Archive for the ‘Solar Finance’ Category

With the collapse of publicly traded solar stocks in the last 4 months, the general business press has been buzzing with speculation about mergers and acquisitions. But these articles have missed some basic industry drivers and circumstances that may point to minimal M&A activity. A good example includes a recent Bloomberg article about how First Solar is a take over target for GE and Siemens as FSLR’s share price has fallen from $156 in Q1 2011 to $36 today losing enormous value.

First Solar - M&A Target?

While I have tremendous respect for what FSLR has accomplished and believe that high performance thin-film will be a factor at some point in the longer term, rapidly changing market dynamics have caught up with the company.  Manufactured costs of crystalline silicon PV modules have dropped much more rapidly than thin-film as a category or FSLR could match.  Indeed, FSLR’s stated guidance was to decrease manufacturing cost by $0.05 per Watt during the last 18 months compared to a $0.20 – $0.35 per Watt decrease by a variety of crystalline providers.

Solar thin-film as a general category is lower in efficiency, which requires more land/space, balance of systems (inverters, racking, wiring, permitting, administration) and as such, requires a module sale price differential from a crystalline module of approximately 30% to remain competitive. Currently the delta between the 2 module technology types is only 6% – 10% in the spot and long-term contract markets respectively.

The thin-film business model as a general category in the current environment is broken. (exception may be Solar Frontier) While First Solar has their downstream project development and EPC capability glossing over the module manufacturing cost problem, this will continue to be a problem for the foreseeable future. And with behemoths like Samsung, LG, Hyundai and now Foxconn about to enter the market with aggressive low cost capabilities and significant resources, the pace of cost reductions will continue.

I would be more than surprised if GE (especially since GE has its own thin-film effort with an integrated BOS approach) or Siemens or similar entities would buy FSLR with the current market dynamics in play. If the price becomes low enough, they may have interest in FSLR’s substantial project pipeline but that would need to be significantly lower than the current $36 price.

Overall, acquisitions in the PV module manufacturing industry don’t make much sense even at the current low valuations unless there is valuable IP present or there is a substantial project pipeline as a result of downstream integration. This is because the barriers to market entry are quite low. Manufacturing equipment used throughout the supply chain is generally American and European made off-the-shelf production machines with willing and able companies such as Applied Materials ready to supply. Additionally, most Asian solar manufacturers have no brand value established worth purchasing. Foxcon’s entry in the PV industry is a good example where no existing company or capacity was purchased, opting instead for the latest, highest efficiency manufacturing platforms available while partnering with an existing Chinese poly silicon company for raw material supply.

Continued weekly monitoring of various entities throughout the supply chain shows the average selling price (ASP) on the spot market continues to decline in all categories except the inverter.

Of particular note is the sharp drop in poly silicon ASP from the previous week. Its widely believed that the efficient silicon refiners cost basis is approximately $25 – $28/kg and we may well see further substantial reductions if the demand situation remains week.

While the data above is sampled broadly from Tier1, 2, and 3 providers, the weaker entities with little or no bankability status will be feeling the pressure, soon, to idle further production and in some instances find an acquirer. Over the last 5 years, there has been speculation about consolidation of the many industry manufacturers when demand has temporarily weakened. This current market demand bust may be the one that results in bankruptcies and acquisitions of the lower tier players. The large Tier 1 players with weak cost structures are looking for strategic partners or majority acquirers such as the deal we saw between Sunpower and Total last month. This may also be the opportunity for the mega sized electronic manufacturing services companies like Flextronics, Foxconn and others substantially grow their PV industry presence with acquisitions.

Lowe’s Companies, Inc., the second largest do-it-yourself retailer (1,750 stores), is now offering a Sungevity solar system lease option at their stores in select

Solar PV Reaching the Masses

California locations. The company also announced that it had purchased a 20% ownership stake in Sungevity, Inc. with terms not disclosed. Lowe’s joins Home Depot in the segment that already works closely with residential solar lease companies Solar City, Inc. and SunRun, LLC. While both home improvement companies offer solar programs with a concentration on California, they also have plans for, or are operating in, Colorado, Delaware, Maryland, New Jersey, New York and Massachusetts.

No Upfront Cost - Source: SolarCity

The residential solar lease has quickly gained traction (in select states with adequate government support) as it removes the upfront cost of the PV system installation, and even though there is a monthly lease payment, the overall benefit is a lowering of the monthly residential utility bill of up to 25%. The lease company monitors the system and provides maintenance.

