Vertical Integration in the Solar Industry
Exhibit: Solar industry value chain
(EPC = Engineering, Procurement & Construction; O&M = Operation & Maintenance)
Source: Sunpower website
Why Solar Installers Are Becoming Vertically Integrated
July 19th, 2014 by Rocky Mountain Institute
By Robert McIntosh and James Mandel.
A curious trend’s been washing through U.S. solar recently: vertical integration, the process of companies
owning more and more of their own supply chains. Sunrun, a developer and financier, recently purchased
the residential division of REC Solar, a major installer. SunPower moved into selling and financing solar
systems, rather than just manufacturing modules. RGS Energy recently announced it will begin providing
leasing in-house rather than through outside groups. And SolarCity, the country’s biggest solar developer,
financier, and installer, just went so far as to buy a module manufacturer (Silevo).
But while some companies still practice vertical integration for supply-chain control (for example, Walmart
owns and operates its own trucking fleet), many are moving away from the practice, instead opting for
horizontal integration (i.e., buying your competitors).
Why the move away from vertical integration? For one, companies often divest the lowest-margin parts of
their business (such as solar modules, which are at this point a global commodity with low margins).
Often it is cheaper to pay a specialized company for a resource than try to run an expensive “side
business” providing the necessary inputs for a final product. Apple, for example, does not make its own
microchips; it buys them from a microchip manufacturer.
Yet, we now have four vertically integrated solar companies in the U.S.—SolarCity, Vivint Solar,
Sunrun/REC Solar, and RGS Energy. They claim it will help them keep costs down, but a look at other
industries (e.g., Rockefeller’s Standard Oil monopoly) suggests the opposite is often true. So, why then is
the solar industry becoming more vertical integrated through a spate of recent acquisitions? The answer
can help provide insights into why U.S. solar has such stubbornly high prices relative to countries like
Germany and Australia.
FIVE REASONS THEY’RE VERTICALLY INTEGRATING
Companies once focused purely on one aspect of the market are now involved in project development,
financing, and installation. Some manufacture their own mounting systems, modules, or electrical
equipment. Across the solar board, vertically integrated companies show some of the strongest growth
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and the largest market share. SolarCity and Vivint, the two largest installation companies, controlled 34
percent of the market in 2013 and were mostly vertically integrated. Here’s why:
1. Vertical integration offers benefits to joint installers/financiers
The federal investment tax credit (ITC) [of 30%] on solar systems goes to the financier, and is based on
the appraised value of the project. This provides a strong incentive for a company to handle its own
financing and its own installations. It gets to control the appraised value of the project as an installer,
and receive the tax benefits from that appraisal as the financier. [the ITC is scheduled to expire in 2017].
2. Vertical integration creates a cost “black box”
How much does a solar module cost to buy? The average cost on the market now is $0.85/W. But how
much does it cost a vertically integrated solar company to manufacture and supply itself with a solar
module? It’s hard to know, and that’s the point. The same goes for the costs of customer acquisition, or
finance overhead, or Installation. When a company controls all aspects of solar PV installations, the costs
are no longer transparent, and the price can become a “black box” into which no one from the outside can
peer in. This allows a company to keep a mystery how much of its prices are based on costs and how
much are based on margins. Plenty of companies protect the inner workings of their businesses and profit
making, so it’s hard to fault solar for going that route, though the industry could use more transparency to
unlock cost reduction opportunities that’ll make solar more affordable for broader swaths of the market.
3. Vertical integration defends against market power
Since financing has become the most popular way to install solar (58 percent growth of solar
financing every year since 2004, and accounting for 80–90 percent of new solar installs in states such as
Colorado and Arizona), financial groups got to set their own terms and high rates of return. Solar
installers might struggle as equipment prices and competition drove margins down, but financiers could
expect a guaranteed rate of return. Installers moved into financing in order to control that high-profit
aspect of the business and avoid being stuck solely in the volatile installations market. Simultaneously,
project developers and financiers began moving into installation in order to exercise better control over
appraisals and system pricing.
4. Vertical integration reduces market competition
The solar installation market is still very large with a lot of small players. The barriers to entry are low; any
electrical contractor can get the parts and equipment to make installations. By vertically integrating, large
companies can become their own suppliers and control access to equipment and financing. Large
companies can attract more customers through better and easier financing, and raise the barrier to entry
for small competitors. While running multiple operations within the company adds to overhead, it also lets
them squeeze out the smaller competitors and ensure a bigger share of the market in the long term.
