Solar is Big Business for Strategic Investors

The multi-billion dollar solar market is capturing the attention of companies looking for long term opportunities with stable technologies, a captive audience of energy users, and a source of free raw materials: the sun.

Electricity users spent $368,906,000,000 ($368 billion) in 2010, keeping the lights on, computers running, temperatures from rising or falling, and much more, according to the US Energy Information Administration. At under 5% of the market, $14 billion is attributed to renewables including solar, wind and geothermal. This is a large enough market to move companies to see solar as a strategic corporate investment, said Pallavi Madakasira, Analyst at Lux Research. That investment is essential to ramp capacities and building process efficiency, taking up the slack as Venture Capital for energy weakens. She went on to highlight compelling reasons for corporate engagement, including the price of solar dropping, a move by Utilities into development, the need to open new markets, continued government action and long term stability.

PV Prices Dropping

Economies of scale are becoming increasingly important as module prices have fallen dramatically in the last 2-3 years. One factor is the drop in silicon prices, which have gone from a high of $400/kilo in 2008 to as low as $25/kilo today. Of the leaders in mono-crystalline silicon panels, Ms. Madakasira mentioned SunPower in the top three listed solar companies with a market capitalization of $750m, and Sanyo Electric, which has been bought by Panasonic. She expects that the pressure on size will contribute to more mergers and acquisitions in 2012 and beyond.

Utilities Invest in Development

Utilities started looking at development as prices approached grid parity--that is costs close to that of natural gas or other fuels. This trend is in addition to their traditional role buying the output from other developers through Power Purchase Agreements (PPA). As an example, Duke Energy's 14-megawatt Blue Wing Solar Project in San Antonio, Texas, consists of nearly 215,000 PV panels and is among the largest solar farms in the country. PSEG owns almost 50 Megawatts at their Wyandot, JEA and Mars Solar Farms. American Electric Power (AEP) is investing $20 million in an Ohio solar farm that will generate 49.9-megawatt (MW), will be built on approximately 750 acres of reclaimed land, and will generate more than 600 direct jobs and approximately 300 during the construction and installation. Those who continue taking advantage of PPAs include many players throughout the world. As an example, Integrys Energy Services and Duke Energy have invested in projects developed by Smart Energy Capital. Smart Energy Capital's PPA is an agreement between them and their clients: commercial, government and utility customers. Their model builds (including costs of design, permitting, installation and so forth) and owns projects on client sites. The client agrees to purchase the output at a price below their utility fees, but invests no capital up front.

Global Partnerships Open Up New Markets

Some partnerships are multidimensional, transferring skills that US Corporations have that newer or smaller companies need. For example, DuPont is partnering with Suntech, providing not just technology advancements --such as DuPont's Tedlar' polyvinyl fluoride film which is used in the process of making solar panels -- but also supply chain optimization, cost reduction and co-marketing. Others are looking for expanding markets, especially in emerging economies where power needs are growing faster than energy production, and where localization and climate are likely to favor solar. GE recently invested in a Kenyan solar field. US based BrightSource Energy is working with the clean energy unit of Sasol (a South African company best known for the conversion of coal and gas into fuels and chemicals) to study plans for a utility-scale solar power plant in their home country. Ms. Madakasira noted that China is looking abroad in order to expand their markets, especially into Asian nations like India and Malaysia. However, many, like India, have regulations on percentages of local sourcing that make Chinese products non-competitive. As a result, companies like JA Solar and LDK Solar are looking for partners who can build locally. Yingli, another Chinese company, has agreed to supply 180 MW of multicrystalline and monocrystalline (Panda) PV modules to IBC SOLAR AG, a German company. TSMC (Taiwan Semiconductor Manufacturing Co.) put $50 million into Stion, a somewhat secretive solar module maker that uses copper indium gallium selenide (CIGS), and has plans for a two-for-one solution with another layer that can generate power.

For corporations, this can be an opportunity to work with developers on the upfront costs of getting to a PPA, in return for a percentage of the gains from the sale of the power to utilities. As examples, Kitson & Partners is teaming with Florida Power & Light to create a city powered entirely by solar energy. Corporations with large physical plants can use such agreements to stabilize energy costs, providing long-term savings, as well as marketing and brand benefits. In Princeton, New Jersey, Dow Jones and the reinsurance giant Munich RE put in place solar panels that shelter parking lots and provide energy.

Governments Continue to Play a Role

SolarWorld, one of the world's largest solar energy businesses with 3,300 employees, has been actively lobbying for a tariff on Chinese products, which are heavily subsidized by the Chinese government. Ms. Madakasira sees this as a mixed blessing. On the one hand, it could be good for Western solar manufacturers. On the other, it could drive prices up, which would not be good for consumers. She believes that a U.S. Tariff is a real possibility, but a possibility is a long way from a certainty. While U.S. Federal incentives for solar and renewables are ending, a great deal of local support is still in place. One of the incentives for utilities to enter into PPAs with solar developers are Renewable Portfolio Standards (PRS) set by states, which mandate a percentage of power that must be derived from renewable sources. For utilities, PPAs can be a triple win: the Utility meets a local mandate, can avoid development costs and hassles, and locks in power at a price that is likely to rise in the future--meaning they can sell the power for more than they pay for it. For developers, the project produces long-term revenue and, in the case of installations with power costs--such as buildings--the owners may get long-term set rates for energy they use as part of the PPA.

Long-Term, Solar Value Will Remain Stable

For the long-term, a technology "game changer" has not appeared on the horizon. Solar paneled satellites that work 24/7 and beam energy to earth are still a pipe dream; not yet near production. However, efficiencies of 25% are on the horizon: the best panels now boast 22% under optimal conditions. Yet demand is building in Africa and Asia, and the U.S. market will continue to grow steadily. For corporations looking to minimize risk, invest for the long run or expand revenue, solar can be a great strategic investment.