So, what exactly is involved in calculating solar panels cost in Ranch Penasquitos? When thinking about solar power very few people know the way the cost of solar panel systems is actually measured. Or even, for that matter, do we automatically grasp the connection relating to the cost of solar power and the value of solar power. We all know that gasoline prices are in dollars per gallon. We likewise are all aware of approximately how far we’ll be able to drive after spending 40 bucks for a tank of gas. In contrast to a tank of gas, the value of which can be consumed pretty much instantly, solar panels deliver their value across a period of time.
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Caption: Kokam 24-megawatt Energy Storage System (NYSE:ESS), used by South Korea's largest utility, Korea Electric Power Corporation (KEPCO): world's largest Lithium NMC ESS for frequency regulation
Sometimes technology creeps up on you before you realize what is happening. Then something happens to get your attention and you realize that things are changing fast. And so it is with batteries, the missing link in replacing fossil fuels with renewable energy.
Here I cover two areas of battery technology that are transforming power management at scale. The first comes out of left field as a solution to frequency regulation in power plants. The second relates to management of excess energy generated by solar and wind, followed by dispatch of that energy when needed. At its most extreme this role may involve near complete charge and discharge once, or even twice, in a single day, every day.
Grid reliability, increased efficiency and frequency regulation
Late last month Kokam (XKRX:040480) a veteran Lithium ion South Korean battery manufacturer, announced the deployment of 3 high performance Lithium ion battery systems to provide 56MW of specialized batteries for frequency regulation in large power plants in South Korea. The batteries are: two Kokam Lithium Nickel Manganese Cobalt (NMC) battery systems with capacities of 24 MW/9 MWh and 16MW/6MWh, and a 16MW/5MWh Lithium Titanate Oxide (LTO) battery system. The LTO system was implemented first. While LTO technology is robust, with less dependence on temperature control, it is more expensive than NMC batteries and the specifications from the utilities often require temperature control (hence housing in containers which are cooled or heated). I suspect that NMC will become the preferred technology for frequency regulation.
The 24MW NMC battery system is the largest used in the world for frequency regulation. These batteries provide the Korea Electric Power Corporation (KEPCO) (NYSE:KEP) with ~10% of the frequency regulation needed to allow its entire system to run largely with batteries. KEPCO plans to install ~500MW of rapid response batteries by 2017 to effectively wean South Korea off the need for fossil fuel to provide this reserve power need for frequency regulation. Several battery manufacturers are involved in this project (Kokam, LG Chem (OTC:LGCLF), Samsung (OTC:SSNLF). It isn't clear how much KEPCO has already installed but it may be as much as 230MW of batteries for frequency regulation.
South Korea is special in that it has a single power authority, KEPCO, which is largely responsible for managing the nation's power capacity. So it is possible for one organization to setup a national program to manage 65 GW of power capacity. This capacity is mostly coal powered (~47GW) but with substantial nuclear and hydro capacity (~18GW). There is a very small contribution of wind and solar renewable energy in South Korea.
Currently ~5% of the coal needed to run a coal fired plant is dedicated to frequency regulation, so having batteries take over this role is a substantial saving in coal used. More importantly the South Korean plans (within 2 years!) indicate one of the first examples of batteries assuming a central role in an aspect of power generation that has been seen as a fossil fuel role.
Clearly Kokam doesn't see South Korea as the only market for this role and they have pilot facilities (2-5MW) being reviewed in both Germany and the US. Kokam has the capacity to deliver 100's of MW of the NMC frequency regulation batteries at short notice.
There is a lot of interest in fast response Lithium batteries and a substantial system (2MW) was recently announced in the UK using Toshiba (OTCPK:TOSYY) Lithium Titanate batteries in association with energy company E.ON (OTCPK:E.ON) and it's wholly owned subsidiary Uniper at the Willenhall substation. E.ON also has a 10MW/2.5MWh battery system under development with Tucson Electric Power in Arizona. E.ON is shortlisted for a 250MW tender for frequency response storage in the UK and Kokam is involved in tendering, so Korea's implementation is being watched in Europe too.