5. Vertical integration defends against opportunism
New installation technologies and techniques are difficult to patent and relatively easy to reverse
engineer. Any company able to create a new system to reduce costs would be rapidly followed by the
other solar installers/companies. By vertically integrating the supply chain, these companies can control
access to top-tier equipment for longer periods. Rapidly expanding a new technology’s use—and the
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cost/system benefits it brings—allows a vertically integrated company to quickly secure market share
before its competitors can develop rival equipment.
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2 solar giants aim to own it all
David Ferris, E&E reporter
EnergyWire: Tuesday, July 8, 2014
SolarCity is America's largest financier and installer of rooftop solar panels. SunPower is one of the
country's biggest solar-panel manufacturers. From opposite ends of the supply chain, the two California
firms have declared their plans to become vertically integrated, just like the major oil companies.
In late June, SolarCity said it would become the first solar-services company to make its own panels, and
a lot of them (Greenwire, June 17). The 8-year-old firm is buying a small manufacturer, Silevo, for $200
million, according to Bloomberg, and is quintupling the size of its planned factory in order to produce a
gigawatt of solar panels each year, by far the biggest such factory in the United States.
The waxing of SunPower has been more gradual. Founded 30 years ago as a maker of crystal-silicon
photovoltaic panels, it added a network of dealers in 2005, then expanded into inverters, racking and
monitoring systems, then into building utility-scale solar plants. Two weeks ago, it announced a
partnership with KB Home to introduce energy storage alongside its home solar systems.
The two enterprises, whose headquarters are a mere half-hour apart on Highway 101, are adopting a
strategy meant to keep costs down and weather the uncertainties of a fast-growing industry. Analysts said
that controlling the market from raw silicon to the rooftop has its risks but makes sense when the product
carries a guarantee to work for 20 years or more.
"They started on opposite ends of the spectrum," said Matt Feinstein, a solar industry analyst with Lux
Research, of SolarCity and SunPower. "Now they want to be energy-solution providers. They're both
pursuing energy storage with solar. They're both looking to be one-stop shops."
By pushing costs down, these super-players may hasten the day when solar is competitive with fossil fuels.
Furthermore, Feinstein said, it signals that the duo are "trying to push the envelope on changing the
utility business model and changing how we get electricity."
Such large resources mean that SolarCity and SunPower are more likely to clash with traditional power
companies. Both are beginning to offer batteries to store solar power, which could deny utilities a lot of
business. And by aggregating the solar output from thousands of rooftop solar panels, they could be in a
position to alter the trajectory of energy use across entire states.
The two have jostled in the past. In 2012, SunPower sued SolarCity for poaching several of its salespeople
and their intellectual property according to Greentech Media.
2 versions of vertical
While these two are the most ambitious in scope, other competitors are also expanding in order to
survive. "There's lots of different kinds of vertical integration in solar," said Shayle Kann, director of
research for Greentech Media.
For example, SunRun, another California solar financier, became a rooftop installer when it purchased the
residential unit of REC Solar in February. In March, NRG Energy, whose traditional business is fossil fuelfired power plants, expanded its presence in the residential market with the purchase of Roof Diagnostics.
So far, the country's other two major manufacturers and developers of large solar plants, SunEdison and
First Solar, remain on the sidelines when it comes to the rooftop war.
SunPower's and SolarCity's visions of "vertical" are in fact quite different.
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SolarCity's drive into the far ends of the solar industry echoes that of its sister company, Tesla. That
electric automaker, also based just outside Silicon Valley, is on the cusp of vertically integrating, as well.
Any day now, it may announce where it will build its enormous "gigafactory," which is envisioned to
produce more lithium-ion batteries than the world currently makes in a year.
Tesla's CEO, Elon Musk, is the chairman of SolarCity and the cousin of its two founders. The batteries that
SolarCity is starting to sell to its solar customers are from Tesla (EnergyWire, March 3).
Both Tesla and SolarCity have exhibited a desire to control and brand it all, as well as a tendency to frame
their grand plans not just in terms of dollars and cents, but as an imperative to hurry along a clean
economy.
With the acquisition of Silevo, SolarCity's name will be on everything, from the solar panel to the green Tshirts that installers wear. "We will be the most vertically integrated solar company in the world, spanning
from modules, balance of systems, installations, operations and maintenance," said Peter Rive, SolarCity's
chief technology officer.
By comparison, SunPower's approach is less monolithic and more flexible. It distributes its solar panels
and systems through a network of dealers that operate independently. SunPower CEO Tom Werner said
in an interview that this gives SunPower the ability to saturate regions more quickly, and to enter new
markets faster.
