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Oil Prices Won’t
Hurt Solar

The slide in oil prices isn’t clouding the sunny outlook for solar energy. Although crude prices have dropped more than half since their recent $115-a-barrel peak in June 2014, this stretch of cheap oil won’t significantly affect consolidation trends in the residential solar energy space.

The important consideration here is not short-term pricing in conventional or solar energy - rather, it’s the strategic and regulatory environment, which is of greater significance and will reshape the market over the next several years.

As the domestic solar market evolves, the sector is heading into a phase that is likely to be dominated by the “big five”: SolarCity, Vivint, NRG, Sungevity and Sunrun. All of these companies wish to be consolidators and are willing to purchase growth in the near term, in part to take advantage of the benefits of the federal solar investment tax credit before it expires at the end of 2016.

The timeline for the “sunset” on this 30% tax credit and companies’ desire to achieve operational efficiency and economies of scale will account for the flurry of consolidation we still expect in residential solar. Deal activity in 2015 is already accelerating, with two to three times more deals in the pipeline than this time last year. Just recently, NRG announced that it had acquired the Northeast sales and operations teams of Verengo Solar, while module manufacturer Canadian Solar purchased solar developer Recurrent.

The recent oil price slide has taken down the value of publicly listed solar companies, whose stocks have declined as much as 60% over the past 12 months. This, however, may be an overreaction, as oil prices don’t have much impact on the cost of generating electricity. Natural gas prices do, but those prices were already low and built into the market. As such, we might expect the sector to rebound fairly quickly.

A consolidated residential solar industry should also see greater demand for its product over the next five years and beyond, largely because electricity rates will continue to rise with old infrastructure requiring replacements and coal plants closing under new U.S. Environmental Protection Agency mandates.

As these market and regulatory forces work in concert, we expect to see greater concentrations of capital directed at the solar industry as a whole, which will, in turn, power future growth, regardless of the price of a barrel of crude oil.

- Michael Horwitz

Michael Horwitz is a managing director at Robert W. Baird & Co. He can be reached at mhorwitz@rwbaird.com

 

Enphase Builds O&M Presence

Enphase Energy continues its march into the commercial and industrial (C&I) solar market with its acquisition of Next Phase Solar Inc. (NPS), an operations and maintenance (O&M) service provider based in Berkeley, Calif.

Through the deal, Enphase intends to expand its own O&M business, which had heretofore been focused on supporting solar facilities equipped with the company’s micro-inverter systems. Enphase Energy Services (EES) will be able to provide O&M support to C&I-scale solar facilities equipped with third-party inverters.

Marty Rogers, vice president of customer services and support for Enphase, says the acquisition expands the company’s U.S. footprint with additional locations and teams while positioning EES as a full-service O&M.

“If you do service and support purely for Enphase, that’s great for Enphase, but it isn’t necessarily a business model for going across the market,” Rogers says. “By buying NPS, it gives us the ability to be neutral on the product and go after the service and support around the general installed base of solar, which is getting larger and older.”

The move is a recognition that O&M services are growing as a lucrative source of recurring revenue. As Rogers points out, the number of solar sites in the U.S. at all scales continues to rise and the existing facilities are, naturally enough, aging. Moreover, as the solar sector matures, manufacturers and service providers are going to disappear - as many have already. EES is looking to step into the breach.

“There is an opportunity to take over the work of others, and this requires us to be able to handle all sorts of systems,” Rogers says. “But I also think that as we move forward, we can develop a complete asset management program where we’re looking at how we help people keep a higher retained value in the system long term - because over time, they are going to get turned over.”

The turnover of solar assets is also emerging as an important new business opportunity. Prior to the transaction, the buying party is going to want to see that there is real value in the asset. Is it really producing as contracted over time? Has it been maintained and kept up?

“Just like if I want to buy a house, if I’m going to buy a $1 million commercial field, somebody has to be able to go out and tell me if there is value in it,” Rogers says. “They have to be able to tell me, through historical records, that it has the real value. I think there is a big business around this activity. In fact, I know there is.”

