Handful of players seen ruling the solar roost

LOS ANGELES, CALIFORNIA - Solar panel makers from California to China are gearing up to capture a slice of the growing U.S. market for utility-scale solar power plants, but just a handful of players are expected to snap up most of the business in the coming years.

U.S. players First Solar Inc and SunPower Corp and China's Suntech Power Holdings are widely expected to be the primary winners of large photovoltaic solar projects in the United States in the next few years, with the first two already firmly entrenched in the market.

"I don't think the utility landscape is going to become as competitive as the commercial market, because the barriers to entry are much higher," said Barclays Capital analyst Vishal Shah. "It takes a long time to prove your technology to the utility so they can be comfortable. So from that standpoint it limits the competition only to a handful of players."

For much of the last two years, investors have been banking on an eventual boom in solar power plants in the United States due to increased concerns about climate change that have ushered in generous government incentives for clean energy. That optimism has only intensified in recent months despite a weak global economy and tight credit markets that have hampered development of green power projects this year.

Efforts by the Obama administration to speed development of renewable energy, state mandates for renewable power and a dramatic drop in the cost of solar panels mean "the U.S. market could potentially (and finally) become 'the promised land' that investors have been waiting for since late 2007," FBR Capital Markets analyst Mehdi Hosseini said in a June research note.

But cashing in, at least in terms of securing the biggest projects, may be a tough sell for all but a select few.

With power plant-sized solar projects costing roughly $1 billion to build, according to Shah, developers and utilities are not willing to take chances on emerging technologies and are even skittish about snapping up panels from the flood of new Chinese manufacturers, despite their rock-bottom prices.

"There is a perception of a quality difference" between U.S. and Chinese panels, said Bank of America/Merrill Lynch analyst Steve Milunovich, who added that the U.S. utility market is shaping up to be a race between First Solar, SunPower and Suntech.

"It will be a fairly oligopolistic market," he said.

The financial health of panel suppliers is more important than ever, one utility executive said, given the global recession that has made even solar companies struggle to stay profitable.

Utilities have to be sure about not just the quality of the panels and their track record, but "the ability of the manufacturer to support their product during the warranty period" of 10 to 20 years, said Southern California Edison's director of generation planning and strategy, Mark Nelson.

For that reason, First Solar and SunPower have snapped up a string of contracts over the last few years, mostly in California, and are by far the biggest photovoltaic players in the utility market today.

The Golden State's utilities, including PG&E Corp's Pacific Gas & Electric, Edison International's Southern California Edison and Sempra Energy's San Diego Gas & Electric, are required to obtain 20 percent of their electricity from renewable sources by 2010, and 33 percent by 2020.

First Solar, whose low-cost panels are made from cadmium telluride, is widely considered the market leader. Milunovich estimates that the company enjoys half the solar backlog in the U.S. utility market.

But with recent steep declines in the cost of polysilicon, the raw material in traditional solar panels, silicon-based panels — including those made by Suntech and SunPower — are now more competitive with First Solar's products.

Southern California Edison, which has contracted First Solar to build the first two megawatts of its 250-megawatt rooftop solar program, may seek more suppliers for the rest of the project, Nelson said, depending on the bidding process.

SunPower's panels, though not the cheapest, are much in demand because they are most efficient at transforming sunlight into energy. The San Jose, California, company also benefits from having recognized the market potential early on and proven its technology to potential utility customers over a number of years, Shah said.

No. 1 Chinese panel maker Suntech, however, is nipping at the heels of its U.S. rivals and does not face the same quality concerns as many of its Chinese peers.

"As Suntech moves up I don't think there is going to be any difference there," Milunovich said. "They are going to be competitive."

To establish itself in the U.S. utility market, Suntech last year formed a joint venture called Gemini Solar Development Company LLC with solar developer Renewable Ventures, which was acquired by privately held Spanish power producer Fotowatio in March.

So far the group has secured a 30-megawatt project for Texas municipal utility Austin Energy, and Suntech is seeking to build a U.S. manufacturing plant ahead of an anticipated boom in the utility market.

Chinese panel maker Yingli Green Energy Holding Co Ltd is also expected to make some inroads into the U.S. market thanks to a new supply deal with solar developer AES Solar, a joint venture between power producer AES Corp and private equity firm Riverstone Holdings LLC.