Investments in renewable energy such as solar have increased over the past couple of years despite low oil and gas prices, which is good news for FSLR investors.

FSLR shares are down 40% in 2016 as a result of low oil and gas prices, but investors should not miss the positives offered by the industry and the company.

Investments in renewable energy such as solar have increased over the past couple of years despite low oil and gas prices, which is good news for FSLR investors.

FSLR's end-market will continue to improve as installations will grow from 67 GW this year to more than 100 GW in 2022 on the back of improving grid parity.

FSLR is well-placed to tap the end-market demand for solar products since it is focused on consistently increasing the fleet efficiency, which will lead to lower costs and higher conversion.

The weakness in oil and gas prices has been a headwind for First Solar (NASDAQ:FSLR) this year as the stock has taken a beating despite a string of impressive performances of late. However, I think that the market has underappreciated the potential of solar energy, as contrary to the popular perception, the demand for solar energy has remained robust despite low commodity prices.

More specifically, annual solar installations have been increasing over the past couple of years, along with investments in the renewable energy sector. This is not surprising because solar power has been fast achieving grid parity, which means that its costs are coming in line with traditional sources of generating electricity.

Lower solar power costs will lead to higher adoption

In order to establish the advantage of generating power through solar energy as against traditional sources of burning fossil fuel, we will use the concept of levelized cost of energy (LCOE). LCOE indicates the total cost of generating electricity using a given source over the total life cycle of that source, divided by the total amount of electricity that the source has produced over its life cycle.

As shown in the table below, the cost of generating electricity through solar power is lower than both natural gas and coal:

In fact, despite the decline in coal and natural gas prices, the cost of generating electricity from solar energy is comparably more affordable at 12.5 cents per kilowatt-hour. The costs of both coal and natural gas are comparatively 15% and 44% higher, respectively, than solar energy. This is the reason why the solar PV installations have increased across the globe despite lower oil and gas prices in the past two years.

In fact, it is expected that annual global solar installations will grow from 45 GW in 2014, when the oil downturn started, to 67 GW this year, which is a rise of almost 50%. More importantly, by 2022, it is estimated that annual solar installations globally will breach the 100 GW mark on the back of improving grid parity that will make solar energy more competitive as compared to traditional sources. The following chart shows the expected growth in the adoption of solar energy going forward:

One of the key reasons why solar energy will gain so much traction in the long run is due to the decline in solar PV module prices. In fact, driven by the deployment of automation and new technologies, the cost per watt of solar modules has been on the decline. According to GTM Research, solar module costs will go down from $0.50 per watt in 2013 to $0.36 per watt by the end of next year, representing a decline of 28%.

More importantly, solar costs are expected to decline over a longer period of time as well. According to the International Renewable Energy Agency, the average cost of generating electricity from solar PV could drop as much as 59% until 2025. If the trend of lower module costs continues, it is expected that solar energy will be the world's cheapest source of generating electricity in the next 15 years.

This will prove to be a tailwind for First Solar, as the company will witness an increase in its addressable market. More importantly, First Solar is well-placed to take advantage of the booming solar market going forward as it focuses on improving module efficiency and lowers costs for clients.

Strong fleet efficiency will be a tailwind

First Solar is highly focused on its margin performance. In order to enhance the same, the company has been increasing the efficiency of its cells and modules, enhancing the capacity utilization, and improving the fleet efficiency.

For instance, in the second quarter of the year, First Solar was able to increase its average fleet efficiency by 80 basis points on a year-over-year basis to 16.2%. At the same time, the efficiency of its lead line increased by 20 basis points to 16.4%. Now, higher lead line efficiency indicates that First Solar will be able to increase the efficiency of its entire fleet as well going forward.

Moreover, due to a higher fleet efficiency, First Solar's modules can convert solar energy into electricity more efficiently, thereby leading to a reduction in module sizes and the cost per watt to generate electricity. This allows First Solar to bolster its margin profile even as the price of PV modules decline.

For instance, as discussed in the earlier part of the article, the cost per watt of installing solar PV has been on the decline and the trend will continue in the future. This decline in solar PV module pricing is a result of the lower costs attained by manufacturers such as First Solar. But, the good thing is that First Solar's focus on improving the efficiency of its lines has allowed it to enhance its margin profile of late despite lower module pricing as it has managed to reduce its costs at a faster pace. This is evident from the following charts:

Thus, even though solar module pricing has dropped in the past three years, First Solar's focus on improving the efficiency of its modules has allowed it to improve its margins for more than a year now. More importantly, I think that First Solar will be able to reduce its cost base further as it anticipates an impressive increase in efficiency going forward due to the deployment of its Series 5 platform.

The use of the Series 5 platform module manufacturing platform is expected to help First Solar bring down the number of connectors required to wire a module, thereby reducing labor costs and enhance efficiency to the tune of 100 basis points over the older Series 4 platform. In fact, as shown in the chart given below, First Solar anticipates a rapid decline in its module cost per watt until the end of the decade, primarily driven by higher efficiency and improved utilization.

Conclusion

Thus, a combination of strength in solar deployments and First Solar's focus on maintaining impressive operating efficiency will help the company capture more of the end market in the long run. So, it will be a good idea to use the dip at First Solar to buy more shares in order to enjoy long-term gains.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.