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 / Autumn 2011 / Issue 64(originally published by Booz & Company)


Renewable Energy at a Crossroads

Technology firms are increasingly integrating downstream on the renewables value chain. For example, leading Chinese solar PV wafer and cell manufacturers, such as ReneSola and JA Solar, have expanded their businesses to include module assembly, a critical link in the value chain with low barriers to entry. Further downstream, Sharp and First Solar, manufacturers of solar panels and modules, have acquired large solar project developers over the last two years.

• Entrants improving project economics. The renewables sector has experienced dramatic growth in the number of project developers, financial players, and other intermediaries in recent years, and this trend has been one of the most critical factors behind the recent boom.

Large international merchants looking for geographic diversification and small startups with hopes of landing their first customers are among the bevy of project developers that have flooded the renewables sector over the past several years. Their participation has helped to identify the most attractive sites and to secure financing, creating a steady pipeline of renewables installations with great potential. Significant competition among developers has helped maintain pricing discipline in power purchase agreements. Companies such as SolarCity have also helped stoke latent residential demand by leasing solar PV systems for home installations, thereby addressing potential customers’ concerns about financing the expensive systems and managing their maintenance. Although consolidation is likely to occur in the coming years, the robust developer market has already provided a strong foundation on which the industry can continue to grow.

Meanwhile, in recent years a number of firms have begun specializing in renewables financing, while tax equity partners have become increasingly involved; these solutions have offered innovative approaches to overcoming the limitations of existing financial incentives. Infrastructure funds joined them by adding renewables positions for long-term steady cash flows, a strategy they will likely continue.

Intermediaries such as renewable energy credit (REC) brokers and green power marketers have provided additional channels to improve project economics. The creation of companies such as Sterling Planet and Green Mountain Energy, which certify and market low-carbon-footprint electricity to residential and business customers, has enabled project developers to secure incremental sources of revenue to achieve positive net present value (NPV).

Going forward, the continued growth of smart grid companies and energy storage providers will play a critical role in enabling the next wave of renewables development. Successful development of economical energy storage technologies would solve many of the intermittence challenges faced by wind and solar, improving project economics. Meanwhile, the widespread adoption of smart meters and variable pricing will make solar power more attractive, given that its greatest output is during the day, when demand is at its peak.

In addition, investor-owned utilities will likely begin to diversify upstream into new parts of the renewables value chain. Companies such as Duke Energy and Exelon have already acquired large asset-ownership and development positions. Utilities that build and own the renewable energy generation and transmission infrastructure, as opposed to simply acquiring energy through power purchase agreements, will have more balance sheet flexibility than smaller renewables financial players to build the new transmission lines required to bring renewable power from remote areas to load centers.

• Entrants improving commercialization and marketing. The introduction of new and innovative business models — particularly those that address the technology’s sometimes steep up-front costs — will likely decide the pace at which renewables are deployed in the marketplace. In the U.S., one of the most important drivers of growth in commercial solar installations was the introduction of long-term, fixed-price contracts for electricity. The SunPower Corporation, a solar technology manufacturer, and other companies have introduced new pricing structures whereby they install solar panels on customer rooftops and charge monthly fees, similar to a lease arrangement, rather than requiring the customer to incur large, up-front capital expenditures.

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