Renewables – Is the “End Game” next for Solar and Wind companies????
One doesn’t have to survey too many sell side analysts (or their traders/sales folks) to conclude that the Renewable Energy Sector is a Giant Hedge Fund Hotel. A former Loomis Hedge Fund manager devotes nearly all his time to the group. He’s not nearly alone. The Golden Days of 2006-8 have given way to overcapacity throughout the wind and solar industries, despite mostly sharp growth due to heavily subsidized programs in Germany and Italy. Late last year, it seemed to me that the next wave of growth was in sight — more durable demand profiles in China (low cost), India (high need and off grid opportunities), and the United States (renewable portfolio standards). However, the accelerating scaleback in European subsidies, combined with even more capacity additions in 2011, continue to postpone the period of ‘growth for the right reasons,’ i.e. grid competitive economics without over-the-top incentives.
Despite very short term good news — the German tariff will not decline this summer, due to weak installations so far — the picture continues to dim for 2012, as hope fades for a robust Chinese solar program next year. Parts of the United States (Southwest, New Jersey, Massachusetts) offer the best solar economics in the world, with the most favorable incentives alive until the end of 2016. The US’ most visible utility-scale projects offer excellent margins and returns, especially if the module manufacturer is also the developer. First quarter (2011) installations are up 66% YoY. First Solar and Sunpower are among several fighting in this space, but Chinese module makers are next. Last week, the US DOE awarded a $150 million grant to SunTech, China’s largest module manufacturer. While this does not appear, at first blush, to be a benefit to the US taxpayer, readers should note that the module is a declining fraction of the all-in cost, with construction, electrical/bracketing, and a variety of overhead/staff comprising the bulk of the project value.
On the other hand, it is NOT clear that public company valuations are enhanced by the project business — a highly visible module maker adds complexity to its business model as it morphs into an engineering/construction operation (E&C), with lumpy business, lower margins (but nice returns on assets), permitting/financing issues, and weak transparency. It may not be a coincidence that, as First Solar’s US backlog builds, its relative valuation/performance have lagged. The next twelve to eighteen months could be messy, without much higher power prices or new programs/incentives (QE for Renewables!). But it may also be time to wonder about the End Game for Renewables Companies. Wind turbine manufacturers were always systems integrators. Solar module makers have two choices — build and transfer, or build and operate, i.e. become a utility. Either way, the shareholder base may be different from the go-go growth investor who dominated the Module Phase of the Solar Life Cycle.
In this environment, the days of being a mere vendor of commodity-like components to a “growth utility” are passed, but, as a part of an ‘energy toolkit,’ solar systems vendors may have great value. General Electric is ramping its own thin film module operation, and clearly has the capability to offer a one stop module, systems, and financing package, to go with gas turbines, etc. Independent Power Producers (IPs), and Oil and Gas companies also have complementary skill sets (permitting, project management, and cash), and Total has already bought into the idea (as a complement to hydrocarbon projects in Northern Africa). As First Solar contemplates the first US bond offering tied to a specific solar project, the role of fixed income is likely to swamp the equity capital of the industry. Who’s next, and when