Last year proved to be a difficult one for investment in the corporate solar sector, with solar panel prices continuing to drop amid a persistent glut of supply. This situation led to big losses and a record number of bankruptcies and restructurings in the industry.
Meanwhile, thin-film, concentrating solar power and concentrating PV technologies all continued to struggle to compete with crystalline silicon (c-Si). Against this backdrop, venture capital (VC) funding plunged nearly 50% to $992 million in 103 deals in 2012 – compared to $1.9 billion raised in 108 deals in 2011.
However, this is only one side of the story because diminished funding activity is not a true reflection of the health of the sector in terms of demand. Installations continued to grow, albeit at a slower pace in 2012 than in recent years. Global solar installations look set to rise to approximately 31 GW in 2012.
Last year, the largest amount of funding, by technology, went to thin-film companies, although total thin-film investment fell by 47% to $314 million. Rapidly falling c-Si prices have put crushing pressure on thin-film technologies, but many VC investors seem unwilling to walk away after pouring nearly $1.5 billion into this category over the past three years.
The copper indium gallium diselenide (CIGS) subcategory received 85% – or $274 million – of the thin-film funding total in 2012, as VCs appear to see CIGS as one of the last few areas with promise to compete for market share. CIGS companies have received more than $1 billion in funding since 2010.
While upstream manufacturers have experienced pain and suffering, the fall in panel prices has continued to be a boon for installers and downstream companies, particularly third-party finance providers who have profited from the falling module prices, many by successfully deploying leasing finance models. Lease firms have become popular as they remove the large up-front costs for residential and commercial systems.
The success of leasing models has caught the eye of big banks in search of ways to take advantage of solar tax credits. These institutions have invested nearly $2 billion in each of the past two years into project funds that finance solar lease businesses.
There were 12 such transactions in 2012. SolarCity closed four deals worth nearly $500 million, including two with U.S. Bancorp, a top investor in these types of funds. Credit Suisse and Citi were also active in multiple funds last year.
VCs invested $269 million in solar downstream companies in 2012. In a sector with successful exits few and far between, SolarCity's initial public offering was one of the few bright spots in 2012. SolarCity, a venture-funded company, raised about $95 million in net proceeds.
Leasing companies show no signs of slowing down and have continued to display promise going into 2013. Sungevity kicked off 2013 by securing $85 million in project financing from Energy Capital Partners and an unnamed commercial bank. OneRoof Energy, a residential solar finance provider, also announced that it has secured an additional $30 million in capital investment from major shareholder Hanwha Group.
Balance-of-system (BOS) companies continued to receive little attention from VC investors in 2012. Even with module prices low, BOS companies represent a significant opportunity for investment, innovation and cost reduction.
Meanwhile, mergers and acquisitions (M&A) activity was robust in 2012. Total solar project M&A activity amounted to $1.9 billion in 2012, and the number of solar project M&A transactions also jumped to 80 in 2012 from 55 in 2011.
This increase in volume indicates that solar projects have come full circle and are now considered mainstream, solid, long-term investments. In fact, the most active acquirers of solar projects were investment funds.
Investment funds and asset management firms accounted for more than 20 of the project acquisitions in 2012. The buyers included The Carlyle Group, BNP Paribas, ForVEI and Capital Dynamics, among others.
Last year was undeniably a bumpy year for investment in the solar sector. However, there were some key positive takeaways from the year that provide a bit of optimism. For instance, we saw strong installations helping downstream companies and solar projects potentially become a solid asset class in which to invest.
In an extremely fast-moving sector like solar, it is very important to watch the trends as they develop and our report helps in understanding the financial landscape of the industry as it unfolds.
Raj Prabhu is managing partner at Mercom Capital Group, a clean energy communications and research and consulting firm with offices in the U.S. and India. He can be contacted at email@example.com or (512) 215-4452.