On the Sungevity website, the company advertises “Pay $0 down,” “Save 15% on your electricity bill from day one,” and “we’ll guarantee in writing how much energy your system will produce each year and, if we fall short, we’ll pay you for the difference.” It is fairly compelling marketing.

For the Lowe’s relationship, Sungevity will provide in-store quotation kiosks in 30 California stores. The Sungevity kiosk runs their proprietary iQuote web based application, which provides users a quote for their home location within 24 hours.  After the customer inputs location and estimated energy use, iQuote accesses satellite imaging of the roof and surrounding vegetation and then ties that information in with historical solar radiation, government incentives and other variables including the cost of utility-provided power. The final quote provides a customized projection of how much money will be saved on the utility bill along with an artistic rendering of the how the installation will look. Local, certified installers who work with Sungevity, install the system.

The best investment return for a residential solar system is for the homeowner to own and operate it themselves, net meter the excess energy to the utility and secure the government solar energy incentives. But with the average residential system costing $16,000, the solar lease is a great option to having the benefits of solar without the upfront cost. As the Sungevity CEO Danny Kennedy said, ““Our goal is to take this solar offering to the masses across the country.” The big box home improvement retailers should be a great conduit for solar leasing companies to reach those masses.

Netscape was an early Internet browser company that went public with startling success in 1995 and kicked off an IPO binge for companies

The Infamous IPO

associated with the World Wide Web. With the historic IPO and subsequent Netscape stock performance as a result of their 90% marketshare, bankers where screaming for any fast growing Internet companies that could have the same IPO performance and returns.  The resulting number of IPO’s was nothing short of spectacular.

Over the last 8 years, there has been much discussion about when the Netscape moment would arrive for the renewable energy industries. Many thought it would be triggered by putting a price on C0₂, some thought it would be a new disruptive technology company, and some thought it would be an enlargement of government subsidies.

Building It Again and Again

It’s difficult to see how the renewable and solar energy industries will have a Netscape moment. As many Venture Capitalists and other investment organizations who did well by investing in IT are experiencing, renewable energy is a one by one, infrastructure-intensive industry requiring large up front capital with longer return on investment timelines. The classic software model – make it once and sell it millions of the times – is not applicable to renewable energy. While the ROI on renewable energy, particularly photovoltaics, is on par with IT industry returns, more patience is required.

The energy industry is also highly regulated by governments in most locales globally which creates distorted market signals and tends to holds back “irrational exuberance” in the market.

In reality, I don’t believe there is going to be a renewable energy moment with one company setting off an IPO binge. It has been, and will continue to be, a longer, smoother growth curve with a number of significant events along the way that demonstrate value and scale. I believe we are entering that time frame now, as evidenced by recent global events:

• The renewable energy market expanded during the global economic slowdown of the past 3 years. In the solar industry growth exceeded 40% YOY during this time.

• Total SA (FP), Europe’s third-biggest oil producer, agreed to buy as much as 60 percent of SunPower Corp. (SPWRA) for $1.38 billion.

• U.S. Department of Energy (DOE) has conditionally committed to provide US $1.37 billion in loan guarantees to support the financing of BrightSource’s Ivanpah 400MW Solar Electric Generating System, one of the largest solar thermal systems in the world.

• After 10 years of development, 140MW CapeWind received final permitting and global wind energy installed capacity is expected to reach 707GW by 2015, meeting 20% of global demand.

• A rapid decrease in the levelized cost of photovoltaic solar energy systems is enabling $3.00/W installed cost for larger systems with $2.50/W in sight for 2012.

• A rapid increase in global fossil fuel costs (coal, oil and gas), and the recent Japanese nuclear disaster, are allowing renewable energy to achieve grid parity sooner than industry forecasts predicted.

The solar energy Netscape moment has been happening slowly but relentlessly. The business model differences between IT and Renewable Energy combined with government regulation of energy markets suggest that the Netscape “moment” will be more like the early days of large commercial agriculture. Highly profitable companies where slowly but consistently building revenue under government regulation and the finance industry began to consistently invest in companies across the agriculture supply chain.



. . . is the project finance industry.  With the complexities of the PV industry, it’s easy to lose track of this fact while focusing on other issues, which are important but completely subservient to the finance issue. While subsidies, module efficiencies and other individual solar energy project lines are highly important, what matters most are the project pro forma’s NPV and IRR and long-term viability for project finance entities. That is their bottom line.

