Google's Solar Investments Could Be Real Winners (GOOG, FSLR, TSL, JASO, STP)

Last June Google Inc. (NASDAQ: GOOG) created a $280 million fund with SolarCity to finance residential solar projects. Yesterday the world’s search engine giant created a $75 million fund with startup Clean Power Finance to do more of the same. The company has now invested a total of more than $850 million in renewable energy projects from geothermal to wind and solar.

The low — and falling — prices for solar panels from companies like First Solar Inc. (NASDAQ: FSLR), Trina Solar Ltd. (NYSE: TSL), JA Solar Holdings Co. Ltd. (NASDAQ: JASO), and Suntech Power Holdings Co. Ltd. (NYSE: STP) have helped grow the market for residential solar installations, and the investments from Google will help even more.

The two solar funds are intended to help homeowners finance the purchase or lease of rooftop solar panels. SolarCity installs rooftop systems paid for by Google, and then charges the customer a rental fee or signs a power purchase agreement under which the company sells the solar-generated power back to the homeowner. Google receives a portion of the payment. SolarCity said back in June that it had $1.28 billion in financing available for residential solar projects.

Clean Power Finance will offer financing to installers to build rooftop systems that are Google-owned and for which homeowners pay a monthly rental fee that is typically cheaper than a standard electric utility bill. The company also offers a variety of other methods for paying to install a residential solar system.

Both plans remove from the homeowner and the installer the substantial up-front cost of a rooftop solar system. The revenue stream to Google may not be huge, but it is steady and it is essentially guaranteed. And if the program becomes a successful, it can expand both rapidly and widely due to the economics of the solar module-making business.

Even as the low prices for solar modules help customers and installers, they are decimating solar makers’ margins. Global shipments of solar modules for 2011 could exceed demand by 4,400 megawatts, if Chinese solar makers continue to ship product as expected. Prices for crystalline silicon modules have already fallen 33% this year at the factory gate, and could fall another 18% in the fourth quarter. That will put pressure on thin-film module makers like First Solar that have until now enjoyed a wide lead in low-cost production.

And as high as production is this year, the industry expects growth of 50% in 2012 above 2011 levels. Demand is expected to increase by about half that amount. Inventory levels at the end of this year are expected to be around 11,000 megawatts, and to be double that at the end of next year. Can prices continue to fall, as it seems they must?

There is little room left for prices to fall as margin compression is reaching a critical point. That means it is likely that solar makers will either have to merge or fail. Evergreen Solar and Solyndra have taken the latter route, primarily because the cost structure at both companies did not allow them to compete with the low-cost providers.

If solar panels are quickly becoming commoditized, then companies need to look elsewhere for profits, and that’s where residential project financing from SolarCity, Clean Power Finance, and Google fit in. There’s money to be made here and the business has the added advantage of doing well by doing good.

Paul Ausick