Strategic Investing in the Solar Industry: Who is Buying Whom and Why

Raj Prabhu, Managing Partner of Mercom Capital has been tracking funding announcements in the solar industry since 2009. His firm believes that by following the money, it can deliver valuable insight to its customers on market trends – sectors in distress and sectors that are thriving. “Following the money is a good indicator of the health of the industry. It gives us and our clients insights into trends in terms of technology and also just general market direction,” he said.

When you look at the solar industry today, some market segments are in distress, while others are thriving.  “If you are in downstream you are healthy.  If you’re manufacturing, you’re not healthy,” Prabhu put it simply. And while he acknowledges that we really can’t judge the success of solar by how the manufacturers are faring, it’s still valuable to take a hard look at what’s happening in that segment with an eye toward who is buying whom and why.

Bleeding at the Top: Solar Manufactures Struggle To Stay Afloat

GTM Research’s Shyam Metha is an analyst who looks at the solar manufacturing space. Today, he doesn’t see a whole lot to be excited about, especially in China.  Mehta authored a comprehensive report that was released in October entitled, “Global PV Module Manufacturers 2013: Competitive Positioning, Consolidation and the China Factor,” in which he predicted that up to 180 solar PV module manufacturers will either be acquired or will fold over the next two years, the majority of which will come from high-cost manufacturing markets in the U.S., Europe, and Canada.

“It’s the devil or the deep blue sea for the majority of these high-cost firms,” said Mehta in a statement. “Manufacturing costs for firms in Europe, the U.S. and Japan are currently over 80 cents per watt. The cost for their Chinese competitors is between 58 cents and 68 cents per watt. The writing is on the wall; these companies will either take what they can get via acquisition or they will bow out.”

While part of the report’s consolidation analysis focuses on companies operating in high-cost PV manufacturing markets, questions about Chinese module manufacturers, their strategies in the face of U.S. and potentially European import tariffs, as well as their domestic demand, debt and diversity are explored extensively in the report. The report estimates that about 54 of the 180 “ill-fated” firms will come from China. Most of these are what Mehta calls “solar zombies,” companies with manufacturing capacities less than 300 megawatts that have operated uncompetitively with support from the government for years. “For these firms, the window of competitiveness has been closed for a quite some time,” said Mehta.

China’s number of doomed firms could be much higher if not for an aggressive downstream build-out that will prop up select domestic suppliers. China’s recent announcement to increase its cumulative 2015 solar target from 15 gigawatts (GW) to 21 GW will most likely provide captive demand for firms such as Alex Solar, LDK Solar, and Astronergy. Mehta thought even the 21-GW goal could be conservative – he said he had heard a rumor that the Chinese government could raise that number as high as 40 GW.  “We have seen a select few suppliers win really large projects or EPC awards for 50-, 100-, and 200-MW ground-mount projects,” he said.  The government is giving them a dedicated sales channel to sell their product, which will keep them treading water for a bit longer, according to Mehta.

In addition, Mehta pointed to the municipal loan that LDK Solar received in July 2012 and the China Development Bank’s renewal of its pledge to support 12 selected domestic suppliers as evidence that the Chinese government will continue to provide financial support to established firms with large workforces in order to cover near-term debt obligations, or possibly encourage diversified Chinese industrial conglomerates to acquire these companies. Potential beneficiaries of these strategies include Trina Solar, Yingli Green Energy, Suntech Power, JA Solar, Jinko Solar and Renesola.  Together, these companies comprise more than 20 percent of existing global module capacity.

The report goes into detailed analysis of the competitive positioning of approximately 85 solar manufactures, rating their efficiency-adjusted manufacturing cost structure, near-term liquidity, future availability of capital, technology differentiation, brand/bankability, and channel penetration a five-point scale.  It also lays out potential business model and product differentiation strategies that large, diversified firms might pursue to strengthen their position in the market.  The chart below explains some of the differentiation strategies that larger firms might seek out and which companies they may target to meet those goals:

Finally, the report assesses the likelihood of different market outcomes for the major module suppliers. GTM categorizes outcomes in the following ways: market exits, acquisition candidates; transformation to a non-standard business model or product; survivors; and industry leaders.  Of the 49 firms that the report charts, GTM predicts that only Canadian Solar, Trina Solar, Yingli and Sunpower are highly likely to become industry leaders.  It rates First Solar, Hyundai Heavy Industries, Talesun, Rensola, JA Solar, Suntech and Jinko solar as possibly becoming market leaders but states it’s unclear at this time.

“I would say we would see a lot more market exits in terms of plant closures or in terms of divestment from PV from diversified firms or insolvencies,” concluded Mehta. “We expect a lot more over the next year.”

Middlemen: Solar Leasing Growing Strong

While module manufactures work diligently to reduce expenditures in order to ride out the oversupply, module prices just keep dropping. And those low prices are driving solar installations like never before. Homeowners and small business owners can now go solar at the lowest prices in history and many markets are approaching that “be-all and end-all” goal of grid parity.  Couple that with increased lender confidence regarding solar power and its no surprise that the solar leasing market is booming.

Today the majority of new solar installations in California are being financed through lease arrangements and as result, more and more banks and corporations are waking up to the potential returns they could reap by helping homeowners go solar through a solar lease.

Mercom Capital’s Prabhu has tracked lender interest in the solar leasing market and estimated that there was about $1 billion in solar lease funds announced in the third quarter of 2012.  “The banks are seeing this as a win-win; obviously the risk factor has kind of diminished and they feel comfortable,” he said.


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 for more information about the event.

Lead image: Railyard switch flags via Shutterstock

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Jennifer Runyon has been studying and reporting about the world's transition to clean energy since 2007. As editor of the world's largest renewable energy publication, Renewable Energy World, she observed, interviewed experts about, and reported on major clean energy milestones including Germany's explosive growth of solar PV, the formation and development of the U.S. onshore wind industry, the U.K. offshore wind boom, China's solar manufacturing dominance, the rise of energy storage, the changing landscape for utilities and grid operators and much, much, more. Today, in addition to managing content on POWERGRID International, she also serves as the conference advisory committee chair for DISTRIBUTECH, a globally recognized conference for the transmission and distribution industry. You can reach her at

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