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First Solar Looks Beyond Its Own Technology for Fatter Profits

The grass seems to be greener across the thin-film solar fence, at least for First Solar. The company, which is easily the most successful in the solar industry, has a research unit in Silicon Valley working on a competing technology called CIGS, according to Reuters.

CIGS, or copper indium gallium diselenide, is a particular material used for thin-film solar panels. The thin-film industry is an odd one; there are literally dozens of companies working on thin-film, but First Solar, which uses cadmium telluride (CdTe) is the only one to ever meet with any significant success. CIGS companies like Miasole and Nanosolar promised years ago to beat First Solar to pulp, but they're still eating its dust today.

So why would First Solar want to try its own hand at CIGS, a technology that has frustrated dozens of top researchers? A company official quoted in the Reuters story seems to suggest that First Solar is simply gathering competitive intelligence, but it could likely do that without funding a separate research lab.

An alternate possibility is that First Solar has found the limitations of CdTe -- and decided that its competitor's technology may, in fact, be better. In fact, it's not really the CIGS companies that First Solar is fighting against. The common foe to anyone in thin-film is the traditional silicon panel made by companies like SunPower and Suntech. Over the past couple years, these have become a serious threat to First Solar's business.

Steady improvements in silicon panels have led to a rising tide of skepticism about CdTe. In a lengthy excerpt from a letter to shareholders, Bronte Capital partner John Hempton lays out why his firm has made a big bet against First Solar:

For all the benefits of First Solar's cells, they are inferior in many important ways to a polycrystalline cell. Their efficiency is lower â€" which means you do not get as much solar energy off the constrained roof space. Secondly, whilst they save a lot on the semiconductor part of the manufacturing process they have to use more glass, more wires etc to generate the same amount of solar electricity ...

But worse â€" the price of ingot has fallen â€" and spot prices are now $55 per kg â€" which is a lot less than $450. The cost of ingot is still falling. First Solar's advantage is entirely dependent on the fact that they use much less semiconductor than wafers ...

We are trying to work out the cost-structures of the polycrystalline manufacturers â€" but it looks to us that the extra glass and other balance of system costs that First Solar panels have are getting close now to completely removing the advantage of low semiconductor material usage ... If that happens though, First Solar is toast. It probably won't file bankruptcy because it has so much in past profits to fall back on â€" but it will be every bit as obsolete as a Palm organizer is now or a Garmin car navigation system might be in five years.

Of course, a First Solar panel is not a straightforward consumer good of the sort Palm or Garmin makes. Where Hempton may be wrong is in considering First Solar as a company that competes strictly in the traditional solar market -- that is, trying to sell solar panels for people to put on a roof. Over the past year, First Solar has stepped ever further into another world: utility-scale electricity generation.

At utility scales, which involves buying up plots of land to carpet in solar panels, First Solar can effectively buy and install its own product. As long as the plants can sell their energy for more than the base rate of the open market, it's a profitable business. And by all indications, First Solar has indeed figured out some areas in which it can make a profit in this way.

Not that it's a great business -- the profit margins could be slimmer than First Solar's panels. But the company has the positioning and the money to potentially pull it off, or at least provide a supplement to its panel sales on the open market. And while it's doing so, it can apply its war chest to a next-generation technology to beat today's silicon panel manufacturers, something they're about as capable of doing as any other company.

Which, of course, seems to be the plan with CIGS. But that's where First Solar loses me. It's investing in a technology that has consistently failed to scale up and meet expectations -- precisely the opposite of what First Solar is known for. They may have settled on CIGS simply because it's the only other thin-film technology that seems in reach. More advanced tech could be a decade out.

Does First Solar have an ace up its sleeve? One fact that Reuters didn't mention was First Solar's poaching of the chief scientist at Solyndra, the best-funded CIGS company around, in early 2009. But they're not talking, so we'll just have to wait and see.