U.S SREC Programs Source: SRECTrade

So it’s surprising to me that the debate around Solar Renewable Energy Credits (SREC’s) vs. Feed In Tariff (FIT) is so hotly contested.  An SREC is a certificate representing the “green attributes” of one megawatt-hour (MWh) of electricity generated from solar energy. SREC’s can be sold into trading pools that have buyers (usually utility operators) who need the credits to comply with Renewable Portfolio Standard mandates set by a few states.  The price for an SREC can vary widely based on demand and legislative policy and a host of other factors. A good review of the SREC program can be found here.

A FIT program is a government legislated policy mechanism, which encourages generation of solar energy and other renewable energy.  FIT programs usually require utilities, under long term contracts, to pay a premium for renewable energy generation with the objective of avoiding building new fossil fuel generation facilities with attendant pollution costs. The overall goal is to foster renewable energy uptake where the kWh price of clean energy is reduced and reaches grid parity.

Energy subsidy programs are highly complex and devil is in the detail. But the basic differentiator is that a FIT is a fixed priced mechanism and an SREC is a variable priced mechanism based on demand from un-regulated trading pools. FIT’s provide a long term energy purchase price that give a solar project pro forma long term certainty for solar project financing entities. SREC’s create a difficult situation for solar project owners who are trying to forecast revenue in the near and distant future, an “SREC forward curve” in solar project developer parlance.

FIT = Rapid Adoption of PV

Most SREC proponents claim that it creates the most competitive environment and puts pressure on the solar industry to innovate to lower installed cost. FIT programs, when structured properly, have auction provisions, which achieve the same outcome. The recent Renewable Auction Mechanism (RAM) program by the California Public Utility Corporation is great example of this type of FIT.  The India Nehru Solar Mission is another recent FIT program that selects lowest tariff bids.

Neither the SREC or FIT programs are perfect solutions for stimulating renewable energy demand.  Both have their challenges in implementation due to the highly fractured regulatory environment at both the state and federal level. And FIT programs can lead to a severely overheated marketplace where the program is eventually withdrawn. But a FIT, when designed and implemented properly, will create the lowest risk option for project financing entities and create the steepest solar adoption curve.

As the graphic below demonstrates, 2011 could be a very difficult year for the global PV industry.

Or maybe not. In the many years I have been in the PV industry, I have seen numerous supply and demand forecasts for the same year with disaster and euphoria always just around the corner, depending on the analyst. Take 2009 for example.

After the Lehman Brothers debacle and resulting recession, the global PV industry was forecast to have flat or negative growth, experience large M&A activity and many bankruptcies. Actual was about 30% growth, minor M&A and very few bankruptcies. 2010 has been a banner year with over 80% growth which many pundits were forecasting at 10% – 40% growth.

What Was the Forecasted Cost of These Modules vs. Actual?

The little industry with large adversaries and many naysayers keeps chugging along.

But forecasting the PV industry is not for the faint of heart. There is a number of highly unstable, rapidly changing variables including government subsidies and mandates, government trade barriers, cost of fossil fuel energy, cost of solar modules and BOS, land costs, permitting costs, financing costs, supply chain tracking issues (actual capacity vs announced, tolling, product reselling etc.) raw material bottlenecks and many others.

As it is an immature industry, clarity on any of theses issues is difficult and there are no tracking mechanisms as with old established industries. As an example, I recently had a global Fortune 50 client company with a new solar PV division ask me where to find the trading exchange for modules so they could have understand spot pricing and long term contract trends both historical and futures. My response that there isn’t one was met with exasperation and disbelief.

2011 may be difficult. The graph above is ominous especially when you consider that nearly 6.4GW’s of module production is being added this year (2010) and demand may be flattening do to the well-publicized subsidies being reduced in many EU countries. But the doomsday forecasts may be way off.

With the steep declines in the installed cost of large PV systems and the increasing cost of fossil fuel energy in locales

Grid Parity Forecast, Source: Deutsche Bank

whereeconomies are recovering, true market demand signals are being felt in regions with already high cost energy. Consider these 2 facts: the installed cost of solar in favorable locations is delivering energy at $0.15kWh, and the cost of coal is up sharply in therecent weeks. In Germany, the cost of coal and natural and gas is soaring.  Consequently, the PV industry will need less generous subsidies to compete with highly subsidized fossil fuel energy, but the overall result may be more installation activity in regions that many analysts have written off.