Only time will tell whether vertical integration is a recipe for success in the solar industry. Controlling
every part of the value chain means that if one link becomes a money-loser, another can make up the
slack. SunPower and SolarCity both have some of the most efficient solar panels on the market. But if a
competitor breaks out with a better one, the companies could be locked in and would struggle to compete.
Early in the game, both companies are confident about their prospects.
"Scale is going to matter," said Werner, SunPower's CEO. "The big winners are going to be the big guys,
and they're going to be integrating."
Here comes the sun: US solar power market hits all-time high
After a rocky start, the American solar market is taking off and growing faster than coal and natural gas power. What
will it take to make it go truly mainstream?
Matt Weiser
Last modified on Thursday 28 July 2016 13.45 EDT
Solar energy in the US has had a rocky existence. Ever since Ronald Reagan symbolically
removed Jimmy Carter’s solar panels from the White House roof in 1986, federal policy has
been unpredictable, such that manufacturers and consumers could never depend on reliable
incentives to produce and install solar energy systems.
Remarkably, the US solar energy industry is now entering what may be its most prosperous
decade ever, thanks to a new wave of federal and state policies and positive economics in the
industry, both at home and abroad.
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“I think it will actually be bigger than people are projecting,” says Jigar Shah, president and cofounder of Generate Capital, a clean energy investment firm based in San Francisco. “The solar
industry is booming right now.”
The US solar industry expects to install 14.5 gigawatts of solar power in 2016, a 94% increase over
the record 7.5 gigawatts last year, according to a new market report by GTM Research and the
Solar Energy Industries Association. Revenues from solar installations also increased 21% from
2014 to more than $22bn in 2015.
For the first time, more solar systems came online than natural gas power plants – the top source of
electricity in the US – in 2015, as measured in megawatts, said Justin Baca, vice president of
markets and research at the Solar Energy Industries Association. This year, new solar is
expected to surpass installations of all other sources, said the US Energy Information
Administration.
Data: SEIA/GTM Research. Illustration: Ucilia Wang/The Guardian
The rise of solar energy use, especially by homes and businesses with panels on their roofs, is
gradually transforming the electricity industry. For more than a century, power plant owners
and utilities have controlled the energy delivery service, and some of them enjoy a monopoly.
“We were just a tiny little speck 10 years ago, and now we are really up there with the major
established generating technologies,” said Baca. “It’s amazing.”
Sunny path
What’s behind all this? A federal tax credit has played a key role: it enables home and business
owners to take off 30% of the price of their solar energy systems from their income taxes.
Congress renewed the tax credit last December.
Another factor is cost. It is simply a lot cheaper to install solar these days, largely because cost of
components have declined considerably. The wholesale price of a solar panel today is about
$0.65 per watt, compared with $0.74 per watt a year ago and $4 per watt in 2008.
The steep decline in prices began initially in Germany. In 2000, Germany adopted policies that
heavily subsidized solar power by adding a special charge on consumer utility bills. Utilities use
the money collected from that special charge to pay higher rates for solar energy as part of a
government policy to promote renewable energy. The higher rates created a huge demand for
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solar panels, driving manufacturers to compete for those dollars and other countries to institute
similar policies. Until last year, it was the largest solar energy producing country in the world.
“They created a massive demand for solar, and manufacturers around the world started stepping
up to that,” Baca said. “Prior to that, a lot of solar panels were still largely made by hand. But the
scale that manufacturers started growing to allowed a little bit more automation.”
Then China, where labor costs were lower, rose to become a mighty manufacturing force.
Chinese manufacturers built massive factories to make solar panels, drove down the prices for
solar panels and forced more than a hundred of its competitors in Europe, US and even within China
to go bankrupt.
The fallout hurt so many businesses that the US government imposed tariffs on Chinese-made
solar panels after determining that Chinese manufacturers were pricing their products at below
fair-market values.
The tariffs and increasing domestic demand have boosted manufacturing jobs in the US, which
is now one of the top five nations for solar panel producers behind China, Singapore, Taiwan and
Malaysia.
“Now the market’s so large you can actually sustain the large manufacturing plants and support
the product locally,” said Shah.
One example is SolarCity, which is building a giant new solar panel factory in Buffalo, New York.
The facility, expected to be in operation later this year, plans to employ 3,500 people. It will
produce panels primarily for SolarCity’s own projects around the world.
