Government and venture capital interest in alternative energy is declining. In response, some solar companies are changing their business models, moving up the value chain from photovoltaic cell manufacturers, to installers, to energy companies. Some are even repositioning themselves as electric power utilities.
This may seem like a refreshing change, but investors should require higher rates of return (deeper discounts) for new business ventures to compensate investors for higher risks.
Below, I will examine SolarCity Corp (NASDAQ:SCTY), SunPower Corporation (NASDAQ:SPWR), and Canadian Solar Inc. (NASDAQ:CSIQ) to see which company, if any, is priced low enough to justify the risks inherent in pioneering new business models as their past sources of funding are drying up.
Green Tech Funding on the Decline
Renewable energy ventures may have a hard time getting capital, as most venture capitalists and private equity companies that previously supported them are shying away. Capital provided for startups involving bio-fuel, wind, or solar energy dropped by about 34% in 2012. Some of the companies that have already reduced their investments in clean-energy ventures include Braemar Energy Ventures and Draper Fisher Jurvetson. Khosla Ventures founder Menlo Park indicates that the unavailability of capital providers is discouraging startups. According to Park, “All the fashionable VCs (Venture Capitalists) have gone away from it.”
The rush to reduce investments in renewable energy startups could be a precautionary measure considering that companies in the industry have been taking losses. Companies like Solyndra and A123 Systems crumbled even after the U.S. Energy Department had given $535 million and $132 million, respectively, to prevent them from failing. Government incentives have also been reduced, and that has seen many capital providers lack the motivation to support the industry. These issues have been reflected negatively in stock prices. New Energy Finance analyst Ethan Zindler explains how difficult it is to convince capital providers considering the losses being incurred and the reducing stock prices. According to Zindler, “Venture investors in early stages do not have the same access to capital they did five years ago.”
Kior and Gevo are some of the bio-fuel companies whose shares dropped in value after their IPOs, and as a result companies like Fulcrum BioEnergy have had to withdraw their IPO registrations. Braemar Energy Ventures managing partner Neil Sulsak highlights that it probably is not the best time to conduct IPOs or finance acquisitions. The poor market for solar panels will negatively affect the share prices and acquisitions of solar manufacturers. According to Sulsak, “Strategic sales have been driven often times by a strong IPO market.”
Solarcity’s successful IPO in December 2012 may be an indicator that all is not lost for the clean-energy industry. Its share price almost doubled since the IPO and the success could be because of their strategy. Most solar companies that made extensive losses were competing directly with Chinese companies in manufacturing solar panels, but Solarcity uses the cheap panels to develop solar projects. Investors will more likely fund companies with other profitable projects alongside solar panel manufacturing.
Large corporate investors are taking advantage of the disinterest in the clean energy industry. For instance, GlassPoint Solar is being funded by Royal Dutch Shell plc (NYSE:RDS.A), while Alstom SA is BrightSource Energy’s benefactor. GlassPoint is working on a project that could help Royal use sunlight to produce steam for use in oil recovery operations. Renowned investors like Warren Buffett have also been attracted to the industry. Through MidAmerican Energy Holdings, Buffett will be part of a $2.5 billion project to set up two solar farms in California. VantagePoint Capital Partners Chief Executive Officer Alan Salzman spoke about the increasing number of corporate investors that are venturing into this ailing industry. According to Salzman, “The area that we have seen a real spike in activity has been from the corporate world.”