The global solar industry has had quite a ride the last 10 years, but as with any industry, it is the peaks and valleys that make the journey an interesting one. We saw large sums of venture capital (VC) invested into thin-film, CSP, CPV and other would-be usurpers to crystalline silicon’s throne. China asserted itself as a dominant force on the global solar stage and drove the industry toward the next major innovation – finance. No-money-down financing giving rise to third-party lease companies saw billions of dollars flow into solar, but nothing compared to the dramatic rise and precipitous fall of SunEdison and the yieldco model. Mercom Capital Group has been following the money in the sector since 2007, and we’re proud to share our view of the voyage this past decade, with an eye toward where solar is headed.
PV technology wars
The evolution of solar over the past decade began with the raw material cost-reduction phase between 2007 and 2011, with a large amount of venture/private equity funding going into developing alternative technologies to crystalline silicon due to polysilicon prices reaching up to $300-$400/ton at the time. Thin-film, CSP and CPV technologies received a deluge of funding, but most failed when China began to massively expand manufacturing with generous help from Chinese banks, which caused a huge oversupply and eventual price crash that brought polysilicon prices back down from $300-$400/ton to $15/ton and c-Si module prices down from $4/W to $0.65/W by the end of 2012. The next phase saw a flurry of trade disputes that were kicked off as a result of the Chinese oversupply situation, which led to hundreds of bankruptcies.
One thing that remained consistent through all of this turmoil in the global solar industry was demand growth, with a compound annual growth rate of 56% between 2007 and 2013, and it has continued to grow every year since.
China saw massive potential in solar and played to its strength by setting up a low-cost manufacturing base with a strong supply chain. But what turned the tables was the decision by the Chinese government to let government-owned banks lend more than $50 billion to domestic manufacturers at subsidized rates. With unlimited capital available at a time when the U.S. was in a recession, Chinese manufacturers were able to bring the costs of components down rapidly, effectively killing other technology start-ups focused on CIGS, amorphous silicon, CSP and CPV, among others.
With air pollution becoming a serious threat in the second quarter of 2014 (Q2’14), China upped the ante and set a very aggressive goal of installing 70,000 MW of solar energy by 2017. That was great news for a global industry that had seen markets rise and fall and is always looking for the next growth hot spot. After taking over from Germany as the largest installer of solar in the world, China looked to stay on top for the next four to five years. China, alone, accounted for 30% of all global solar installations in 2015!
China’s strong policy support encouraged domestic solar demand and an emphasis on distributed generation. The Chinese government’s decision to let Shanghai Chaori Solar Energy Science & Technology default on its bond issue showed that the government was serious about not bailing out companies that didn’t fit the strict manufacturing criteria. That was another big positive for the sector, which was used to seeing billions in credit go from Chinese state banks to Chinese manufacturers – a trend that eventually led to massive overcapacity, price crashes and bankruptcies around the world. In a strategic shift, Chinese state-owned banks started providing more credit to downstream project development in 2014.
Rise up with zero down
Meanwhile, in the U.S., residential and commercial solar funds raised money at a torrid pace with over $700 million in VC funding in 2014 as the third-party-owned model became the main driver of residential solar installations in the U.S. before spreading to other markets.
In Q1’14, SolarCity announced its second securitization deal of $70 million in solar asset-backed notes carrying an interest rate of just 4.59% – at the time, one of the lowest out there – then followed that up in Q2’14 with another for $70.2 million at the same rate. Things really ramped up in Q3 when SolarCity announced its third securitization deal of the year, this time for $201.5 million priced at 4.32% interest. 2015 was a record year for dollars raised in residential and commercial solar project funds, and from 2009 to Q1’16, third-party financing firms (led by SolarCity) raised more than $18 billion.
In 2016, policy uncertainty surrounding net metering hurt most rooftop installers, especially public rooftop companies that had fallen out of favor with investors. The stocks of SolarCity, Sunrun and Vivint Solar were all down more than 50%. Tesla then stepped in and purchased SolarCity to take advantage of the lower SolarCity stock price and possibly save the solar company from debt and other problems. On the positive side, solar installations continued to grow unabated, especially in Asia and the U.S. Solar became the fastest-growing new energy source, along with wind, in many markets around the world.
2017’s final story is yet to be told, but the year started with residential and commercial solar fund announcements dropping significantly, down to Q4’15 levels. The rooftop market has been moving from leases to loans because loans are getting cheaper and more flexible. There is a significant transformation going on in the U.S. rooftop segment, which means fund announcements will likely decline further. SolarCity (now part of Tesla) has been the largest recipient of residential and commercial funds, and it is unclear whether it will report any further fundraising.
