Private equity and venture capital firms are pouring record investments into rooftop solar, following a model popularized by billionaire Elon Musk’s SolarCity Corp. -- sell power, not panels.
They’re on pace to supply $5 billion this year for residential and commercial solar projects, up from $3.3 billion in 2013, according to the researcher Mercom Capital Group LLC.
The funds are going to companies such as Sungevity Inc. and Sunrun Inc. that sell electricity, a shift from the last boom year of 2008 when venture capital and private equity investors provided $4.97 billion, mostly for solar-panel factories. That helped spur a price war that bankrupted dozens of companies including Solyndra LLC.
“It’s become clear that it’s a legitimate asset class, a legitimate source of electricity,” said Tom Athan, a managing partner Altus Power America Management LLC. The Old Greenwich, Connecticut-based company finances commercial-scale solar projects and expects annual returns of 8 percent to 10 percent for the next several years from selling electricity.
“Questions from a few years ago -- ‘How do I know the sun is going to shine enough to make the amount of power you say?’ or ‘What if the solar panels don’t work?’ -- nobody asks those anymore. They accept it’s going to happen,” he said.
SolarCity transformed the industry by giving investors a way to take advantage of the declining cost of solar cells. Often for no money down, the San Mateo, California-based company installs panels atop homes and commercial buildings, leasing the systems back to property owners who save on their electricity bills.
SolarCity’s stock has increased more than eightfold since its December 2012 initial public offering, buoyed by strong demand from consumers seeking to produce their own electricity and reduce their monthly utility bills. That’s outperformed Musk’s better-known company, the electric carmaker Tesla Motors Inc. Musk is SolarCity’s chairman and biggest shareholder.
“We knew that in order to maintain quality and be able to scale, you have to build up your own infrastructure,” said SolarCity Chief Executive Officer and co-founder Lyndon Rive. “Our competitors are now realizing that.”
Private-equity companies invested $2.4 billion in rooftop solar plants in the first half of 2014, and the total may reach $5 billion for the year, according to Austin, Texas-based Mercom.
“There are very nice returns to be had, especially given the scarce number of ways investors can really get good returns that don’t have a lot of risk to them,” said Cynthia Ringo, a managing partner at DBL Investors, a San Francisco venture-capital company.
DBL’s renewable portfolio includes investments in Brightsource Energy Inc., which developed the world’s largest solar-thermal plant, in southern California, and SolarCity, now the biggest U.S. residential solar company, installing about one of every three systems.
Selling electricity means steady, predictable income, usually guaranteed by decades-long contracts. Private equity funds are betting on these reliable payouts from companies that specialize in rooftop solar systems. Sunrun got $150 million in the second quarter, Sunnova Energy Corp. received $145 million and $70 million went to Sungevity -- with much of that coming from private equity.
That hasn’t slowed down in the current quarter. In July, Astrum Solar Inc., a Maryland-based residential installer, raised $100 million and Sunnova got another $110 million on August 7.
The solar investment strategy has evolved from backing companies developing new technologies, said Victor Flatt, head of the Center for Law, Environment, Adaptation, & Resources at the University of North Carolina at Chapel Hill.
“The earlier investment was in manufacturing, and the idea that some companies would excel,” he said. “Now the investment is in the revenue stream.” Several solar developers are creating separate units known as “yieldcos” to own and operate power plants, channeling that revenue toward dividends for investors and capital for new projects.
Backing photovoltaic panel producers was a more common venture-capital strategy in an investment boom that peaked in 2008, when about $5 billion was poured into the industry, according to Bloomberg New Energy Finance. Investors included Kleiner Perkins Caufield & Byers, VantagePoint Venture Partners, Firelake Capital Management LLC, Madrone Partners LP and Rockport Capital Partners.
They supported manufacturers including Evergreen Solar Inc., which filed for bankruptcy in 2011, and Miasole Inc., which sold itself in 2013 for a fraction of what investors had put in. Chinese competitors led by Suntech Power Holdings Co. and Yingli Green Energy Holding Co. boosted production capacity and drove down prices, gutting margins across the industry.
“What we couldn’t predict and couldn’t address were the impact of the economic downturn and the impact on the financing ecosystem associated with the Chinese investment in solar,” said Martin Lagod, a managing director at Firelake, which backed Miasole and now backs Sungevity.
In perhaps the best-known crash, Solyndra tumbled into bankruptcy in 2011 after receiving more than $1.2 billion in private funding and a $535 million U.S. Energy Department loan guarantee. Backers including Madrone Partners, Redpoint Management, Rockport Capital and Argonaut Venture I LLC didn’t respond to phone calls and e-mail messages seeking comment.
“There’s been a bit of a vacuum that was left by traditional venture capital firms in the wake of the Chinese overcapacity boom,” said Michael Morosi, an analyst at Jetstream Capital LLC, which led Sungevity’s $70 million round. “Them taking a step back has opened up a window for other investors.”
Some Silicon Valley VC firms have been reluctant to get back into solar.
“While we’re proud to be investors in Sunrun, solar isn’t a focus area for us,” said Andrew Kovacs of Sequoia Capital, who declined to discuss his photovoltaic strategy further. Mohr Davidow Ventures, which invested in Nanosolar Inc., a failed thin-film panel maker, declined to comment, as did Miasole supporter Kleiner Perkins.
“PV technology is pretty much set right now,” said Raj Prabhu, chief executive officer of Austin, Texas-based Mercom Capital. “Everything seems to be circulating around installations and project development because that’s where the money is right now. Downstream is the area it’s going to be in for the next couple of years.”