Interestingly lithium technology is being used to replace lead acid batteries by Duke Energy (NYSE:DUK) in a 35MW facility. There are also major frequency regulation projects in Canada (e.g. 12MW system in Ontario's Independent Electrical System Operator).
These Lithium NMC and LTO batteries are also useful for peak load management improving power quality and reliability in solar and wind applications, and also for spinning reserve applications.
Energy management for renewable energy
This is a big one, as you need a way to store and then access the intermittent power from solar PV and wind. Unlike the frequency regulation application described above, which needs fast, but short term response and high power delivery, energy arbitrage for solar and wind smoothing requires slower and longer term charge/discharge (up to over a number of hours).
A frequency regulation application has a high life cycle (10,000, compared with 4000-8000 with arbitrage), high power (i.e higher than arbitrage), but lower energy density than arbitrage. Because frequency regulation is a special rapid application it is more costly than an arbitrage battery.
The actual needs for energy management at scale are more varied than frequency regulation and so the actual configurations for batteries for this purpose are still evolving. It might be that the critical requirement is ramp rate control, or charge/discharge over hours may be more critical. Battery manufacturers are focusing in on their preferred configurations. For example Kokam has a High Energy NMC battery for energy management at scale.
For the technically minded here are a couple of links to give a sense of the kinds of lithium battery technology and how the different formulations behave. A good summary is here, and for those who want a deeper dive into lithium battery chemistry, here is a pretty up to date article.
Energy management applications for renewable power generation
Pumped hydro has a significant role in energy storage and this is well established with 140GW of pumped hydro already implemented. This large scale storage allows long term (even seasonal) energy storage.
There are surely many old mines, with tailing dams at the top and down below an open cut mine, that can be flooded. GW levels of power can be addressed in such schemes, but the capital costs are not small and they attract controversy because of their size. Two pumped hydro projects in California, Eagle Mountain and Iowa Hill, have been on this path for a long time, but capital and approvals are elusive.
This is happening at several levels. The easy one involves home solar PV systems linking with a home battery. Because it is a small cost (relatively) and the market is big (1.5 million homes in Australia have solar PV), just about all of the battery providers are interested. Here numbers matter as many small systems add up to a lot of power managed and it is managed locally (at the individual house level).
The harder thing is larger scale energy management, and detractors of Lithium batteries point to frequency regulation to indicate why Lithium batteries are inappropriate for energy arbitrage. However, Lithium battery chemistry configured for frequency regulation is not the only chemistry or configuration for lithium batteries, as Tesla is doing fine with its electric cars that have a range of several hundred miles and hence can discharge over many hours.
It seems that a 40ft container housing a 2-2.5MWh system is the scale for a number of utility energy management systems, but systems as large as 100MWh give a sense of the scale being implemented. Obviously a 100MWh plant would involve 40 x 2.5MWh 40ft containers.
Utilities adopting lithium battery energy management applications
There are now many multiple MW systems being installed for this kind of application. Kokam gives details of 12 of its systems installed in the US, South Korea and Australia that have more than 1MW power capacity. In 2015 Kokam alone installed 85MW of battery storage systems and 75MW of that capacity was larger than 1MW.
Substantial lithium batteries are also being adopted (along with solar PV) in remote and mining communities to partially substitute for diesel-powered systems. For example a remote indigenous community in Northern Australia is installing a 2MWh lithium battery storage system to store solar PV and take over grid forming functions from a diesel system. This will allow switchoff of the diesel system during the day as well as storing solar PV produced power.
Lithium batteries as part of a renewable energy project
Clearly renewable energy projects are considering including arbitrage, as there are various management functions that batteries do well, and holding the power generated to be delivered at a time when the value of the energy is greater may make sense. An early example of this kind of arbitrage involves Statoil (NYSE:STO) which recently announced a pilot 1MWh Lithium battery (technology not given) storage system to complement its Hywind Scottish floating 30MW wind farm.