According to Rogers, the NPS acquisition will help enable EES to move personnel to solar assets in desirable solar regions of the U.S. as required in a timely and cost-effective way.

Of course, inverters are notoriously individualistic creatures, which is why most manufacturers guard their architectures jealously. Enphase has made its Enlighten software a key component of its architecture. It features bi-directional communications that enable monitoring functions as well as updates to be pushed into the systems remotely. Although the NPS acquisition will enable Enphase to access third-party inverters, these will not be addressable through Enlighten - at least, not initially.

“Today, obviously there is no link between the Enlighten software and third-party systems,” Rogers says. “But the concept of the platform is actually quite strong and the benefits of performing predictive monitoring through non-Enphase inverters is a true opportunity for us to go do development work with our software team. I definitely see us as a company developing some wings around that.” - Michael Puttré

 

Duke And REC Solar Lay Future Of C&I

Financial analysts have predicted that 2015 is likely to be a very active year for mergers and acquisitions in the solar sector, with consolidation pulling together larger players in various market segments.

The commercial and industrial (C&I) solar segment is emerging as the new frontier, as developers look to build a business model in a post-2016 future that may not include an investment tax credit. Duke Energy’s recent acquisition of a majority stake in REC Solar represents an early effort to shape the dynamics of that undiscovered country.

Marc Manly, executive vice president at Duke Energy and president of its commercial portfolio, says the investment will enable the company to extend its utility-scale development efforts into the C&I space.

“We’re going to be offering the full suite of solar products, from commercial and above, to customers - however they want it,” Manly says.

Historically, the C&I market has been the most difficult one from a developer’s perspective. As businesspeople, owners tend to be focused squarely on the economics. Installations at C&I sites involve a wide array of ground-mount configurations and roof types. New technologies, such as carport canopies, racking and mounting options, and inverter types, have vastly expanded the range of system options. This has placed a strong focus on meticulous engineering and time-consuming documentation.

According to Manly, as Duke Energy performed due diligence in preparation for the REC Solar deal, it became apparent that it was possible to bring the same sort of economies and marketing approaches to the C&I space that the residential space currently enjoys. There was a time when even residential installations were “unique snowflakes.” However, time and effort has streamlined residential projects considerably, enabling the rise of large and growing franchise-type providers.

“We and the REC Solar management team thought the same is going to happen in the commercial market,” he says.

Allen Bucknam, CEO of REC Solar, says his company’s focus on the C&I space as a business decision with hundreds of projects under its belt has enabled it to develop some of the design, permitting and contract processes that are essential for success.

“The prime focus is the capital that Duke is making available to finance our customers’ commercial projects and making that as seamless and as easy a process to deal with as possible,” Bucknam says.

Although the financial terms of Duke Energy’s investment in REC Solar were not disclosed, the former has committed to making up to $225 million in commercial solar projects that are to be developed by REC Solar and supported by long-term power purchase agreements.

At the same time, Bucknam says the combination of the two firms means more than just access to cheaper capital to build project pipelines. “One of the real benefits of having Duke as a strategic partner is [its] vast capabilities and expertise in a broad arena of distributed energy solutions,” he says.

Echoing this sentiment, Manly says Duke Energy is able to call on the other company branches for expertise in areas of transmission and distribution that will enable the partners to address extremely complex customer requirements. He points out that the C&I market encompasses the mom-and-pop store with the flat roof looking to benefit from tariffs and moves upstream to larger businesses and organizations - universities, hospitals, military facilities - focused more on sustainability commitments.

“We want to have that suite of services that can meet their needs,” Manly says. “We just received [a request for proposals] from a university with a requirement for garage-mount, roof-mount and ground-mount with capacity wheeled in from a utility-scale farm to boot. I’m quite delighted because we now have the capacity to meet every single one of those requirements. I’m hoping our competitors don’t.”

