Although many are dreading the sunset of the investment tax credit after 2016, some financial experts say this ‘kiss’ from the government is causing many firms in the solar sector to take a hard look at their balance sheets and business practices. And the more they do, the more investors will notice.
Michael Horwitz, managing director of the clean technology investment group at Robert W. Baird Inc., says residential solar is currently turning the most heads, with mergers and acquisitions (M&A) leading market interest in 2015. In his view, M&A activity will constitute a stronger portion of the financial market than initial public offerings where renewables are concerned.
One of Horwitz's significant deals of the year was NRG Energy's acquisition of Pure Energies Group Inc., a developer of Web-based customer acquisition systems focused on the residential solar sector. The acquisition is a component of NRG's residential business strategy and complements its acquisition earlier this year of Roof Diagnostics Solar, a provider of home solar direct sales and installation.
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‘There's a couple more to get done like that between now and the middle of next year,’ Horwitz says, with the residential solar space continuing to consolidate.
In his view, the solar sector is going to end up with what he calls the ‘Big Five’ – SolarCity, Vivint, NRG, Sungevity and Sunrun.
‘I think all of them are looking to be the consolidators,’ Horwitz says. ‘It's a fairly fragmented universe below that, with a couple of names that people are aware of that will probably end up being bought by some of the others, or because the market is moving so quickly, they could get left by the wayside.’
Andrew Redinger, managing director of KeyBanc Capital Markets' utilities, power and renewables group, agrees that the M&A market is red-hot right now and will continue to be so through next year. ‘We're as busy as we have ever been in the M&A space with assets changing hands,’ he says.
Although the year has evolved essentially according to his forecasts, there were a few surprises.
‘What I was surprised at was that there were some hedge funds coming into the game,’ Redinger says. ‘You are getting a lot of hedge fund-like investors coming in being very aggressive in trying to grow portfolios as assets as quickly as they can to access these public markets.’
Horwitz says that in terms of financing and access to capital, the solar sector is definitely in a better position than it was 18 months ago. In that time, there have been at least a half-dozen funds that have developed new products to enter the market. That is the good news.
‘However, that's still sort of 'rifle-shot' financing,’ Horwitz says, indicating the tendency of funds to target their money on specific deals. ‘We're looking for the time when financing becomes a commodity around the renewable energy space. Within residential solar, I think SolarCity is certainly trailblazing that idea. They've proved that they can access capital better than anybody.’
One asset class that Redinger has been focused on as being indicative of how much money might be available for renewables are real estate investment trusts (REITs). ‘The rate at which people are acquiring these assets is pretty aggressive,’ he says. ‘There's a $400 billion publicly traded REIT market.’
This being the case, Redinger is rather keen to see some of that move into renewables as an asset class, which he characterizes as being very much like real estate – only better. Renewables as an asset class are typically contracted for 20 years with investment-grade off-take that is non-cyclical to boot.
‘Renewables remain a brand-new asset class,’ Redinger says. ‘It's taken some time for the market to understand it. But it's not that complicated. Banks. Investors. Everybody is jumping in. And quite frankly, if the REIT market is $400 billion, I know there are investors looking at switching from REITs to this. It's just a better asset.’
I find your lack of faith disturbing
At the same time, there is more money out there than solar understanding. The near free-fall of oil prices in the last few weeks has caused some new money sniffing around the solar sector to rabbit.
‘Some of these folks who I thought were starting to get more comfortable in the market didn't last two weeks because of oil prices,’ Horwitz says. ‘They have all of a sudden gotten cold feet. And oil prices are irrelevant to the economics of solar. Literally irrelevant. Natural gas prices are very relevant.’
All energy is not created equal, and oil has ceased to be much of a factor in the electricity market. Although it has a huge impact on the pump, it has next to no bearing on electricity prices. According to the U.S. Energy Information Agency, legacy oil represents about 4% of existing U.S. capacity and no new real growth is expected. At the same time, solar represented nearly 19% of all new U.S. capacity in the three quarters of this year.
Solar has even shrugged off the rise of natural gas as a source of new generating capacity, with supplies in demand keeping pace with one another. Horwitz points out that natural gas prices have been trading sideways at very low levels for three or four years, and solar has grown right through that. ‘Natural gas and renewables have proven to be good bedfellows,’ he says.
Eventually, sources of capital are going to catch on. Redinger says a lot of the aggressive money – particularly hedge funds – is smart money and will find sources of information that will put them wise to the solar sector.