Image : Statoil Hywind turbine
However, there are other battery technologies for deep charge/discharge on a daily basis. While at an earlier stage of development, flow batteries seem well suited to this task. It is a race to see if flow batteries will get a place at the table or whether lithium batteries now have sufficient momentum to dominate the battery arbitrage space.
Update on flow batteries
Six months ago I wrote an article on three flow battery companies (Redflow (ASX:RFX), Imergy Power Systems and ViZn Energy which had partnered with substantial manufacturing companies (Flextronics (NASDAQ:FLEX), Foxconn (OTC:FXCOF) (TWSE:2354) and JBL Circuit (NYSE:JBL) respectively for manufacture of their flow batteries.
While it is too soon to see a lot of progress, there have been developments in each of the partnerships.
Redflow/Flextronics ZnBr flow batteries :
The last 6 months have seen substantial progress with Flextronics now assuming 100% of manufacturing from Redflow. Flextronics now controls all aspects of manufacturing of the RedFlow batteries, with production ramp up in April 2016.
In 2015 in partnership with FLEX, manufacturing costs have been decreased by 15%, the lifecycle/longevity has been improved and cycle cost/kWh over battery lifetime decreased by 50%. Redflow will soon deliver an on-grid demonstration 0.1MW/0.48MWh flow battery system to Ergon Energy.
In addition to exploring remote markets around the world, Redflow is entering the Australian home battery market with a smaller offering. The Redflow share price has doubled since the start of 2016.
Imergy Power Systems/Foxconn :
It is too early to know how the Imergy projects in India, China and Africa are proceeding, although the status of the Sun Edison (NYSE:SUNE) purchase of up to 1000 of Imergy's vanadium flow batteries for implementing in India could be problematic given the disaster that has recently befallen SUNE and news that it is not supporting its activities in India. The rumor is that Adani (IN:ADANIT) may be interested in SUNE's Indian projects.
Recently (end of February 2016) SUNE announced agreement with Ontario Independent Electricity System Operator (Ontario IESO) to supply an Imergy 5MW/20MWh system in 2017; this was to be SUNE's first large scale grid-connected energy storage project and it will need to be restructured with SUNE in difficulty. Imergy and Foxconn will need to think creatively about diversifying the route to market for their flow batteries.
ViZn Energy/JBL Circuit : ViZn reported 20% improved capacity and reduced life cycle degradation, which is important for frequency regulation applications.
At the end of the day there will be winners and losers and here sits the dilemma for investors. Is it still too soon to know which technology to back and which companies to invest in? Given the intense interest in frequency regulation I suspect that this market, will be satisfied soon by companies like Kokam and LG Chem who have done the hard yards on understanding Lithium battery chemistry. I suspect that for management of renewable energy it will end up a combination of pumped hydro, Lithium and flow battery technologies, with the latter becoming increasingly important.
What is abundantly clear is that all investors need to look carefully at their fossil fuel portfolios, as the complacency that the switch to renewable energy (with storage) is going to take a long time seems misguided in 2016.
This story about battery storage starting to do heavy lifting has implications in two areas of large scale energy supply: frequency regulation and management of renewable energy. It will help resolve issues of intermittency of renewable energy. The impact will be felt not only on adoption of renewable energy (and hence solar and wind companies) but also on fossil fuel power generation. Investors in fossil fuels should think carefully about where this is heading.
Disclosure: I am/we are long ASX:RFX.
