Last month saw the surprise announcement that Total SA—one of Europe’s largest oil companies—agreed to buy 60% of U.S. solar company SunPower for $1.38 billion. Many pundits saw the goal of the deal as helping SunPower take on low-cost Chinese solar module manufacturers. But I actually don’t think that was the main focus of this deal. In my view, the hook up reflects the continuing
evolution of the solar industry from a niche to a significant part of
the mainstream energy industry.
A lot of the commentary on the deal, frankly, had me scratching my head. Most analysts seemed unable to get beyond the SunPower-vs-low-cost-Chinese-solar-modules framework. While the announcement noted some incremental investment in R&D and new technology, it clearly wasn’t the centerpiece.
If SunPower was looking for a technology partner to improve its cost-structure, an oil company would be an odd place to find it. And if Total was looking to make an investment in a solar technology business, there are lots of other ways to do that besides buying the majority share of a company like SunPower.
This deal was about access to capital and credit. Lots of it. What SunPower got in this transaction was Total’s massive balance sheet, as highlighted by the announcement of $1 billion in credit support from Total. Why do they need the credit support? Because one of SunPower’s biggest unrealized assets is its large utility-scale solar project pipeline (the lines that get the power from the solar plant to the grid). The key is that it will take a ton of capital to deliver the pipeline to full operating status—and raising more equity was not the answer.
There are two ways to extract maximum value from the pipeline for SunPower’s shareholders: One is to reduce the cost of building the solar plants themselves. The other is to cut the cost of financing the projects. The transaction with Total takes a tremendous amount of risk off the table for SunPower. What Total got was a way to put its balance sheet to work while sharing in the uptick in value it created for SunPower. It’s a smart deal and I think it makes a ton of sense for both companies.
There are strong parallels to Sharp’s acquisition last year of Recurrent Energy (where I’m CEO). Like SunPower, Recurrent Energy has one of North America’s top three pipelines of utility solar projects. The key execution challenge for us was finding a way to maximize the company’s value. The sale to Sharp provided both a balance sheet and access to the supply-chain expertise to reduce the cost of building our plants—the two levers for realizing maximum pipeline value.
As the utility scale solar market grows, pipelines will become ever more important. And because building those pipelines requires large amounts of low-cost capital, a key competitive feature of tomorrow’s solar leaders will be access to a balance sheet that maximizes pipeline profit for shareholders.
While that’s good news for shareholders, perhaps it’s more important to recognize that it’s also tremendously good news for the world. Energy generated from solar PV is 100% clean and carbon-free. Solar PV’s rapidly declining price over the last couple of years has made it one of the best cost renewables. As a result, it’s now the fastest growing source of new generation in the utility power industry. The fact that financiers and conventional energy businesses are embracing PV means it’s ready for primetime. And what the world needs pretty badly right now is prime time-ready renewables that can deliver energy cost-effectively at large scale.