Declines in other sources of electricity generation has also helped solar’s growing popularity.
The coal business suffered historic losses in 2015 as concern about its greenhouse gas emissions
took hold. Just 3 megawatts of new coal generation came online in 2015, compared to about 2,600
megawatts for solar, according to the Federal Energy Regulatory Commission.
Dark clouds ahead?
Although the solar market is booming overall, its reliance on government incentives makes it
vulnerable to the whims of policymakers. In Nevada, once considered a role model for solar
development and a national leader for solar jobs per capita, the state Public Utilities Commission
approved a major rollback of solar subsidies and policies last December.
The commission voted in response to a complaint by the state’s largest utility, NV Energy, which
contended that the subsidy – and the billing process required for the program – threatened its
profitability.
That change prompted SolarCity, one of America’s largest solar companies, to stop selling and
installing new systems in Nevada and take some 550 jobs with it. Another company, Sunrun, did
the same. As a result, the industry association expects Nevada to drop from the fifth-largest state
for residential solar installations in 2015 to 31st by the end of this year.
Robert Boehm, director of the Center for Energy Research at the University of Nevada-Las
Vegas, said the changes could mean trouble ahead for the industry as a whole.
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“My opinion is that many of the utilities in the US would like to do this in general,” Boehm said
of curtailing state solar incentives and policies. “The whole rooftop solar thing has really gone
south (in Nevada). We were amongst one of better states in terms of supporting rooftop solar.
Now we are down amongst probably the worst.”
Energy storage presents another obstacle. Solar remains a small contributor to the nation’s
energy supply, accounting for less than 1% percent of total electricity production. As it grows and
replaces traditional sources of energy, which can produce electricity any time, the need to make
solar energy available even when the sun isn’t shining will only grow.
Batteries are emerging to be the solution, but the technology and the manufacturing scale aren’t
improving quick enough to make it financially feasible for the masses. One company, Tesla
Motors, is attempting to address that problem by building a massive factory in Nevada to build
lithium-ion batteries that will go into energy storage packs designed by Tesla for homes and
businesses.
Tesla is counting on battery sales to complement its electric car business. Its CEO, Elon Musk,
surprised investors last week when he announced Tesla’s plan to buy SolarCity. Musk is the
chairman of SolarCity’s board of directors.
Boehm, who has solar panels on the roof of his home, said cheaper batteries will nudge more
people to invest in solar equipment.
“I’m kind of an enthusiast, but I wouldn’t do it right now,” Boehm said. “I don’t think the costs
are right. We’re seeing the price of batteries come down and they’re improving the performance
of them too. The movement’s in the right direction.”
Shah takes a different view. Consumers shouldn’t have to worry about energy storage because
they can always count on the utilities if their own solar panels aren’t producing energy, he said.
Utilities, on the other hand, should invest in more renewable energy and storage to meet the
growing demand and ensure a stable flow of electricity.
“The amount of capital and investment going into to solar is at an all-time high,” Shah said. “I
think the economics are clearly very good and we haven’t really even tapped but a very small
percentage of our opportunities.”
Trump’s Solar Tariffs Are Clouding the Industry’s Future (excerpt)
By ANA SWANSON and BRAD PLUMER JAN. 23, 2018
ZEBULON, N.C. — At this century-old farm just outside Durham, symmetrical rows of shining
blue solar panels have replaced the soybeans and tobacco that Tommy Vinson and his family
used to grow here. It is one of many solar farms that have sprung up around North Carolina,
transforming a state long battered by global offshoring into the second-largest generator of solar
electricity after California.
“It’s still reaping a very good harvest,” said April Vinson, who is married to Tommy. “It’s just not
a traditional kind of farm.”
Across North Carolina, textile factories and tobacco farms have disappeared, giving way to fields
of solar panels. But for those venturing into solar farming like Mr. Vinson, the future of this
vibrant industry is now cloudy. On Monday, the Trump administration announced that it would
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impose steep tariffs on imported solar panels, which could raise the cost of solar power in the
years ahead, slowing adoption of the technology and costing jobs.
Mr. Trump has long championed trade barriers as a way to protect United States manufacturers
from foreign competitors. On Monday, he also slapped tariffs on imported washing machines,
and his advisers say additional measures on steel, aluminum and other products will soon be
coming. “Our action today helps to create jobs in America for Americans,” Mr. Trump said on
Tuesday in the Oval Office.
