Robert Lahey, vice president with Ardour Capital, a firm that focuses exclusively on cleantech and has a significant interest in the downstream solar market, agreed. He acknowledged that despite the weak global merger and acquisition environment his firm believes that “there is a significant amount of opportunities in the solar space, both upstream and downstream.”

Lahey sees panel manufacturer challenges as motivating factors for these firms to explore those “transformations to a non-standard business model” that Mehta examined in the GTM report.  He sees downstream opportunities, “especially in the U.S. market where residential leasing has been a significant growth driver” as significant. 

Increasingly, at least in the U.S. where demand for solar on the residential side is growing as a result of low module prices, “a handful of large financial institutions are becoming more comfortable solar’s risk/reward profile,” he said.

Lahey said this is a huge milestone for solar, one that “few technologies in the cleantech world have achieved.”  U.S banks are increasingly putting up large amounts of money to fund solar leasing programs. “With solar approaching grid parity in several large markets, these mature companies are starting to view the industry as less risky,” said Lahey.  He said that solar leasing is seen as a bright spot for investors because, when you think about it, people tend to pay their power bills.  While they may default on their mortgage or other debt obligations, they still want to lights to come on when they flick the switch.

In addition, Lahey said that new banks are entering the space and corporations are getting involved. “Many of the leading players in the space are the same ones that have been in the market for a few years now, but there is definitely new interest as well,” he said.  “There have also been examples of corporations participating in downstream solar,” said Lahey. 

Overall Ardour Capital is bullish on solar leasing and expects to see the phenomena grow across the U.S. either through acquisition or new entrants.

According to Mercom Capital’s Q3 Solar Funding Report, some of the notable third-party solar lease firms include SolarCity, SunRun, SunPower, Sungevity, OneRoof Energy, Clean Power Finance and Enfinity. In 2012, active investors in these funds included Credit Suisse, Rabobank, Wells Fargo, Citi and U.S. Bancorp.

Downstream Success: Solar Developers Acquiring Companies and Projects      

On the downstream project development side, mergers and acquisitions in the solar market are being driven by larger companies looking to pick up project pipelines. “Most of our focus has been on pipeline and project acquisition, what we call the three ‘P’s’, pipelines, projects and people,” said Arno Harris, CEO of Recurrent Energy, one of the leading North American solar project developers.

Harris pointed to Recurrent’s 2009 acquisition of UPC solar as a good example of acquiring all three “P’s”.  “We acquired a pipeline developed by UPC solar and a really talented development team based in Chicago and we were able to really turn that into a key asset in our project portfolio,” he said.

When it comes time to start building projects, sometimes smaller three-person shops can have a hard time obtaining capital with attractive terms and that’s where acquisitions come in. Since Recurrent has a large project portfolio “around 600 MW of projects under contract,” according to Harris, “we can bring the capital and bring those projects to realization.”

In fact, it’s fairly common for smaller-sized solar developers to put together project plans that they never intend see through to the finish line.  Harris compared it to the real estate industry or the conventional energy project development ecosystem. “You have the 3-person shop that just knows how to go out and find a few good sites, and is smart about what the market’s going to need in a few years,” he explained.  These developers are willing to do the legwork behind the project but they don’t have the capital to develop it.  So, “a developer like us comes along and we’ve got the capital to put to work and we want to pick up more projects and we are happy to pay a price for that,” said Harris.

This is the natural consolidation of the solar industry according to Harris, who feels it’s healthy for the industry overall. “Part of what that consolidation does is it ensures that the developers that are ultimately building and delivering those projects are enjoying the lowest cost of capital on the market and so those projects are being built — from a broad industry perspective — at the most efficient cost,” he said.

He continued: “Because the lenders and investors want to work with folks that pull enough volume together…there’s a natural kind of pressure point there that is triggering some consolidation of pipelines and developers.”

Is VC Funding Trending Down or Staying the Course? That Is the Question

According to Mercom Capital’s Solar Funding and M&A Q3 2012 Report, which was released in October, venture capital funding in the solar sector was down to its lowest levels since 2008, amounting to only $72 million in 14 deals compared to $376 million in 32 deals in Q2, 2012.  VC deal size was also much smaller with the largest deal coming in at $15 million, received by SolFocus.

Mercom Capital’s Prabhu doesn’t see this as a trend yet but he’s anxious to see the outcome of Q4. “One quarter isn’t a trend but I think this last quarter of 2012 is crucial in terms of what well see. If it is again at these very low levels, we could be seeing an ongoing trend in terms of solar funding falling off,” he explained.

Venture funding is inherently risky and Prabhu was quick to point out that VCs didn’t fund of energy companies until just a few years ago. He said many people were skeptical 2-3 years ago when VCs started putting money into solar because for the most part, VCs had historically only invested in technology. But “actually kudos to them,” said Prabhu.  “They put a lot of money into innovation and there has been a lot of innovation that has happened in the last three years, which wouldn’t have happened without venture funding,” he explained.

Prabhu is confident that good solar technology will continue to get funding.  “If there is a company out there with really good technology, wherever they might be, they will still get funded,” he said. He thinks that as more companies refine and innovate in the solar technology space, the money will follow. “It doesn’t have to be just manufacturing technology, it could be all through the supply chain — inverters, combiner boxes, it could be anywhere,” he said.

Back on the installation side of the industry, Prabhu pointed to the Q3 acquisition of Vivant by Blackstone Group for $2 billion as a potential trend. Vivant was a home security company that branched into home automation, meaning that it would turn off the lights, set the thermostats and take other energy efficiency measures for its customers.  Since it was already working with the customer in the home, in 2011, Vivant spun off Vivant Solar, a solar leasing company. Blackstone’s purchase of the whole company is another good indication of success of the solar leasing industry, said Prabhu. He said he wanted to watch this area to see if this type of transaction – home automation companies entering the solar leasing space – becomes a trend.

So Is the Solar Industry Healthy or Sick?

At the end of the day, said Prhbhu, you don’t measure the success of the solar industry by how many manufacturers exist and how much they are manufacturing.  “That’s an internal industry datapoint,” said Prabhu.  What is a measurement of success is installations and in solar, those continue to flourish. 

Recurrent Energy’s Arno Harris acknowledges that this is a “stressful” time in the solar industry. “It’s difficult on individual companies and stressful on people who work in the industry," he said. But he points out that these are the type of growing pains that the industry must experience in order to get stronger. This is what “points us toward a future where solar is increasingly a mainstream part of energy markets,” he said. “For all of us that have been in this industry for a long time, that’s been the dream,” said Harris.

“We have to put our heads down and get through this period now to get to that really exciting future,” he concluded.

For an in-depth exploration of strategic investing in the solar industry, be sure to attend Solar Power-Gen in San Diego next February where our plenary CEO roundtable will focus on this very topic. Visit Solar-PowerGen.com for more information about the event.

Lead image: Railyard switch flags via Shutterstock