Smaller installers that did not have access to tax equity funds are now able to partner with loan providers just like mortgage providers or car dealerships. Larger installers like SolarCity, Sungevity and others have been struggling as their customer-acquisition costs have been much higher compared to smaller local installers and roofers. Any gains in economies of scale by these large firms have been nullified by higher customer-acquisition costs. Most are in trouble, and many are in restructuring mode. Suniva announced significant layoffs and Sungevity declared bankruptcy in Q1’17, but only recently, the U.S. International Trade Commission voted 4-0 to proceed with the Suniva/SolarWorld Section 201 trade case, with a final remedy recommendation due by Nov. 13. If Suniva gets its initially requested minimum import price of $0.78/W on crystalline silicon modules, the impact on demand will be significant.
The yieldco play
Yieldcos, which are publicly traded companies that are created to own operating projects with predictable cashflow, became a hot investment area in 2014.
In Q1’14, third-party finance companies began leading in the development of innovative financial solutions that helped bring the cost of capital down. SunEdison announced initial capitalization of its yieldco with a $250 million facility. The following quarter, Abengoa Yield raised about $829 million in its initial public offering (IPO) that signaled a slew of yieldco announcements (four of the eight IPOs that year). Yieldcos need to expand their portfolio of generating assets in order to increase dividend growth. So, as more yieldcos went public in 2015, the expectation was for solar project acquisition activity to increase exponentially and create huge demand for quality solar projects worldwide.
Solar stocks made a complete U-turn in 2015. As oil prices slid, investors incorrectly drew correlation between the drop in oil prices and solar. Yieldcos were particularly hard hit, with some stocks losing more than 50% of their market value in just three months. After SunEdison’s planned acquisition of Vivint Solar, markets began to question its pace of acquisitions, whether Vivint was a strategic fit, and the over-leveraged situation SunEdison was in.
Yieldcos were formed to access capital at lower costs and were supposed to have a low-risk profile with predictable and growing cashflows. But SunEdison began operating like a high-growth company and made investors skeptical of all solar yieldcos. By Q1’16, SunEdison’s collapse and Abengoa’s bankruptcy had a negative effect on the overall solar market. In July 2015, SunEdison had a market capitalization of about $10 billion. It had plummeted to ~$50 million by April 2016. SunEdison overplayed its hand by accumulating more than $10 billion in debt in a relatively short time and creating not one, but two, yieldcos. SunEdison’s bankruptcy in April 2016 added to the overall investor skepticism of yieldcos and solar public companies, in general. In Q1’17, SunEdison’s two yieldcos finally entered deals to break away from their sponsor and be acquired by Brookfield Asset Management (TerraForm Global for about $1.2 billion and TerraForm Power – a 51% stake – for $622 million).
As the yieldco model collapsed, solar securitization deals have picked up steam, with over $1 billion to-date. Once interest rates start trending north, we will see other financial innovations crop up.
Though it ended up being extended, the pending expiration of the 30% federal investment tax credit (ITC) at the end of 2016 initiated a rush by companies to raise funds and install projects to take advantage of this incentive in the U.S. The pace picked up in the first half of 2015, with $3.8 billion raised globally compared to $4 billion in all of 2014.
After the extension of the ITC, the industry overall was able to look forward to a five-year period of stability, and the U.S. became the second-largest solar market in the world, ahead of Japan. The extension was touted as a cure-all and was expected to propel the sector to new heights, but in Q2’16, total corporate funding into the global solar sector actually fell by about 41% to $1.7 billion from $2.8 billion in Q1’16. Year-over-year, the fall was even steeper, down 71% from the $5.9 billion raised in Q2’15.
Donald Trump’s win in the U.S. general election had clean energy markets speculating what the implications would be for the sector. The president has already committed to pulling the U.S. out of the Paris Climate Agreement (nonbinding). Most nations will go ahead with or without the U.S. based on the implications of climate change in their own countries. The threat of a Trump presidency to the ITC is likely to be minimal, though. A substantial number of large-scale projects were postponed from 2016 to 2017 due to the absence of an impending ITC deadline. Residential installations slowed down due to net metering fights in several states, and larger installers found it difficult to reach profitability as customer-acquisition costs remained stubbornly high.
The financial markets are looking for solar companies to stop chasing market share and finally make profits and lower debt. That could help solar companies get healthy and start tapping the capital markets again, but in the end, profitability will be the key.
Raj Prabhu is co-founder and CEO of Mercom Capital Group, a global clean energy communications and consulting firm.