In the end, Duke Energy and REC Solar view their partnership as a necessity for what the future holds for C&I.

“If you just want to be a regional player post-2016, I think it’s going to be a tough place to be,” Bucknam says. “We’re very happy to be in the right place at the right time in terms of teaming up with Duke and really taking a long view of both the solar and energy service markets way beyond 2016.” - Michael Puttré

 

Canadian Solar To
Acquire Recurrent Energy

Canadian Solar Inc. has entered into a definitive agreement with Sharp Corp. to acquire Recurrent Energy LLC for approximately $265 million in cash.

Once completed, the acquisition of Recurrent will increase Canadian Solar’s total solar project pipeline by approximately 4.0 GW-8.5 GW and will increase its late-stage project pipeline by approximately 1.0 GW-2.4 GW.

Canadian Solar says Recurrent’s late-stage pipeline in California and Texas is approximately 1.0 GW. These projects represent utility-scale project portfolios scheduled to be built prior to the expiration of the investment tax credit at the end of 2016.

In addition to broadening its project development and financing capabilities, Canadian Solar says the acquisition enhances its position for creating its own yieldco subsidiary in the near future.

The transaction is expected to close prior to the end of the first quarter, subject to customary closing conditions and regulatory approvals.

“By combining Canadian Solar’s global reach and experience with Recurrent’s proven solar energy development track record in the U.S. and Canada, we are significantly expanding the scale of our solar energy development platform,” says Shawn Qu, Canadian Solar chairman and CEO. “At the same time, this transaction broadens our strategic options to extend our business model from development and construction into potential ownership and operation of solar power plants, as we work to create additional value for our shareholders.”

 

China’s Solar Boom A Boon To Suppliers

Strong and sustained growth in China’s solar power industry is providing many opportunities to foreign businesses in certain sectors over the next five years, according to a new report from China-based materials market research firm CCM.

China is now expecting to reach 70 GW of installed photovoltaic power capacity by 2018, after the National Development and Reform Commission raised targets in May 2014. CCM says China’s solar market should grow at least 40% per year over the next five years.

Almost all of this new capacity will be manufactured and installed by Chinese companies, the report says; however, these companies are still dependent on imports for several key materials and technologies, which will provide opportunities for exporters.

According to CCM, materials that are in short supply in China include silver paste, Tedlar film backsheets, ethylene vinyl acetate encapsulant film and slurry material. Although China has made progress in developing large-scale polysilicon production facilities, the report says 40% to 50% of its polysilicon needs are still filled through imports.

Moreover, China is still yet to develop the high-end equipment capable of producing high-purity polysilicon, so manufacturers of hydrogenation furnaces, large-scale casting furnaces, plasma-enhanced chemical vapor deposition coating equipment, automatic screen printing presses and other key technologies could also benefit, the report concludes.

 

Could This Be Texas
Solar’s Breakout Year?

The Lone Star State has all of the natural and demographic elements for a thriving solar sector - if none of the incentives. However, Charlie Hemmeline, executive director of the Texas Solar Power Association (TSPA), says solar speaks for itself.

“Our view is that we support the competitive market,” Hemmeline says. “We want to prove solar is a good customer choice by its merits. It’s becoming that, and it already is in certain segments. At the large scale, solar is cheaper than a gas plant and very much cost-competitive.”

The TSPA is a statewide industry trade association that supports solar power at all scales - wholesale and retail. Hemmeline says the development climate in Texas is positive for energy in general. The state generally supports investment, resource development and business. There is no reason solar cannot thrive as a business in Texas, particularly with all of the advantages it offers.

“The solar industry is the energy industry, and we are businesses,” Hemmeline says. “In that regard, Texas is very attractive to our member companies as a fertile place for development. We have some of the best solar resources in the country, and our electricity load is very large. All of those things combined make Texas very appealing as a solar market.”