Forecasting the tipping point (see graphic above) where increasing fossil fuel energy costs cross a downward PV installed cost line is highly fluid and difficult at best.   But writing off 2011 as a disaster may be a bit premature.

Less Subsidies = More BOS Focus

Solar energy subsidy incentive schemes are being reduced globally, and PV module prices continue to drop at astonishing rates. This intersection of policy and market economics is creating extensive focus on lowering the LCOE metric via improvement in the balance of systems (BOS) costs. With lower subsidies, project developers are under greater pressure to deliver strong return on money to project financing entities, the ultimate masters of the solar energy industry.

While the PV industry is closing in on the elusive equalization with grid retail and wholesale energy cost,

Zep's Patented Auto-grounding, Drop-in Mounting Solar Panel Install Solution

creating projects with return on capital that financing companies will commit to financing en masse is requiring reexamination and upgrading of every component in the BOS category. This includes upgrading project development processes, system design tools and process, installation methods, shipping and logistics, array conduits and components, solar panel racking, inverters and monitoring systems, and operations and maintenance.  New technologies that harvest more energy from a PV system like distributed DC-DC optimizers, are key.

Gehrlicher Solar Panel Install Robot

A number of new tools are evolving which are creating a new LCOE-lowering ‘toolkit’ for project developers. Good examples include new system modeling software, robotic installation, simplified racking, easier-to-install combiner boxes and the aforementioned DC-DC optimizers.

Looking to the future, this developing LCOE toolkit will have a substantial impact on the solar bankability of all sizes of PV projects. It’s likely that a new level of performance, monitoring and cost will create projects which will confer more confidence and visibility in their financial performance, and be placed in a higher bankability bracket than other projects which are done using outdated BOS methods and products.

This is another great developing story for the solar industry. One Block Off the Grid (1BOG), helps interested residential solar energy customers achieve lower costs and cut through the complexity of government programs, various PV products and solar

1BOG -Making It Easy

panel installation by offering a unique combination of group purchasing, installation and objective advice.

Their website features some of the most clear and concise marketing I have seen in the residential solar market and is easy to understand for the average customer.

From an article by Warren Schirtzinger on Renewable Energy access, “1BOG’s service organizes homeowners in a given area and allows them to purchase and install solar as a group. In addition to negotiating a volume discount of about 15%, 1BOG acts as an independent provider of quality assurance and objective information. To qualify as a 1BOG vendor, local solar companies must go through a rigorous evaluation of their products, installation practices, and long term stability as a company. Customers are also provided with assistance and support in the areas of rebates/incentives, financing and permits.

“While most people would point to the 15% reduction in cost or the assistance provided with bureaucracy and paperwork as the primary benefits of 1BOG’s program, I believe the true power of their approach is in helping reduce the perceived risk of solar.”

1BOG is partnered with SunRun , SolarCity, REC and other industry innovators focused on bringing solar energy to the residential market segment more efficiently and  in a less costly manner.

While this early 1BOG business model may have some easily solved issues (loss of control by end customer, warranty integrity etc.), overall this is a great new product offering to build on for the industry. Congrats to Mr. Dave Llorens, CEO for his rapid market development progress.

As mentioned in previous posts, the installed cost of a photovoltaic (PV) solar energy system has declined by more than 50% in the past 2 years. This is a result of large cost reductions in solar panels, cost reductions in balance of systems and higher efficiency in the design, engineering and installation functions.  Overall, the levelized cost of energy (LCOE), a key metric for project finance entities, is significantly enhanced by these cost reductions, resulting in strong solar project bankability for the finance community. (LCOE is defined as all the expense line items of a PV system’s installed cost + the total lifetime cost of the PV system divided by the total amount of energy output in kW hours that the system will put out over its lifetime,)

At the same time, energy prices from conventional brown fuel utilities have been increasing by an average of 2.5% per year in the U.S. While there has been a temporary flattening of this price increase during the recession, all forecasts point to a 2.5% to 6% annual increase in electricity rates as the economy recovers.

These two factors are rapidly leading to a situation where the retail cost of solar PV electricity at the kWh level (the unit of energy your utility meter reads) will be same or less than utility-supplied energy (a.k.a. “grid parity”) by 2012 – 13 in vast geographies across the U.S. and globally. Currently, in a few regions solar is already at grid parity, including city centers in California and in New England, where utility rates are above $0.15/kWh with time of use (peaking) charges that are more 5X that rate. An excellent research report about near term, residential solar grid parity in the U.S. can be found here from the highly esteemed people at the National Renewable Energy Laboratory (NREL) which part of the U.S. Department of Energy.

