Phillip Gerbert and Holger Rubel (both Boston Consulting Group) published an interesting review of the Solar sector and its strategic position both in the pre-2009 years and its outlook for the next decade. A research piece by JPMorgan‘s Gokul Hariharan, Shoji Sato and Carrie Liu comes to their support although takes a more holistic, if not biased view.
The key observation remains: despite the phenomenal energy we could generate on the back of the sun, the costs to do so remains restrictive. Today, the authors claim, only 0.1% of the energy mix comes from solar; by 2020 it may be as ‘high’ as 2%. There is the issue of moving variables, Phillip and Holger elude to, but not explore further. Anxillary industries such as the electric vehicle and smart grid companies, may come as helpful support. Ceteris paribus, and if all parts move in the right direction, the path to solar may be faster then expected as the perceived benefits to both companies and society starts to accelerate in the eye of the beholders.
The Venture Capital industry is pumping significant amounts of capital into the solar sector (in fact, the bulk of all renewable investments goes towards solars technologies) which should reap some rewards in the next 3-7 years, subject to vintage years.
Focusing on the supply side constrains, the silicon spot price reached a peak at $400 whilst long-term contract deals were struck at a fraction of the price. However, whenever the economic rent is too good to be true, entrepreneurs as well as corporates enter the market and ramp up capacity. Sounds like a typical China-syndrome: becoming a market leader irrespective of the long-term implications whether the supply-demand balance is sustainable. The consequence, margins drop off and firms struggle to survive.
The McKinsey chart below shows that Chinese corporates are significantly ramping up the capabilities in the silicon supply chain. Again, the credo of ‘lets become world leader’ is an interesting one. We had a meeting with a CEO of a Chinese company who proudly presented to us that they had a achieved their goal of being #1 in their industry. He could not answer the question what vision and objectives the firm would focus on from now on. Equally he did not see the issue of now being the one to chase and he did not yet know what industry leadership abilities he had to prove. The silicon industry may walk down a similar path.
An interesting presentation on the silicon industry put together by Wacker Chemie can be found here. Wacker Chemie is one of the leading suppliers of silicon and they have a number of business units that deliver products to the solar industry.
Todays news on MEMC (dropping 17% in intra-day trading) may be a sign for significant struggles ahead. The jury is out when the solar market will take a turn. Meanwhile, we continue to think that investors struggle to extract sustainable returns of the sector. A possible route to see significant total returns may be to back leading VC players who are able to spend significant resources filtering through the many start-ups that are trying to commercialize low-cost solutions. However, patience may be key at this stage.