Solar energy consolidation: How to benefit

December 28, 2011 -- Solar markets are booming in the US, despite the country?s sluggish economic recovery. In fact, strong consumer demand and ?nancial incentives from the federal government, states, and utilities have sparked some impressive solar installation numbers.

In 2010, the US installed 887 megawatts (MW) of grid-connected photovoltaics (PV), up 104% from the 435MW installed in 2009, according to a recent report by the Solar Energy Industries Association and GTM Research. In a few years, the report notes, the US market may be the largest in the world. One of the report?s key findings was the increase in grid-connected PV installations in Q2 2011 -- up 69% since the same quarter last year and up 17% over Q1 2011. These have now reached 314MW, or enough to power 63,000 homes. In addition, cumulative grid-connected PV in the US is now at 2.7 gigawatts (GW).

This fast-growth industry, however, has created a number of shakeouts in the PV panel manufacturing sector. Solyndra, recipient of a $535 million loan guarantee from the Department of Energy (DOE) in 2009, declared bankruptcy earlier this year. In August, Evergreen Solar Inc., the Massachusetts clean-energy company that received millions in state subsidies, filed for bankruptcy, listing $485.6 million in debt. SpectraWatt, a solar spin-off from Intel that shut its doors last year, recently filed for Chapter 11 reorganization.  

According to Swiss bank Sarasin, The list of companies potentially taking this same path -- Conergy, Q Cells Heliovolt, LFK -- is growing. In addition, there have been a number of projects changing hands in the development phase. This all may sound like a dark harbinger, but this trend has occurred in every great business sector. The fact is that the cost of solar continues to drop exponentially every year, which means that in the near future, it will be cost competitive with traditional generation. So, the question becomes: What approach should developers and investors take in order to benefit from solar energy?s bright future?

So far, the value of new solar installations has stemmed from an array of up-front financial incentives:

• Tax equity investors can quickly depreciate huge sums of money via Bonus ARRA depreciation or five years MACRS depreciation;
• The Federal and state rebates make the initial capital outflow more palatable for institutional investors and small investors alike;
• Developers typically get their money up front via the development fees.
  

For the most part, the business community has ignored on-the-ground solar assets and overlooked a key means for long-term success. In fact, investment in existing assets can benefit every stakeholder in the solar industry continuum -- from manufacturers to installers to system owners -- by taking advantage of solar energy?s inevitable direction: consolidation of solar companies.

At this point, all of the consolidation activity has occurred in the first two stages of the development process, motivated by negative financial pressures. The portion of the industry that has been overlooked throughout this process has been the installed project base. This base and its installer community represents the most fragmented component of the industry and includes individuals, roofing companies, small city-wide players, big regional players, and international powerhouses. Consolidation brings these fragments together into larger, more functional entities. The resulting value creation, associated with higher Wall Street valuations, generates increased top line revenue. This model is the only one in which the consolidator, and those being consolidated, achieve considerable appreciation. This strategy is also the only one in the solar industry that allows for continued financial returns beyond the short term, project-based revenue process associated with manufacturing and project development.

Conclusion
Despite the collapse of companies like Solyndra, Evergreen and SpectraWatt, the US is the strongest and most stable growth market for PV worldwide. Of the countries that have developed a solar strategy, the US has the best infrastructure and insolation, which will ultimately make solar a mainstream component of energy diversification. Ultimately, the consolidation and management of these large portfolio holdings can benefit developers and investors who get involved early, and, in terms of reaping the rewards, the earlier the better.

Michael Gorton, CEO and Chairman of Principal Solar, is an entrepreneur in the fields of renewable energy, telecommunications, music and healthcare. See his bio at http://www.principalsolar.com/aboutus_leadership.html#mg.

Read his previous column: Solar-powered electric vehicle charging stations sprout up nationally

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