, summarized the dominant theme of the day. “As I was preparing my presentation, I was struck by the growth of ‘bite-sized’ solar projects and how that is an emerging trend and is based on solid economic data,” he said.

The other panelists echoed this observation toward smaller-scale, distributed generation projects in the range of two to 20 megawatts. These projects are on the rise compared to utility-scale projects because they are faster to approve, have high profitability, have shorter connection and permitting reviews, and have increased flexibility.

Panelists described an average time for project completion in the range of six to 12 months for smaller projects, compared with two to four years for large utility-scale efforts. Ric O’Connell of Black and Veatch referenced his 2006 report that documents the high rate of renewable contract failure, and describes the risk factors that can lead to long project approval times.

“Distributed generation projects represent a hedge or safety value as we work to develop our business portfolios and regulators work to meet renewable portfolio standard goals,” added Recurrent Energy CEO Arno Harris.

Utilities Will Increase Smaller-sized Projects As Well

Paul Douglas of the California Public Utilities Commission described the significant challenge in meeting California’s Renewable Energy Standards – and as a result, the need to pursue a more diversified procurement strategy. Details of this challenge are in the PUC report 33% Renewable Portfolio Standard: Implementation Analysis .

The trend today is to increase the number of smaller-scale, competitive bid projects approved by the PUC, Douglas said. “Utilities know they have a deep hole to fill. Solar can do it in some ways even easier than wind.”

Douglas also shared details of a new proposed program that could streamline the ability for the PUC to approve smaller-scale projects. This proposal recommends a renewable auction mechanism for distributed generation procurement. The auction method is a market-based procurement process that utilizes some of the components of a traditional feed-in-tariff program.

“Because the distributed generation market is growing so fast, we think there is sufficient competition in the market space to make this program viable and accelerate project adoption,” Douglas said.

Panelists also identified another trend: an increase in vertical integration and the offering of full systems and services in addition to initial company products. For example, Michael Rogol, head of PHOTON Consulting, said the opportunity for increased profits comes from the addition of value added services and sale of full solar systems, and not merely panel manufacturing.

Howard Wenger, President of Global Business Units at SunPower, explained how his company initially sold its cell technology, but is now a fully vertically integrated solar business that participates in all segments of the market from cell manufacture to project development and construction.

U.S. Can Be a ‘Massive, Massive Market’

Overall, the speakers were optimistic for the future growth of distributed and utility-scale solar. “I think PV will grow faster than almost anyone in this room would believe,” said Rogol. In 2004 the global market was less than 1 gigawatt. This figure has grown to 12 gigawatts in 2009, and Rogal predicts a potential for 46 gigawatts by 2012.

PHOTON Consulting’s research also forecasts, “The U.S. is a one-terawatt industry and this is 25 percent larger than all of Europe combined. It is a massive, massive market.”

Rogol was specifically positive about the opportunity for solar at the utility level, saying, “We believe the utility segment will fuel future growth. Two years ago, utility-scale solar was non-existent. We believe utility-scale solar can be as much as 50 percent of the total market.”

photo: Wayne National Forest

To explore the opportunities, R. Thomas Hoffmann, Partner with Ballard Spahr, led a panel with three experts on Chinese solar investing. They were:

• Jimmy Chuang, is with GCL Solar, the largest polysilicon producer in Asia and the largest solar developer in China.  GCL has access to $4.5 billion.

• K. Scott Son, Vice President of Project Finance at Suntech, the largest producer of silicon PV in the world (nearly $2 billion in revenue in 2008).

• Sha Wang, Principal at Cybernaut Investment, a family company with US and Chinese roots and a $500 million solar investment fund.

Low Risk, Stable Returns
All three panelists agreed Chinese companies are looking for equity investments in the US, and that solar offers an attractive way to diversify their portfolios.

Sha Wang explained there is a low tolerance for risk among Chinese investors, so her company looks for fixed income-like returns of 10-20 percent. The fact that the US does not have feed-in tariff programs makes this market much more complex and difficult to predict returns compared to European investments. The speakers also stressed that they want good management teams that can execute successfully and demonstrate a good track record.

Consensus: Joint Ventures Never Work!
During the session, the panelists offered advice to potential US business partners:

• Educate investors. Chinese investors are often surprised by the complexity of the US capital markets.  K. Scott Son advised that, “developers need to vet investors and provide significant education.”  Jimmy Chuang added, “the complexity of the US market implies that the education process could take as long as a year.”

• Present low-risk deals. Chinese companies either do not have an appetite for tax write-offs, or are not eligible for US tax credits.

• Align with the company goals. Take time to understand how investors generate income and where they are going. For example, many investors are also module manufacturers; in the case of Suntech, it is looking for partners who can help them sell more panels. To achieve this goal, Suntech has a $20 million solar project development fund to facilitate partnerships.

• Learn about how capital can get out of China. China has currency control and complicated rules regulating how money leaves China.

• Be patient. Sha Wang stressed: “Patience is key. If you don’t have patience, I don’t suggest you partner with a Chinese company.”  However, K. Scott Son provided a jovial counter to the caution by adding, “unless you want to work with Suntech.”

