Unlike residential projects, where costs per watt can actually go down with higher efficiency, utility scale projects are much more sensitive to the price of a solar panel. Efficiency matters, but it's often overshadowed by sheer panel costs.
The impact on solar companies
This dynamic between cost and efficiency puts a lot of pressure on solar companies. There's little ability to differentiate on efficiency, something SunPower (NASDAQ:SPWR) found out and a big reason it bought Cogenra Solar to produce its new low cost P-Series product, but you have to be efficient enough. For a few years, First Solar (NASDAQ:FSLR) was the lowest cost supplier of solar panels, but was behind on efficiency. Its fortunes only improved when efficiency improved, so there's a minimum viable product concept in solar panels.
What's clear is that utility scale solar projects won't pay much of a premium for more efficient solar panels. Paying more per watt makes sense when the panel is only 15% or 20% of an installation's total cost, but when it's nearly 50% the cost of panels matters a lot, while efficiency doesn't.
This should play into the hands of low cost module manufacturers like Canadian Solar (NASDAQ:CSIQ), Trina Solar (NYSE:TSL), and JinkoSolar (NYSE:JKS). They'll have to sell panels at lower prices, but lower costs are going to be an advantage in the utility market.
Different solutions for different solar markets
As it stands today, cost is still the biggest differentiator in the utility scale solar market. That doesn't mean efficiency doesn't matter at all, but it doesn't outweigh the cost side like it does in residential solar. That's something investors need to keep in mind when they look at solar stocks in a market where panel costs are falling rapidly.
Travis Hoium owns shares of First Solar and SunPower. The Motley Fool has no position in any of the stocks mentioned. 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.