The two solar companies that had sought the tariffs, Suniva and SolarWorld Americas, argue
that low-cost imports have decimated American manufacturing of solar cells and modules in
recent years. Today, 95 percent of the solar panels used in the United States are imported from
countries like Malaysia and South Korea, and the companies contend that tariffs are needed to
protect the nation’s remaining solar factories.
But while the tariffs may help domestic manufacturers, they are expected to ripple throughout
the industry in ways that may ultimately hurt American companies and their workers. Energy
experts say it is unlikely that the tariffs will create more than a small number of American solar
manufacturing jobs, since lowwage countries will continue to have a competitive edge.
Solar manufacturing now represents just a fraction of the overall jobs that have developed
around the solar industry. More than 260,000 Americans are employed in the sector, but fewer
than 2,000 of those employed in the United States are manufacturing solar cells and modules,
according to the Solar Energy Industries Association.
Far more workers are employed in areas that underpin the use of solar technology, such as
making steel racks that angle the panels toward the sun. And the bulk of workers in the solar
industry install and maintain the projects, a process that is labor-intensive and hard to
automate.
The tariffs the president announced start at 30 percent next year and ultimately fall to 15
percent by the fourth year. In each of the four years, the first 2.5 gigawatts of imported solar
cells will be exempted from the tariff.
At the Wakefield solar farm, the five-megawatt project on the Vinson family’s land, the cells that
collect solar energy are imported — they were manufactured by JA Solar, a Chinese company,
which makes cells and panels in China and Malaysia.
But the steel frames that the panels rest on are American made, manufactured by RBI Solar,
which is based in Cincinnati. The steel that RBI Solar used to make these racks is also American,
bought from Worthington Industries in Ohio and Attala Steel in Mississippi.
And then there are the Vinsons, the farming family who now have a steady income from leasing
their land that allowed Tommy’s mother, Martha, to comfortably retire.
On a brisk day this month, the Vinsons sidestepped puddles of melting snow as they walked
through rows of solar panels. But the sun was still shining, and the air above the panels
shimmered with heat. Built on a 30-acre site, the project now produces enough power for 1,000
homes — including, potentially, that of the Vinsons, who live just a mile away.
In North Carolina, state laws and tax incentives that favor solar projects selling power directly to
the electrical grid have helped the industry expand to the point where it now powers more than
400,000 homes and employs around 7,000 people.
The move is expected to hit utility-scale solar projects like this one, which sell their electricity to
power companies, particularly hard. Home and business owners may decide to continue buying
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solar panels for their rooftops, even if the price is a little higher. But when solar projects sell to a
utility company, they compete with other sources of energy, and every cent counts.
Over the last eight years, an influx of cheap imported panels has driven down the cost of solar
projects by 85 percent, according to Lazard, a financial advisory company. As a result, the
number of solar installations has soared to 12 gigawatts last year, from less than one gigawatt in
2010.
While the tariffs are likely to slow the adoption of solar power in the United States, they will not
entirely halt the industry. An analysis by GTM Research found that solar installations will
continue to rise from 2018 to 2022, though there will be 11 percent fewer panels installed as a
result of the tariffs.
One reason for the muted effect: Solar cells and modules account for one-third or less of the
overall cost of solar systems, and the industry has been relentlessly cutting the costs of all
components. All told, the tariffs will increase the cost of utility-scale solar projects by about 10
percent and residential rooftop systems by just 3 percent — raising them roughly to prices seen
two years ago.
But even a small price increase could slow the industry’s growth in states where solar already
faces fierce competition from cheap natural gas, such as Florida, Georgia, South Carolina or
Texas. “In the Southeast in particular, we were just starting to see solar compete at the margins
with natural gas,” said MJ Shiao, a solar analyst at GTM Research.
“This tariff only puts module prices back to where they were in 2015 or 2016, and U.S.
manufacturers weren’t competitive then,” said Varun Sivaram, an expert on solar power at the
Council on Foreign Relations.
Ana Swanson reported from Zebulon, N.C., and Brad Plumer from Washington.
Questions for discussion:
1. Which are the most important drivers of vertical integration in the solar industry? Are these
related to achieving efficiency or synergy?
2. What are the costs and consequences of vertical integration in the industry? Does it benefit
or hurt the consumer? Innovation? Industry players? Potential new entrants?
3. What changes to industry structure would break up the tendency toward vertical integration?
4. What is the right level of vertical integration? Does SunPower or SolarCity have a better
approach to vertical integration?
5. Is Tesla’s acquisition of SolarCity really vertical integration? Does it make sense?
6. How do you think the industry will respond to the new tariff?
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