• Concentrate on PV. Currently, Chinese companies are interested in crystalline PV.  They are less interested in — and know less about — concentrated solar power and solar thermal.

• Provide exclusivity. Pipeline exclusivity is a must.  K. Scott Son reminded the audience of a photo op with President Obama highlighting a SunPower project where the President is standing in front of Suntech panels.  “We must have exclusivity.  It would be a PR nightmare for us to invest in your company, yet you later use Trina panels in the project.”

• Don’t do a joint venture. All three panelists shook their heads and said, “joint ventures are very hard to make work.  Especially when they are 50/50.”

Five hundred bankers and solar executives speculated about the promise and pitfalls of implementing solar power projects at the 2010 Solar Power Finance & Investment Summit in San Diego last week.

Permitting the Biggest Challenge

Permit approval and securing financing dominated the two-and-a-half day meeting as the greatest obstacles to completing projects.  A panel of venture capitalists agreed that in all cases, developing solar projects and technology consistently takes longer than expected.

According to Sven Strohband, partner with MDV-Mohr Davidow Ventures, this is because “materials science is hard, but not as hard as biology: We are trying to do something truly new, and solar investments require a lot of capital to go to market.”
“Permitting continues to be the single biggest challenge, there are options on the financing side,” said Natalie Schaefer withBrightSource, a company that is working to site 400 MW of solar thermal projects in the California desert.

Deadline for Federal Dollars
Permitting and financing are even more of a challenge when there’s a deadline. Time is short for those  companies applying for federal grants covering up to 30 percent of the cost of renewable energy projects. The funding is part of the 2009 American Recovery and Reinvestment Act. In order to qualify, projects must start construction by December 31, 2010, and the job gets tougher if your project is on federal land.

To help meet impending deadlines, the Bureau of Land Management (BLM) has created a “fast track” process, but even then, permits are not expected to be approved until September 2010.

On the finance side, Rainer Aringhoff of Solar Millennium pointed out, “That gives companies like Solar Millennium two-and-a-half months to close financing on billion dollar projects.”

Fast Track to Meet Grant Deadline

According to Greg Miller, the BLM Program Manager of the California Desert Renewable Energy Coordinating Office, there are 34 projects in the fast track process, and nine of these are solar projects.  Two solar projects have already gone through the environmental review, five more should be finished next month, but some may not make it.

Rainer Aringhoff expressed anxiety about the process, “The entire industry is concerned about the time frame set by the ARRA cash grant funding.  As an industry, we are concerned that on the federal side with BLM, it looks good, yet there are misalignments with other agencies such as California Fish and Game.”

He expanded with an example that many large solar desert developers are now facing.  Recently, California Fish and Game highlighted that there might be impacts on the Golden Eagle.  Even though the department has not issued specific guidelines, all of the developers are conducting studies just in case the department requests more information in the future.

California is clearly the most difficult jurisdiction when it comes to environmental permitting.  Speakers such as Bill Chilson at NextLight said his projects in Nevada have not had significant objections from the environmental community.  However, his company has worked closely with the off-road vehicle community to respond to their concerns.

Solar Industry Needs Clarity

To create a clear and transparent process, BLM is leading the Desert Renewable Energy Conservation Plan (PDF) to coordinate permitting among four state and federal agencies with jurisdiction in the California desert. This includes the California Energy Commission, California Department of Fish and Game, Fish and Wildlife Service, and the Bureau of Land Management.

The plan is expected to take two years to develop, and the goal is to designate a set of conservation areas and renewable energy zones with permits in place. Several speakers highlighted the need for this type of coordination, although it comes too late to benefit the 60 companies applying for the federal cash grant this year. It was pointed out that it doesn’t make sense to site a project in a suitable conservation area if it is not feasible because of transmission failure. A draft conservation strategy for the DRECP is expected out on April 30, 2010.

New “In Lieu Fee” Plan to Streamline Mitigation

Kevin Hunting, Acting Chief Deputy Director with the California Department of Fish and Game, says the state is proposing an “in lieu” fee to make mitigation more efficient and transfer the burden of mitigation from companies to the state.  Compared to other power generation, solar requires a large amount of land, which creates a challenge for developers to buy land quickly to meet mitigation requirements.  Often land prices soar, and projects become too expensive.

The “in lieu” plan would pool industry mitigation fees and allow the government to be more strategic about species protection.  “It is definitely helping [us] to have more flexibility in the process.” He added, “but we are under no illusion that it will be cheap—likely in the seven digits,” said Rainer Aringhoff.

We Are in the Game Together

The California Environmental Quality Act (CEQA) was also a popular topic at the conference. Mark Tholke, Director, Southwest Region at enXco, encouraged the industry to stay positive: “There are rules that we either live by, or work to change.  CEQA is difficult.  I suggest that if renewable energy is a public policy goal, having some flexibility around CEQA is not a crazy idea.”

Fortunately, Kevin Hunting and others agreed, “There is a strong commitment by the environmental community to get projects permitted.  I believe we can find a balance and that there is sufficient land out there.  Our goal is to meet the law and that it is defensible.  If the permit gets sued, the department gets sued, but also the project gets stopped.  We are in the game together.”

photo: ClearlyAmbiguous