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.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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SunPower Corporation (NASDAQ:SPWR) is a global solar energy solutions provider. It operates in the specialized semiconductor industry and was incorporated in 1985. It is headquartered in San Jose, California and has offices in North America, Europe, Africa and Asia. The company's operating activities include designing, manufacturing and supplying solar panels and solar systems to a wide range of clients. SunPower's customers range from residential to utility customers, including businesses and the government. The company also offers different products related to solar systems that include inverters and control chargers. SunPower Corporation reports its revenues based on geographical segmentation. The company generates about 70% of its revenue from America, 20% from EMEA (Europe) and 10% from APAC (Asia Pacific). The revenues from Europe and Asia have been decreasing over the years partly because of the growing American demand and partly because of the recent economic conditions of Europe. NRG Solar is a significant customer of the company, being responsible for 35% of the revenue generated from America or in aggregate terms 24.5% of the entire revenue. SunPower is backed by Total S. A., the fifth largest publicly-traded energy company in the world. Total has a controlling interest in the company and holds around 66% shares of SunPower.
SunPower Corporation is listed on NASDAQ and is currently trading around $30. 2013 proved to be a good year for the company as far as market performance is concerned. Shares of the company appreciated consistently during the year. In the first week of January, shares were trading at around $6 but now they are touching $30. The solar industry has been facing difficulty in the past two years but now it seems that the market is regaining confidence in the solar industry.
EPS of the company also improved during 2013 which caused the share price to increase. Revenues have also been improving over time and SunPower has posted a CAGR (compound annual growth rate) of 4.95% since December 2011. These growing financial figures were responsible for the positive trend of the share price.
It appears that the solar industry is starting to recover. The recent years have been rough, especially for American solar businesses because of the dumping exercises carried out by China. The subsidizing of solar companies by the government of China enabled them to sell below their production costs. This forced the American companies to cut prices and suffer losses. Oversupply in the industry was also a major factor in the reduction of prices and diminished earnings. The sales of Chinese solar firms in Europe are capped now due to limitations imposed by the European Union. Once the US and Europe have settled the Chinese solar panel issue, profits in the industry will begin to grow. Furthermore, China has banned the construction of any further solar panel factories. All these developments enhanced the investor's confidence in the solar industry which in turn is reflected in the market performance of the American solar companies. "We're at a point now where demand starts to be driven by cold, hard economics rather than by subsidies and that is a game changer," says Jason Channell of Citigroup.
The solar industry is poised for future growth. According to IEA, renewable electricity will surpass output from natural gas and double the generation from nuclear plants by 2016; becoming the second most important source of energy after coal. It is worth noting that the growth of renewable energy has always been underestimated in projections. For instance, in 2003, IEA predicted that non-hydro renewable energy would represent 4% of the global generation by 2030 but the industry reached that figure in 2003. According to BNEF, renewable energy will account for around 69-74% of new capacity added by 2030. Estimates by HIS predict the global PV (photovoltaic) market to grow by 17% in 2014. All of this points toward the fact that the solar industry will grow in the future.
BNEF also projects a 20% increase in PV installations by 2017. The emerging markets are USA, China and Japan, accounting for 52% of the solar demand in 2013 compared to 13% in 2008. Overall, the industry is set for growth but the question is, on whose expense? China and the US are the two main competitors in this industry. The relative strategies and actions of their governments could affect the companies based in both countries.
Global Production Leader
China is the largest supplier of PV modules. It plans to add 10 GW of solar capacity to the system each year until 2015, aiming for 35GW by 2015. The current capacity is 5GW. Chinese companies like Trina Solar, Yingli Solar and Hanergy have low production costs and are offered subsidies by the government. Therefore, they manage to compete on very low costs, rendering the US based suppliers unprofitable.
The excess production and oversupply of solar panels by Chinese manufacturers reduced the price margins in the industry. This oversupply has been adversely affecting the global solar industry for the past few years. The capping of Chinese solar panels by the EU and the restriction of the Chinese government on the establishment of new solar panel installations has helped in improving the conditions of the industry globally. This, however, presents a problem for the American solar companies because the Chinese suppliers are likely to converge upon the attractive US market. This development could pose a serious hindrance to the growth of US based companies. China still produces the cheapest cells and the efficiency of the cells is also competitive. American companies need to find a way to produce cost effective cells to counter China's competitive advantage. To encourage competition, The U.S. Commerce Department set anti-dumping duties ranging from 18.32% to 249.96% on solar-energy cells imported from China in 2012. This provides a level playing field as far as the American market is concerned. In Europe, the market is equally competitive for both US and Chinese firms because China's sales have been capped. In Asia, as expected, Chinese companies have a clear advantage over their American counterparts.
