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Heavy bets on SolarCity, RiverBend not risk-free

New York State and the Cuomo administration are making a $750 million bet that SolarCity and its newly acquired solar panel technology will keep the solar energy system installer’s business growing rapidly and turn Buffalo into a hub for solar module manufacturing.

There’s a lot at stake for the Buffalo Niagara region, too. If the plan succeeds as state officials and the company hope it will, it could bring 2,900 badly needed jobs here and potentially create the kind of critical mass within the solar industry that could attract many more in the years to come.

Of course, that’s if everything works out according to plan — and to their credit, that’s pretty much what happened in Albany when the state tried a similar recipe over the last 20-plus years to build what now is a booming semiconductor industry there.

But nothing is guaranteed, especially in a business that is evolving as quickly as the solar industry, where today’s market leaders face growing competition and today’s technology could be supplanted by something better.

Let’s take some key assumptions behind SolarCity’s South Buffalo factory and look at what could disrupt them:

— SolarCity’s workload may not grow as rapidly as the company expects. No matter how you look at it, SolarCity’s business has been growing at breakneck speed. The capacity of the solar energy systems that it installed jumped by 78 percent last year, and the company expects its installations to jump by another 88 percent this year to between 500 megawatts and 550 megawatts of generating capacity.

An in 2015, just as the Buffalo plant is getting close to starting production, SolarCity thinks its installations will have shot up by another 81 percent to around 900 megawatts to 1 gigawatt of capacity.

Those projections dovetail with analyst forecasts that the solar industry will keep growing rapidly as the cost of solar energy systems continues to drop, but that growth could be derailed by a number of factors, from a recession to a spike in interest rates that makes it harder — and more expensive — to finance solar system installations.

SolarCity also is the dominant player in the U.S. residential solar market, accounting for almost 3 in 10 residential solar energy systems that were installed across the country during the second quarter. SolarCity’s 29 percent market share was more than three times bigger than the 9 percent share of its nearest competitor, Vivint Solar, which just raised $330 million by selling stock through an initial public offering.

Morgan Stanley analyst Timothy Radcliff doesn’t think a market share in the 30 percent range is sustainable in the long run, especially as competition grows from energy companies such as NRG Energy that are moving into the solar sector.

— Making solar panels may be harder than SolarCity expects. SolarCity isn’t easing into the solar panel production business. It’s jumping in headfirst.

The Buffalo plant will be the biggest solar module factory in the Western Hemisphere and one of the biggest in the world, with a capacity that approaches some of the world’s biggest solar plants in Asia.

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Silevo, the small California company it bought to break into the high-efficiency solar panel market, currently makes panels at a small plant in China, which has a capacity of 32 megawatts. The Buffalo factory, when running at full scale, would have a capacity that’s 30 times bigger, or more than 1 gigawatt.

Some analysts have expressed concerns that ramping up production to such a large scale may be more difficult, especially since SolarCity has no experience in solar panel production.

“SolarCity is getting into a business it has never been before,” said Angelo Zino, an analyst at S&P Capital IQ.

“The recent Silevo acquisition provides opportunities for SolarCity to lower its total installed cost per watt through vertical integration efforts,” Zino said in a report. “We, however, are cautious about manufacturing expansion and its ability to execute.”

— Will Silevo’s technology pan out? One of the main reasons SolarCity decided to spend up to $350 million to buy Silevo was its solar panel technology, which is more efficient than the conventional panels that are widely used today.

That extra efficiency can make a big difference in driving down the cost of solar energy systems, since a system that uses panels that can convert 21 percent of the sun’s energy into electricity requires fewer modules and less mounting equipment than a conventional installation that is only 18 percent efficient. In addition, SolarCity executives think their panel technology can become even more efficient as time goes on, maybe as high as 24 percent, yielding further cost savings.

But that bet assumes that Silevo’s technology develops as they hope and that it won’t be surpassed by new solar technology — possibly from competitors — that are even more efficient.

In SolarCity’s own words: “If we cannot continually improve the efficiency and power output of our solar panels and reduce the cost of production, we could become less competitive in the market and our financial and operating results would be adversely affected,” the company said in a Securities and Exchange Commission filing last week.

That’s also why research and development is part of the company’s deal with the state, with R&D efforts expected to be split between the Buffalo factory and locations tied to SUNY Polytechnic Institute in Albany, which has developed expertise in the semiconductor technology that forms the base for solar panel production.

The Buffalo factory will tie SolarCity’s future closely to the success of Silevo’s technology. Until now, SolarCity has been, in the words of Morgan Stanley’s Radcliff, a technology agnostic, free to switch from one supplier’s panels to another. That has allowed SolarCity to take advantage of the aggressive pricing offered by competing module manufacturers.

“In many cases, SolarCity was buying product at cost, even without the associated capital required to build the facility,” Radcliff said.

That’s changing. Now, the company is committed to the Buffalo factory — and an investment of its own money of up to $150 million — for an in-house supply of solar panels that eventually will cover most of SolarCity’s projected needs.

The company believes the combination of Silevo’s higher-efficiency technology and the massive scale of the Buffalo factory will drive down its costs substantially. And by making panels in the United States, SolarCity will avoid the import tariffs that it now faces, since it currently buys all of its solar panels from Chinese suppliers.

But all that depends on Silevo’s technology panning out.

— Can solar survive shrinking incentives? The growth of solar has been fueled, in part, by lucrative subsidies aimed at narrowing the gap between the higher cost of solar-generated electricity and power purchased from conventional utilities.

One of the key incentives — a 30 percent federal tax credit — is set to drop to 10 percent at the end of 2016, which puts pressure on solar installers such as SolarCity to relentlessly reduce the costs of its solar systems so they still make economic sense once the federal subsidy is reduced.

“SolarCity needs to find a way to reduce its costs structure,” Capital IQ’s Zino said.

A big part SolarCity’s plan to do that is the company’s factory in Buffalo, where the state’s $750 million investment and a sweetheart lease deal with annual rent of $1 will go a long way to reduce its costs, even as it absorbs the risks from its inexperience in manufacturing and its bet on Silevo’s technology.