Texas has invested in its transmission through the competitive renewable energy zones (CREZ) additions. Although the infrastructure was developed primarily to take advantage of the wind resources of West Texas, it is equally useful for large-scale solar projects. West Texas has similar irradiance resource characteristics to California’s Imperial Valley. Solar can help the state maximize its investment in the CREZ transmission.

Hemmeline points out that there is also tremendous opportunity - perhaps as much as 60 GW - to locate solar close to load in the big cities through distributed generation. There is a huge amount of urban rooftop acreage to install solar commercially, and there is a vast number of untapped residential rooftops.

In terms of solar-specific policy, the state does not currently have a mandate or an incentive to develop solar in particular. For this reason, the TSPA’s objective for the new Texas legislative session is to get it to “do no harm.”

“We would not want to see the legislature go out of its way to add new taxes or fees or other barriers to solar,” Hemmeline says. “There are concerns in other markets about solar’s expansion, and so we wouldn’t want to see Texas try to put the brakes on it. We think solar’s going to be a tremendous benefit, and let’s let it happen.” - Michael Puttré

 

Reznick Cap Markets Reorganizes

New York-based Reznick Capital Markets Securities has changed its name to CohnReznick Capital Markets Securities and is now an affiliated company of CohnReznick LLP.

Along with the name change, the firm announced an expansion of its investment banking advisory services, along with a broader diversification of its client base.

Since 2008, Reznick Cap Markets has conducted more than $3 billion in corporate and asset financings, primarily in the renewable energy sector. As CohnReznick Cap Markets, the firm expects to broaden its resources and capabilities to serve a wider spectrum of middle-market companies.

“I am excited about expanding our relationship with CohnReznick and the opportunities for collaboration this affords our clients,” says Rob Sternthal, president of CohnReznick Cap Markets.

 

Solar Asset Management Marked By New Owners

San Francisco-based solar asset management firm Radian Generation LLC (RadianGEN) says that, last year, it increased the size of the portfolio under contract to 150 MW, which represents a 300% increase.

Chad Sachs, CEO of RadianGEN, says an important factor of the company’s growth is the evolution of the marketplace from an owner’s perspective.

“You are seeing some very confident owners who are aggressively buying projects,” Sachs says.

The aggressiveness is due, in part, to the rush to acquire a pipeline of projects prior to the expiration of the U.S. federal investment tax credit at the end of 2016. Many such projects typically involve large-scale utility-type projects with long development times that, at this point, are running up against the edge of the development timeline.

“Two of the last three customers we’ve had brought us in during the early stages of acquisition to help them with diligence, to help them look at production estimates, and to help them look at how their operations and maintenance (O&M) contracts are structured,” Sachs says. “We gave them guidance on that, and we were hired in a more traditional asset management role once the transactions closed.”

At the same time, the solar sector is attracting more investors who have become comfortable with solar power as an asset class - many more investors than there are large-scale projects left to acquire. Many investors are looking to build portfolios of smaller, distributed generation (DG) projects.

“It is becoming very competitive to buy these assets, so people are really sharpening their pencils when evaluating what they can pay and what risk they can assume,” Sachs says. “And then, they really want the assets to perform.”

From a business standpoint, Sachs says the movement of more passive classes of owners looking to offload the day-to-day aspects of solar asset maintenance means more opportunities for companies like RadianGEN that are able and willing to provide such services.

However, the maturing of the market is resulting in the “first generation” of solar plants coming to the end of their initial engineering, procurement and construction warranties while not yet being even a third of the way through their power purchase agreements. This is also a significant opportunity.

First and foremost, owners are interested in solar plant production, Sachs says. “You have warranties expiring, aging plants, vendors going out of business,” he says. “I think there is more interest in re-opening O&M contracts. That’s been somewhat of a change for us.”

That change has caused RadianGEN to modify its business strategy. Instead of positioning the company as an outsourcing option for owners who want to avoid handling asset management themselves, Sachs says the company is more focused on what it can do to optimize performance - which, after all, is the owner’s revenue stream - and hold O&M providers to their performance guarantees. - Michael Puttré