Mercom Capital Group dedicates a good deal of effort to tracking
global trends in the wind, smart grid, and solar industries.
If you want
to get a good sense of what is happening in those spaces, the deals
that are happening, and where the money is going, Mercom’s quarterly
reports and weekly updates will keep you up to date (30,000 subscribers
do just that).
The company has a research and consulting division which puts out
reports, and consults with clients around world, as well as a
communications division. With offices in the U.S. and India, Mercom
Capital assists financial institutions, investors, and solar, wind and
smart grid companies. CEO
Raj Prabhu keeps a beat on what the longer-term trends are in all of
these industries and can give you some pretty solid insights.
Last week, on the heels of the publication of their report on solar
funding and M&A activity in the first quarter, we had a chance to
catch up and discuss the goings on in the solar industry, as well as
recent trends and deals. Prabhu is pretty clear on his strategy: if you
want to know what’s going on, start by following the money.
We look at VC funding moving into companies, and technologies and other areas. We look at debt financing, equity financing, then we look at project acquisitions and funding… Once you start following the money, the trends begin coming clearer. Up until mid-2012 VC funding was the big story. We were used to seeing $300 to 500 million per quarter of VC financing.
Then China stepped into the manufacturing space and ruined that play.
They created an oversupply, the panels got cheap and margins got
squeezed. But pushing on the balloon on manufacturing meant lower panel
prices, so the balloon popped up further down the chain and the money
went to installers.
Most VC-funding we see now are in niche technologies or they are focused downstream, on the project developers and installers… That’s where the money is right now… Venture funding money is out there, but many got burned the first time. However, nobody wants to miss the boat; they still love solar, but they are more cautious than they used to be.
Prabhu also noted that Mercom is seeing more investment in finance
platforms. Part of this has to do with increasingly affordable solar
hardware, but financial markets have the final say.
The last two quarters, the resurgence of capital markets is driving everything. The stock market is going well. With valuations up, the solar companies can raise money in capital markets. Solar stocks used to be in the$1 or $2 range. Now companies can finance at reasonable rates and plan for growth.
Cheap money also matters as well. Third party financing (TPF) is the
main driving force behind the growth in rooftop solar, with TPF
responsible for over 80% of leases and power purchase agreements in a
number of states. However, the cost of money for TPF is still relatively
high, and Prabhu estimates it to fall within the 9-15%range. Last
year, Mercom Capital reported $3.34 billion raised for U.S. third party
financing. The TPF phenomenon is still going strong in early 2014.
Last quarter we saw $1.09 billion for just the first quarter. If this keeps up we could beat last year’s numbers. 2011 and 2012 were close to $2 billion. In the first week of April, I have already seen four or five announcements.
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Mercom Capital
Prabhu highlighted Vivint
as significant, with a recent $280 million announcement, and $1 billion
already raised, according to their analysis. He noted that SolarCity SCTY +1.17% came in at $250 million, with SunPower SPWR -0.86% raising $220 million. He is also taking note of the yieldcos being proposed by SunEdison
and others. These function like REITs or Master Limited Partnerships,
investing in solar projects and paying out a dividend to investors. He
comments that the costs may be lower than TPF,
Yieldcos may be able to drop the cost of capital to 6 or 7%. It remains to be seen whether this is ultimately a better financing vehicle because you can’t compare directly. It is not an apples-to-apples comparison as the portfolios might be different for each Yieldco.. Compared to Germany we are so far behind in soft costs. Dropping financing costs matters.
Prabhu commented that securitization is another growing trend that
can help lower financing costs. SolarCity just launched its second round
of solar-backed notes, with a 4.59% interest rate, expected to close
April 10. SolarCity’s notes are fully secured and will be paid out with
cash flow generated by a group of solar assets. With this second round,
SolarCity’s securitized portfolio is just under $125 million. Long run,
the U.S. markets may find cheaper ways to get the job of financing done.
That would be a good thing, as the debate is already swirling about
the future of the Federal Investment Tax Credit, which is scheduled to
decline from 30% to 10% at the end of 2016. Mercom’s CEO is not unduly
concerned, since this should be offset by falling costs,
If project economics continue to improve and costs continue to drop – though we cannot expect it at same rate as they have – we should be fine even if the ITC expires. Taking an optimistic view, if the ITC remains as is at the end of 2016, a majority the solar in the U.S. would be at grid parity. If the ITC falls to 10%, roughly two-thirds of the U.S. would still be at grid parity. Those numbers are based on today’s forecast and how trends are playing out. Things can change fast in solar.
Bigger picture at the global level, Prabhu expresses some
astonishment and satisfaction at the pace of global solar adoption. He
believes that solar markets and related developments have the power to
radically re-shape our world,
When I go to India I see the acceptance of solar converging between emerging and developed markets. I didn’t think this convergence was going to happen so fast. That opens up the markets and makes them much bigger.
In places where people finally have power that before had no access to electricity, which is the case for roughly 300 million Indians for example, that means you now have 300 million light bulbs, and the opportunity for economic development. That fosters innovation, and opens up new markets. Solar is already a very accepted form of energy generation. I think it will unleash new things we never expected before.
http://www.forbes.com/sites/peterdetwiler/2014/04/16/solar-trends-for-q1-of-2014-and-beyond-the-view-from-mercom-capitals-ceo/?ss=energy
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