What is an investor to make of the roller-coaster ride that has been the evolution of value in the PV industry, notwithstanding its steady global rise this past decade?
I have seen the story from the front lines, as a solar entrepreneur and a private-equity investor in renewables.
I well remember the honeymoon days of 2006, when solar was a star among the fast-growth prospects on the stock exchanges. Feed-in tariffs (FITs) were driving spectacular growth. The specialist solar investor Good Energies was worth several billion euros, based on rising-star manufacturers.
My own then small, now middleweight, downstream company raised venture capital from the biggest clean-tech investor in Silicon Valley. The fund I was a director of, New Energies Invest, was on an upward trajectory, celebrating a lucrative exit: SunPower’s acquisition of downstream California flat-roof specialist PowerLight.
Then came the crash: the credit crunch of 2007, the financial crisis of 2008 — all was downhill in the wake. Good Energies shrank to a vestige. Bankruptcies erupted across the industry as credit dried up. New Energies Invest began a steady decline to administration.
Could all the misfortune be ascribed to the excesses of investment bankers hooked on complex derivatives of mortgage-backed securities? No, some solar enthusiasts were undoubtedly open to a bit of irrational exuberance.
But equally, was all the carnage the standard “creative destruction” that free-market diehards espouse? Certainly not. Much of the misfortune could clearly be traced back to “enemy action”, by which I mean the rearguard action of the energy incumbency: the work of its lobbyists and its fellow travellers within government.
In my early years as a solar entrepreneur after the turn of the century, the default investor view on FITs was clear: too much political risk. Many investors also talked about wasted subsidies in support of a too-expensive technology. By 2006, herd sentiment had turned 180 degrees. FITs were so common, the reasoning went, that even if one or two governments did a U-turn, there were plenty more where they came from.
By 2011, following several years of incumbency lobbying against the rising tide, we were back at the beginning. After one of many dire profit warnings from a once-mighty solar manufacturer, an eminent fund manager told the Financial Times that the sector had become “uninvestable”.
Now there are strong signs that the tide is turning. Despite all the setbacks, the global solar industry continues to grow and costs continue to fall.
In 1990, the total annual global market for installed solar was less than 50MW a year. By 2000, it was still only around 300MW. In the noughties, the average annual growth of the world market leapt to 52%. By 2010, it was about 20GW a year. Today, the industry’s project pipeline is well in excess of 100GW.
What of the cost-down, driven by this degree of scale-up? A report from AllianceBernstein makes interesting reading. It shows cost decline so fast, on a real-dollars-per-million-British thermal-units (MMBTU) equivalent basis, that analysts Michael Parker and Flora Chang are moved to warn the energy incumbency: “Welcome to the Terrordome”.
It is only a question of how and where solar becomes a dominant force in energy markets, not if, they argue. Solar is now — in the right conditions — cheaper than oil and Asian liquefied natural gas on an MMBTU basis. “Solar still makes up only a tiny fraction of overall energy usage on an absolute basis — about 0.17%. But it’s an unstoppable trend,” they conclude.
Even at this tiny penetration of global primary energy, solar is marrying with wind to help create what analysts are starting to call a “death spiral” for utilities. Once penetration is an order of magnitude bigger — a mere 1.7% — the oil and gas industry is next in line.
The sheer disruptiveness of PV is breathtaking. McKinsey, for example, see one terawatt of fully economic solar market potential as soon as 2020.
The pushback continues, however. After a phase of solid growth in ground-mounted solar, a gas-obsessed UK government has again reversed what it promised investors, dropping its Renewables Obligation support for solar farms to zero from next April. Cue disarray for an industry clawing its way back to health after a similar kneecapping in 2011, that time on residential roofs.
Once again companies that didn’t need to go bankrupt will do. Once again thousands of jobs will be lost.
But all this won’t make a jot of difference to the big picture on the wall of the global Terrordome. Big Energy will have to change or die.