Residential Leasing Program
SunPower's leasing program is a competitive advantage for the company, as it allows the consumers to install their energy systems without paying all charges upfront. Consumers can save up to 10% or 15% on their electricity bill and be eco-friendly at the same time. SunPower is trying to bridge the gap further by lowering the costs of the system and improving the efficiency. It is aiming to enhance efficiency by 10% and reduce panel costs by 35% in 2015. The residential lease program has attracted 16,200 customers since 2012. "Our residential lease business remains strong, with demand outstripping our financial capacity in the first quarter," said Tom Werner, SunPower's CEO, during a call with analysts to discuss quarterly earnings. The company has been fuelling its finance requirements from Citi, Credit Suisse and recently from US Bancorp. These leases are a competitive advantage for SunPower because they help in reducing the overall energy costs of the consumer.
Maxeon cells that are being manufactured by SunPower are the most efficient cells to date. They are 24% efficient. Provided the company manages to reduce the production cost of the cell, they would be every one's first choice.
SunPower's Oasis C7 is a solar photovoltaic tracking system that concentrates the sun's power seven times to achieve the lowest levelized cost of electricity (LCOE) for utility-scale solar power plants.
The leading technologies offered by SunPower are its differentiated strength and can help the company to grow.
Research and Development
SunPower is involved in research with King Abdullah University and the French Laboratory of Interfaces of Physics and Thin Films. Total S. A. is also working in solar R&D which could also benefit SunPower. Total is working in collaboration with:
LAAS: (Laboratory for Systems Analysis and Architecture - Toulouse, France) to enhance the efficiency of photovoltaic modules using a systemic approach.
IMEC: (Interuniversity Micro Electronics Center - Louvain, Belgium) to decrease the amount of silicon needed for cells and improve their efficiency
LPICM: (Interface and Thin Film Physics Laboratory - Saclay, France), a joint research facility of the French National Center for Scientific Research (CNRS) and the Ecole Polytechnique's engineering school with a combined team working on crystalline silicon thin film technology.
SunPower's exposure to extensive R&D is reflected in its technologically advanced products.
P/E ratio of the company stands at 26.8x and PEG ratio at 0.76x. This indicates that the company's growth would be higher than what market is paying for a dollar of earnings. In simple terms, the market perception is not in line with future growth and we can say that the price is not perfectly correlated to the anticipated growth. Industry growth estimates are 17.09% but the street expects SunPower to grow by a staggering 30%.
With growth estimated at 30% for the next 5 years the multiplier to value the company should be higher than its P/E. That is why we are taking a relatively higher multiplier of 35x.
The mean price target is $35.7, using an average multiplier of 30x which is also above the current price. However, we will use a higher multiplier of 35x and a target price of $42. These estimates give us a 25% upside on SunPower.
SunPower Corp. is well-positioned in the solar industry. It has highly advanced and differentiated products, which, despite their high costs are capable of competing with the low cost and less efficient solar modules. With its intense exposure to R&D, we believe that the company will be able to compete on the cost basis in the near future. It has the potential to become the leader in the solar industry. With the anti-dumping legislation enacted in the US, cap on China's sales in the EU and plans to initiate global leasing, SunPower has an opportunity to penetrate these markets. The top quality cells, Maxeon, enable the company to compete with other American counterparts like First Solar. As far as Asia is concerned, the market will continue to be influenced by China until the solar giants of America can develop a cost effective solution.
Overall, the future of SunPower Corp. is bright whether fueled by their differentiated technology or by the backing of Total S A. The target price of the company indicates further price growth. So, our call on the shares of SPWR is a BUY.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.