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Roadmap for a Changed Landscape: Consolidation and Integration in Solar PV

The financial storm the world is going through might turn out to be positive for solar power. By speeding up consolidation, the current crisis could end the current fragmentation and facilitate the emergence of industry behemoths, with a game-changing ability to deliver massive economies of scale.

That, in turn, would shift the industry towards grid parity — the point at which the cost of renewable power is equal to that of traditional fossil fuel energy — starting with the most favorable regions. Through a domino effect on installed system prices in adjacent regions, this may engender a real "big bang" for solar energy that could quickly snowball its way to dominance of the electricity generation market.

The ongoing consolidation wave is nothing new to solar players. In the past few years, the space has witnessed a series of forward acquisitions, with many solar module manufacturers or project sponsors acquiring integrators and installers. Sunpower acquired PowerLight early in 2007, while solar financier SunEdison acquired Portland-based installer Renewable NRG in April 2008.

Through both organic growth and acquisitions, Germany's SolarWorld has integrated assets along the entire solar value chain to create an end-to-end solar corporation (it acquired all of Royal Dutch Shell's solar crystalline operations in 2006). In October 2008, Chinese silicon and module manufacturer Suntech further validated the trend by purchasing EI Solutions.

Already, consolidation has created corporations that can better weather the sector's inherent cycles, and leverage their political and economical muscle to champion the solar cause. But much more is needed before solar energy can truly be regarded as a real contender among mainstream energy sources. Luckily, the current conjunction of events makes it likely that the consolidation trend will intensify.

The Polysilicon Industry Gets Into the Game

At Riverdale Partners, we anticipate that the push to integrate is going to encompass further participation from upstream players. Companies that started in the polysilicon business want to join in on the action — and can afford to, even in the current capital market.

After a shortage of polysilicon left almost all manufacturers scrambling to add new lines of production, those companies are likely to face a capacity glut in 2010-2011. The estimated world capacity of global polysilicon for 2008 is 50,000 tons. However, summing up all the announced capacity additions underway, we estimate this number will swell to 150,000 tons by the end of 2010. That's a tripling of capacity over the next two years, whereas current projections indicate that the solar PV market itself will take eight years to triple.

Meanwhile, having taken advantage of the silicon crunch to increase their average gross margin to about 50% in 2008, from 20% back in 2001, polysilicon producers are sitting on hefty piles of both cash and assets. Risking being cut away from demand and facing the possibility of a serious price drop, most are now frantically signing long-term supply contracts, often extending the privileged relationships developed during the silicon shortage years. A cursory look at one online industry source showed that 20 out of 37 recent news articles were related to the signing of such agreements — of five years on average.

But polysilicon players won't fully secure their destiny until they have taken control of their demand chain. And to do that, they need to build solar module manufacturing and retailing capabilities or, often better, acquire them. This is a strategy they are actively contemplating, if not vigorously pursuing.

Norway's REC kicked off the trend in late 2007 by initiating the construction of its own Singapore facilities to transform silicon all the way through to solar modules. Its next strategic direction is likely to revolve around swallowing up solar integrators and installers. Other polysilicon producers, such as Hemlock Semiconductor Corp., Wacker Chemie, Tokuyama, or Timminco will likely follow suit.

Meanwhile, other types of players, such as large electric conglomerates have also recognized the strategic and future value of "last mile" solar players, and are moving to acquire key companies in that space. In August 2008, GE — which is aiming to grow its solar sales to one billion dollars by the end of the decade — took a 32% stake in Spain's largest solar power project developer, Fotowatio, which is developing around 1 GW of solar projects in Spain, Italy and the US.

Utilities are also expected to get into the space sooner or later. Many are already actively involved in project commissioning and financing. Southern California Edison, Duke Energy, and San Diego Gas and Electric have recently entered distributed solar. The risk for them is to see parallel "solar utilities" emerge and grow into rivals once grid parity is reached. Conditional on their statutory requirements, some regular utilities could soon move into the project development and installation business by acquiring players in that space.

It is unclear yet whether distribution will be fully integrated in vertical giants, or controlled by utilities, but what is very clear is that it will be consolidated.

Strategies for Downstream Solar Players

All solar module manufacturers, integrators and installers have become prime merger and acquisition targets and their business strategies should reflect this.

Short term, many of those potential acquisition targets risk experiencing a capital crunch, alongside mixed market prospects. Longer term, those downstream solar players are supported by solid, positive fundamentals. It is widely anticipated that grid parity will be achieved in the next five to eight years, as installed system prices drop and utility prices continue to increase. Environmental regulations and incentives, peak oil — which won't go away with the economic crunch — and the green marketing wave should continue to amplify those trends and drive growth in solar installations. These opposing dynamics offer great conditions for a consolidation wave.

Siding with one of the major solar conglomerates in the making can enable players to compete successfully in a mainstream solar market. But, companies that pursue independent strategies without the necessary size may find themselves "stuck in the middle", i.e. in increasingly niche markets or fighting for survival in the R&D ecosystem along with a myriad of startups seeking money from dried-up VC wells.

Riverdale believes that players that have the flexibility to be acquired should leverage the sunny outlook to drive up their valuation. They should also proactively seek and assess the right potential acquirers and align their market strategies with those of their prospective allies, while advancing their organic growth strategy, this may mean pursuing a global rollout strategy while focusing their marketing and product development efforts onto a well-defined market.

For those companies that intend to remain in full control of their destiny, and have the means to back their intentions, an aggressive acquisition strategy to build the business to the necessary size while maintaining a finely targeted positioning should be formulated.

Whatever future they see for themselves, companies should gear their marketing strategies to compete in a world in which only a few vertically integrated giants will remain, next to a multitude of ventures on a quest to develop the "next" technology. Getting strategies right will make a significant difference in valuations and augment chances of ultimately achieving market leadership.

The author gratefully acknowledges the contributions of Jon Worren.

Note: Additional analysis on relevant market strategies is offered in the print version of this article, available in the Nov/Dec issue of Renewable Energy World magazine.

Greg Boutin leads the cleantech practice at Riverdale Partners, working alongside his Norwegian colleague Jon Worren to deliver outsourced strategic planning, marketing and sales channel services for innovation-driven companies. Riverdale recently completed work on the growth strategies of a large German solar integrator and a Canadian green building material manufacturer. A detailed biography of Greg is available at http://www.riverdalepartners.com/OurTeam. You can reach Greg at greg@riverdalepartners.com.

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