Internationally, a recent announcement about the reduction in the Italian solar subsidy program (Italy has highest utility grid power costs in Europe) is in reaction to this drop in PV costs. Grid parity in that country is imminent.

Solar energy grid parity is not a simple subject. The number of variables, including widely varying utility rate structures from location to location, different insolation (incoming solar radiation), conditions labor costs, transmission and distribution costs etc. make broad generalities less accurate.  Diving down into the detail in a blog format is not possible but the NREL presentation cited above provides solid background on these variables and the process to determining grid parity. What is exciting is that this intersection of downward installed PV costs with rising utility costs will make the need for government subsidies less important.

As page 22 of the NREL presentation shows, 80% or more of the U.S. will be at grid parity with only the 30% federal investment tax credit (ITC) subsidy being applied (it also includes a CO2 carbon policy resulting in 0.3 cents/kWh – 2.5 cents/kWh utility cost increase depending on location). This removes the need for state subsidies and will go a long way toward a national solar energy market rather than the state-by-state paradigm currently hobbling U.S. market growth. Previously, photovoltaic solar energy has only been deployed where a strong state subsidy or mandate could be combined with the ITC to make a solar system economical.

For the first time in the history of the solar energy industry, there will be a demand pull market place on large markets instead of an artificially driven market that is a response to large and complex government incentive programs. While the industry needs the banks to start lending again to finance new solar installations, grid parity will go a long way toward making the industry  more predictable and make solar bankability less risky in the eyes of the finance community.

As Jigar Shah, (founder of SunEdison, currently CEO of Carbonwarroom) says, photovoltaic solar (PV) energy is a competitive, high value energy generation source that hasn’t received the widespread respect it deserves.

My observation from the past 10 years of involvement in the industry is that part of this respect problem comes from a large and constant drum beat of erroneous and just plain bad journalism about solar energy.  While the intention of many writers is to present the exciting aspects of a rapidly growing green industry, many miss the mark continually due to minimal research on what is otherwise a highly complex and active industry with numerous variables and a large number of different technologies.

A recent example can be found here from Brian Palmer of the Washington Post, and a well-written rebuttal from PV industry veteran Tom Cheney here. When you read the article and then read Tom’s response, you get a very good idea of the complexity and variables the writer missed.

Weatherized Against Hail. Fragile?

Another preposterous article comes from Alex Kingsbury at U.S. News & World Report. In his piece about the optimism and growth of the solar energy industry, he goes on to make the claim that PV solar panels are highly fragile and need almost constant, round the clock maintenance.  The lunacy of this statement is that simple research reveals that photovoltaic solar modules carry a 25 year warranty and need almost no maintenance annually. The solar panel itself has no moving parts so there are no parts to replace and the solar cells are encased in laminates with a glass cover sheet for weatherization against the environment. The modules meet a rating standard for large hail impact, so I am not sure why he believes solar panels are fragile. While inverters, which condition the power from DC to AC, need to be replaced on a 10 year cycle, this a minor cost compared to the overall photovoltaic solar system benefit.

This type of misinformation is not just reserved for journalists and bloggers. Senator John Kyl from

Solar PV Farms in Arizona

Arizona wrote an opinion piece recently in the Nogales International publication with a headline of, “Solar energy could be a drain on Arizona’s water supply”.  Clearly there is a behind-the-scenes political issue playing out in the press.  The article is riddled with inaccuracies about Concentrating Solar Power (CSP) which flashes water to steam and powers electric turbine generators.   The author doesn’t even bother to mention that photovoltaic solar energy systems use no water and are highly efficient in the desert Southwest climate. Arizona currently has a number of multiple megawatt PV systems operating within its borders with large, multiple 20MW – 100MW systems in the development stages. This omission is even more surprising given that largest photovoltaic solar company in the world, First Solar (NASDAQ: FSLR), with revenues of over $2B, has its global headquarters in Tempe, Arizona.

Currently, energy generated from PV is at the same price of highly subsidized fossil fuel generated electricity (a.k.a. “grid parity”) in select markets where electric utility costs are high. Think California and many states in the North East. My subsequent post will show how solar grid parity is coming to over 80% of U.S. geographies in the next 3 years. This is a mature energy technology with the financing, technology and integration processes in place now. Respect is just around the corner . . . .