Solar Consolidation Expected as Tax Credit Drives Deals

Acquisitions in the solar industry will take off as manufacturers and developers prepare for the expiration of a tax credit that’s helping drive a U.S. installation boom.

With renewable-energy executives gathering for the Solar Power International conference that began yesterday in Las Vegas, some will be shopping their companies around and others may be evaluating potential purchases, said Michael Horwitz, who leads energy technology investment banking at Robert W. Baird & Co. in San Francisco.

The federal investment tax credit, which reimburses 30 percent of development costs for solar projects, has underpinned the industry’s business models. When that drops to 10 percent at the end of 2016, some companies will struggle to remain competitive. Horwitz expects a wave of consolidation leading to about six to 12 large solar conglomerates that will be able to beat utility prices for power.

“We’re going to see a lot of M&A activity going into next year,” Horwitz said in an interview. “The growth in front of that ITC loss is going to be dramatic.”

U.S. solar development will almost double by 2016 to 9.6 gigawatts, up from about 5.1 gigawatts this year, according to Bloomberg New Energy Finance. After the ITC is reduced, the London-based research company expects new construction to drop to about 4 gigawatts in 2017 and take six years to recover.

NRG Deals

Some consolidation has already begun. NRG Energy Inc., the largest independent U.S. power producer, purchased three solar companies this year, most recently a deal this month for the online marketer Pure Energies Inc. and an August deal for Goal Zero, a supplier of portable batteries and solar panels that charge laptops and smartphones.

The price of those acquisitions weren’t disclosed, though other potential deals in the solar industry may be significant.

NRG’s Chief Executive Officer David Crane said he’s been approached by companies “that wanted to be bought by us for billions of dollars.” He expects other companies to pursue solar acquisitions, especially in the U.S. rooftop market.

“In the next year, the residential solar market will thin out very quickly,” Crane said. “There will be three or four companies going for a national footprint and brand name, and they will have roughly 70 to 80 percent of the market. You have to be vertically integrated.” NRG isn’t planning any more deals, he said.

Vertically Integrated

SolarCity Corp. is become more vertically integrated. The largest U.S. rooftop developer agreed in June to buy Silevo Inc., a maker of high-efficiency solar panels for about $200 million. The deal gives the San Mateo, California-based company a dedicated supply of gear, and follows its 2013 purchase of Zep Solar Inc., which produces racking equipment that reduces installation and labor costs.

A sell-off in solar stocks may make acquisitions cheaper. The Bloomberg Industries Global Large Solar Index has declined 27 percent this year, compared with a 2.7 percent gain for the Standard & Poor’s 500 Index.

SunEdison Inc., the Index’s best-performer this year, in July bought a 50 percent stake in Silver Ridge Power LLC, a U.S. developer based in Arlington, Virginia.

David Einhorn, president of Greenlight Capital Inc., identified St. Peters, Missouri-based SunEdison as a potential “winner” in the solar industry yesterday, and recommended buying the shares.

Sunrun Inc., a San Francisco based rooftop developer, is also becoming more vertically integrated. In February it purchased the residential installation and racking-system units of Mainstream Energy Corp. to “help us better understand the installation business,” CEO Lynn Jurich said at the time.

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