When investing in the solar industry always remember the old joke: Question: Do you know how to make a small fortune in solar? Answer: Start with a large one.
There are exceptions to this rule, like when PowerLight was purchased by SunPower the PowerLight principles came away with valuable SPWRA stock options. Powerlight was a structural balance of systems (BOS) company. They had unique rooftop and single axis tracking structural technologies for photovoltaics (PV), and used that IP to win jobs with various PV module manufacturers, the lowest priced ones at any given time. By purchasing PowerLight, SunPower obtained a healthy revenue stream just when stock prices and P/E’s were soaring. Today SunPower is executing nicely in a more stable stock priced market with many module manufactures P/E’s reflecting more reasonable industrial ratios.
In our previous articles “Metrics for Thin Film Solar CIGS Company Comparisons” and “Finer System Level Details for the Comparison of Photovoltaic Technologies” we alluded to various system level details in the comparison of photovoltaic (PV) technologies and promised this follow up article on structural and electrical BOS components.
Structural and electrical BOS components are increasingly becoming a larger and larger portion of the cost of PV systems. As module prices have dramatically decreased, electrical and structural solutions have not decreased as dramatically. BOS will see more cost reductions, possibly through mergers and acquisitions, in the near future. Something the industry has been hoping for, for decades, is the time when systems, not components, will be marketed by major players. That time is fast approaching.
Now there are newer electrical balance of system’s companies in the market. At the recent Solar Power International conference held in LA this past October, Sam Vanderhoof from [privately held] Petra Solar commented that he saw 27 AC micro inverter or DC optimizer BOS companies, many of them brand new. All of this activity shows that there will be a variety of distributed electronics solutions available in the future. This includes the better known microinverter approach from companies such as Enphase and next-generation DC optimizers from companies such as Petra, eIQ, SolarEdge and Phobos Energy. The industry is beginning to understand the tradeoffs associated with microinverters, but has yet to fully grasp the benefits of DC optimizer solutions. All of these electrical BOS technologies are fairly new and thus their relative benefits and long-term reliability have not yet been sufficiently measured. Additionally, there is significant new technology being introduced on an almost daily basis.
Akeena Solar (WEST) has had a complete packaged structural and electrical BOS solutions for a few years called Andalay (Now Westinghouse Solar). It uses the Enphase micro alternating current (AC) inverter and a quick installation framing solution. Structural and electrical BOS companies are merging. Privately held Sunlink Corporation recently purchased the electrical BOS product line from Blue Oak Energy. Even monitoring companies like Fat Spaniel was recently purchased by Power-One (PWER), currently the second largest manufacturer of solar power inverters globally. You will see the same trends with micro boxes on the back sides of PV module manufacturers, where the modules will have either AC outputs or optimized DC solutions.
Vertical integration has been happening in the silicon-to-solar-cells-to-modules side of the solar business. Forward integration is when a module manufacturer buys up structural, wiring, electrical solution components as in the PowerLight/SunPower case mentioned above. Forward integration is happening with the module companies performing in house complete systems solutions. This type of systems approach will become more mainstream with a single warranty and potentially an industry that has AC power ratings in the near future. The industry is going through consolidation as well as forward integration. The good news is that systems solutions will become less expensive, as well as more reliable with one warranty covering the complete system. Be looking for the SunPower (SPWRA), SunTech (STP) and Yingli’s (YGE) of the world to be announcing both electrical and structural BOS relationships addressing specific solar electric market sectors.
When you think of the solar industry, or investing in this industry remember the old joke, and consider the ultimate forward integration possibilities with Berkshire Hathaway. At the 2010 stock holder meeting I was able to ask both Charlie Munger and Warren Buffet about their plans for their solar investment in BYD. It is no secret that Munger has a hankering for solar as shown in his youtube video. Connect the dots, Berkshire (BHK.A) owns a major interest in the company BYD (BYDDY.PK). BYD is known for batteries, cars, but is also a major solar company making modules and inverters. Berkshire owns the roofing company Johns Manville (who have announced BIPV plans). Berkshire owns the building company Clayton Homes and and owns the Electrical Utility companies MidAmerica Energy, PacifiCorp, Rocky Mountain Power, Pacific Power. Munger answered my question regarding forward integrations potentials by indicating that the higher cost of today’s solar energy is a small blip when looking at the over all macro economic factors facing the world. In other words he is bullish. I think Berkshire Hathaway has potentially the ultimate forward integration strategy.
This article was originally published on altenergystocks.com and was reprinted with permission.
Joseph McCabe is a solar industry veteran with over 20 years in the business. He is an American Solar Energy Society Fellow, a Professional Engineer, and is internationally recognized as an expert in thin film PV, BIPV and Photovoltaic/Thermal solar industry activities. Joe can be reached at energy [no space] ideas at gmail dotcom.