*This article is a response to Shayle Kann’s recent article Can Pure-Play Utility PV Developers Compete in the U.S. Market? on Greentech Media*
Shayle, thanks for the article. I enjoyed reading your recent report which echoed similar themes. You’ve done a great job pulling together some comprehensive numbers on the ‘state of play’ in the North American downstream market. However, I would say there are several areas where our views of the market differ and I think it’s worth some public discussion.
As an aside, I have to point out that drawing the line on the market at the US-Canada border distorts the league tables for North America. With 165MW of projects in Ontario (and over 370MW now contracted), Recurrent Energy is actually the third largest developer in North America. I know you and I have a friendly disagreement on where to draw that line, but I figure it’s worth pointing out once again.
Your article (and report) repeatedly mentions the issue of underbidding in the US market in connection to the ‘vertical integration’ trend. While some recent California and Arizona bid results are rumored to have come in at very low prices, I am less concerned than you are about the issue. PV plant costs have certainly come down quickly and opinions differ about how far they’ll come down in the next 2-3 years—which accounts for some of the bid variation. To the extent there is aggressive risk taking, I think market mechanisms will correct any underbidding fairly quickly.
The reality is that strategic buyers in this marketplace do a tremendous amount of due diligence prior to pricing an acquisition. The idea that acquirers just count up signed PPAs and make a bid is inconsistent with my recent experience in the sale of Recurrent Energy. Buyers examine every project document and model each project assumption, carefully assessing potential profit of each project individually. They then discount each project based on the degree of development risk remaining. A portfolio of projects that cannot be realized profitably will not get an acquirer’s attention or investment.
If underbidding is occurring by developers who hope to flip a pipeline quickly, I think the market will deliver a swift and painful economics lesson. As you point out, late-stage development is capital intensive and a poor quality portfolio will not attract the investment required to bring it to realization. This is not the internet circa 1999.
The other mechanism that will come to bear on this issue is developer viability standards. Simply put, we need the utility evaluation process to take into account a developer’s history, balance sheet, and capabilities (as the California RPS does) and require them to post a meaningful security along with their bid. This approach ensures that they have skin in the game and tests their confidence in their ability to deliver a profitable project.
Finally, your report suggests in numerous places that vertical integration is the key driver behind all of the recent downstream acquisitions. While it certainly seems to fit some of them, I think that may be an oversimplification of what’s actually going on. In our case, the strategy we announced with Sharp is a little more nuanced.
We see a transition occurring in the market from FIT-driven demand to power-market-driven demand. Sharp’s acquisition of Recurrent Energy is really about building an interface to new market participants (utilities and IPPs) that is distinct from the module sales business. Recurrent Energy benefits from Sharp’s reputation as we compete for customers and project investors. And we will harness Sharp’s technology and supply-chain expertise to achieve a market-leading equipment and construction cost. That’s a strategy that enables us to define a long-term competitive advantage and a path to sustainable profits in a very competitive industry. You’ll see the evidence of this in coming months as we continue to harness a diverse supply of modules and services that won’t really fit the ‘vertical integration’ label.
Regards,
Arno Harris
CEO
Recurrent Energy