PV Installers Launch Wave of Mergers

by Travis Bradford

The photovoltaic (PV) supply chain has been solidifying as companies have tried to lock up a consistent supply of vital inputs and achieve revenue stability to reduce the risk of building new production capacity. Many new multiyear silicon, cell and wafer deals – amounting to billions of dollars worth of contracts – have been announced.

Until recently, this industry solidification has been happening mostly among component manufacturers. New announcements over the past few months signal that downstream PV installers and integrators are increasing the pace of corporate transactions. Instead of signing long-term contracts, their vehicle of choice is mergers and acquisitions, and the pace of these has accelerated. If this trend continues, it will lead to a much more concentrated, sophisticated U.S. installer network in the coming years.

Installer Competition Intensifies

The largest transactions began about a year ago in the commercial installation business. Maryland-based SunEdison announced a merger with New Vision Technologies of Illinios in December 2005 and the acquisition of California-based Team Solar in August 2006 – both among the top 10 commercial installers in California in 2005. Backed by financing from Goldman Sachs, SunEdison has assumed a leadership position in the industry, alongside California companies Powerlight (itself purchased by SunPower in November 2006), Solar Integrated Technologies and SPG Solar. Together these four companies represented well over half of the new commercial PV installations in the U.S. last year.

But of most significant interest recently is the number of smaller and residential installers that are fining funding and consolidating operations. In California alone, three new deals were announced early this fall. Start-up Solar City, recently infused with $10 million by PayPal founder Elon Musk, announced two simultaneous acquisitions – Declination Solar and Palo Alto Solar. Industry veteran Akeena Solar went public through a reverse merger and then expanded its geographic reach by absorbing Solahart’s PV business in the Fresno are.

International competition is entering the market as well, with Conergy’s SunTechnics division (based in Germany) purchasing California’s D&J Electric. That brings the weight of a major international integrator into the California market. And the U.S. subsidiary of Japanese Mitsui & Co. recently announced the purchase of SunWize, a leading full-service integrator headquartered in Kingston, NY.

It’s not just the California market that’s exciting interest in U.S. integrators. In addition to the SunWize acquisition by Mitsui, The Solar Center of New Jersey acquired rival MAK Technologies, also of New Jersey, creating what it calls “the leading East Coast solar energy company operating in both the residential and commercial sectors.” Finally, Vermont’s Global Resource Options re-branded itself as groSolar and raised a $2.25 million venture investment to expand marketing and operations.

The logic behind many of these acquisitions is straightforward. Installers increasingly need several things:

– access to experienced design and installation professionals;
– leverage to negotiate to ensure adequate supply of module products at bulk purchase prices;
– third-party working capital to finance their in-process inventory; and
– local knowledge of markets and regulatory environments

Mergers are the fastest means to acquiring these resources. Small installers that remain in the market will need to find ways to compete with the larger companies or themselves combine operations in order to compete.

Customer Financing Ahead?

Now that the installer network is becoming more concentrated and professional, what it desperately needs to do is provide access to adequate financing to its customers. While the commercial side of the business is developing models to cost-effectively deploy solar electricity using on- and off-balance sheet structures, the residential market still lags behind.

Typically, residential marketing has been based on the notion of a payback period (the number of years to recover the initial costs of the system), in large part because of installers’ historic inability to provide financing alternatives. This measure implicitly assumes perhaps the most financially inefficient way of paying for a system (with cash) and ignores many of the real and perceived benefits of owning a PV system, such as long life, stable electricity costs and user ownership. These are the very characteristics of good financial products.

Perhaps the growing concentration in the installer base will finally provide the operational scale to allow these companies to offer a good loan product to their customers. An optimal residential loan product would do several things:

– spread the cost of the PV system over its lifetime;
– capture the tax benefits embedded in the deductibility of home mortgage interest;
– be based on real, not nominal, interest rates (rates that are inflation-adjusted so that customers pay a flat, real electricity price over the system’s life); and
– allow lenders to have alien (second mortgage) on the customer’s home to keep the interest rate as low as possible.

Engineering such a financial product would do more to grow the U.S. market for residential PV than most opportunities in system engineering and could be deployed much more quickly. In a country with such sophisticated capital markets and so much financial talent, can it long before someone creates just such a product?

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Travis Bradford is president of the Prometheus Institute for Sustainable Development and a board member of the American Solar Energy Society. Contact him: tbradford@prometheusinstitute.org.

FROM Solar Today, a SustainableBusiness.com Content Partner