As the solar industry becomes more competitive, both within the industry and with fossil fuels, companies are having to figure out where they most efficiently fit into the market. For a while, solar companies thought they may have an advantage in developing and owning solar projects, leading to the structure of many of the companies you know today. First Solar (NASDAQ: FSLR), SunPower (NASDAQ: SPWR), and Canadian Solar (NASDAQ: CSIQ) all bought development companies to build large projects, and Tesla's (NASDAQ: TSLA) SolarCity was always a solar developer that owned the systems it built. And all of these companies either planned to own solar systems long term or drop them down to yieldcos.
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As this was happening, utilities across the country began to develop their own renewable energy strategies. The beginning was buying renewable energy projects from developers, including the solar companies mentioned above. But with more experience, they've moved more and more into solar project development themselves, cutting out the middleman.
As the solar industry and utility industry begin to collide, each has to figure out where they fit in the new world of energy. And we may be seeing some hints about where the industry will land in the long term.
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Utilities learn their renewable energy role
As utilities have entered the solar market, they've found that that there are places where they hold an advantage over solar companies. They may not ever manufacture solar panels or create a great racking system, but they have a lower cost of capital than solar companies. When the yieldco yields rose and made it difficult for solar companies to drop downs assets to an entity they controlled, utilities had an opening because they still had a low cost of capital.
What also makes sense is that utilities will move from buying completed solar projects to developing them in-house. NextEra Energy, NRG Energy, and Duke Energy have all developed renewable energy development arms that do more than just buy projects.
To that end, AES (NYSE: AES) bought solar developer sPower for $1.58 billion late last month. AES has been a leader in developing energy storage solutions around the country, and now it's a leader in solar as well.
What about solar companies?
While utilities are moving more into development, there's still a big role for solar companies to play. They may not be doing financing and site selection, but they'll be making panels, designing tracking solutions, and making integrated solutions that utility developers will use.
If you look at the strategy changes at First Solar and SunPower over the past year, they fit into this new energy world perfectly. They've moved from project development to supplying solutions, such as Oasis from SunPower and the Series 6 product from First Solar. They're expanding their offerings beyond solar panels into racking, site design, and inverters, but they may not be moving as far into the industry as owning projects long term.
Even Tesla is selling most of its energy storage solutions to utilities or other third-party developers rather than storing them on the balance sheet.
Sticking to what you do best
There will continue to be tension between utilities and the solar companies upending their business, but the tension may not be focused on the utility side in the future. It makes sense for utilities to stick to project ownership and some development work, while solar companies offer plug-and-play solutions where developers need energy. This may lead to a more stable solar industry long term, and it will make it less risky for investors, too.
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