Monday, November 20, 2006

Strange deal under the Sun.

I saw this $330 Million piece of merger news last week and I'm puzzled. What is the point of SunPower and Powerlight merging? I already posted the question over at Cleantech blog.

SunPowerLight will combine two steps in the solar value chain: making modules and installing them. But these are distinct activities and it is hard to see major cost savings by attempts to integrate them. Meanwhile I see clear risks to both business as existing customers/suppliers try to realign business that will currently benefit a "new" competitor.

Don't get me wrong, there are major cost savings to be had both in making modules cheaper (longtime readers will know that I am developing IP in this area) and bringing down costs on the installer end. Unfortunately this appears to be a defensive merger in an otherwise expanding marketplace. The best analysis on the topic seems to conclude that SunPower thinks owning Powerlight will ensure it a distribution channel and help it maintain market share as the silicon shortage draws to a close sometime in the next 12 months.

While an end to the shortage would be good news on the cost side for SunPower, all its competitors will benefit as well, leading to fierce price competition. If demand were not to increase as costs drop, a glut could develop. My personal opinion is that demand will explode as costs fall. Many people quote the kilowatt hour (kwh) cost of solar in the $0.25-$0.30 range today. By several methods of analysis the price of solar is likely to fall by 20-40% over the next 5 years. Many sources point to a 5-6%/yr historical decline in the cost of solar which would suggest a 25-30% decline. Combine historical trends with a potentially large drop in the cost of silicon (by 30% or more as the recent silicon price squeeze unwinds) and the delivered cost of solar drops to $0.15-$0.18 kwh with a reasonable degree of probablitiy. At these prices, solar becomes fully competative with delivered power in several major markets (Japan, NY, Hawaii) without subsidy.

I can't help but think that SunPower competitors must be cheering this deal as it will distract the management team for at least the next 6 months.


Post a Comment

<< Home