First Solar's Utility Contracts Pass Production Capacity

Together with the 550MW installation on California's Carrizo Plain that First Solar inherited when it bought Optisolar, the company now has contracts with utilities for over 1.2 gigawatts of power (including some smaller deals like one for 58MW with Sempra Generation). That exceeds the single gigawatt production capacity that First Solar earlier said it would hit this year.

The new contract with SCE splits the full 550MW between two installations, one of which will start in 2012 and the second in 2013, and will likely take place over a year or two, so they're not immediately meaningful. However, First Solar hasn't yet projected its manufacturing much past 2010, so the growing utility pipeline suggests that it may continue to expand production.

More and bigger utility contracts are a good thing for First Solar. The company is just beginning to encounter serious competition from solar photovoltaic companies, which are benefiting from plummeting silicon costs. But shifting its business more toward utilities will also put more pressure on First Solar to cut costs on its panels.

So far, it has done a good job of streamlining, having reached a 90 cents per watt manufacturing cost -- a couple years ago, there was still some speculation over whether getting below $1 per watt was possible.

That's probably good enough to turn a profit on the SCE installations, which an analyst in the Wall Street Journal estimates will bring in $1.2 to $1.8 billion dollars for First Solar. Although the lower end of that range might not offer much potential, something near the middle would yield a good margin.

But the future of working at the utility scale is another story, because that the competition (outside of California) is ultimately natural gas, coal and nuclear plants. The cost of installing the panels probably can't fall as quickly or as much as manufacturing costs, so the only way to reduce prices is improve manufacturing (a process that will hit a wall at some point) or cut into profit margins.

And there are always silicon panel makers like Suntech and Sunpower, who are striving to bring down costs as much as possible and even stealing some customers from First Solar. For now the company still appears to be on firm footing, with plans to lower its costs to 65-70 cents per watt. But the competitive hurdles are growing; the easy days are over.