Contributed by Martin Meyers, Clean Energy Associates

There’s good news and not-so-good news for the solar M&A market – and with both come risk. When it comes to pricing and acquisition of solar asset portfolios, having a thorough understanding of solar asset acquisition – whether it’s acquiring a portfolio or investing in a module manufacturing plant – can spell the difference between meeting projected returns or realizing future losses. 

Here’s the good news: The volume and value of global transactions in the solar energy space have been rising across the board, from venture capital investments to corporate mergers and acquisitions to purchases of asset portfolios.  The value of transactions in 2021 increased 91% year-on-year, with a total deal value of $27.8bn spread over 144 deals, according to the Q4 2021 “Solar Funding and M&A” report from Mercom Capital.

The not-so-good news comes from geopolitical, and both economic and financial headwinds: These transactions are taking place in a context of rising geopolitical risk, fast-evolving trade policy, volatility in commodity prices, and an outlook for rising long-term interest rates, as signaled by the U.S. Federal Reserve.

In such an uncertain environment, there is a heightened risk for solar energy deal participants. These risks include discovering significant technical issues, operational shortcomings, or external market surprises after deal closing. Any of these risks can result in dramatically lower returns or increased liability from faulty systems or materials.

Historic operating data is an imperfect indicator of material defects

The acquisition of an operating PV system portfolio is an example of a transaction with the potential for an adverse outcome arising from uncertainty or weak due diligence.

Historical operating data provides a solid foundation for evaluating future cash flows. However, PV solar assets also hold the potential of adverse future events that can lead to a significant shift in cash flows – and that can lead to dramatically lower returns.

The challenge with conducting thorough due diligence is that material defects in solar modules often cannot be seen easily, may not even be known by the selling company.  Oftentimes the acquiring company and financier may not know the right questions to ask. It is a “buyer beware” situation.

For example, material defects in system components from modules to wiring to connectors to inverters may not impact system performance until several years after commissioning; when and if they do arise, they reduce cash generation and require higher than anticipated maintenance expenditures. Accordingly, a detailed, thorough on-site technical inspection of the assets to evaluate such risks needs to be part of the deal terms and conducted as an essential component of deal due diligence.

Service provider M&A

Corporate acquisitions of service providers in the solar space are another class of transactions for which the many forms of sector-specific risk are crucial to understand.

For example, multiple players have considered, and in some cases proceeded with the acquisition of engineering, procurement, and construction (EPC) firms to enhance their exposure or facilitate entry into the fast-growing solar installation market. At a macro level, a potential acquirer must have a granular understanding of the uncertainties associated with key forces driving market growth; examples of this include cost and technology trends, the evolving policy environment including, crucially, trade policy, and the broader competitive landscape. Equally importantly, the acquirer must undertake an in-depth assessment of the competitiveness of the target’s capabilities in solar, the strength of its pipeline, and the potential value of its customer relationships

Solar manufacturing

A third class of transaction involves a company’s evaluation of a potential acquisition of solar manufacturing capacity within the US – or for that matter the establishment of a domestic manufacturing footprint within the US. The interest in such actions to establish a domestic robust and cost-competitive solar manufacturing sector at scale has risen sharply as a result of multiple drivers:

• The U.S. federal government has, under multiple administrations, taken steps that limit access and/or increase the price of imported modules through 1) administration of existing laws such as the 1930 Tariff Act and the Trade Act of 1974, as well as 2) the passage of new laws such as the Uyghur Forced Labor Prevent Act of 2021 and, potentially, the America COMPETES Act recently passed by the U.S. House of Representatives.
• The global supply chains that are an essential element of delivering components such as PV modules and inverters to the US have experienced extraordinary stresses over the past 12 to 18 months, with shipping costs up twofold or more and delivery times experiencing delays of multiple months

Assessing the value of existing manufacturing assets, particularly in light of rapid evolution in solar technologies, such as wafer and module form factors and cell architectures, can be complex and requires deep technical expertise.    

For instance, the design and construction of PV manufacturing assets depends on a specialized ecosystem of supply chain partners providing know how, technology, specialized tools and equipment. Equally, the successful operation of a solar manufacturing facility takes place in its own ecosystem involving suppliers of critical feedstocks, materials, and consumables. The successful execution of such due diligence  activities can be complicated by the need to conduct the due diligence in an accelerated timeline.

Given both the projections for increased solar deployment and the drive to diversity supply chains, we expect competition for these deals to accelerate – and that may cause higher valuations that are not accurate and lack the insights of due diligence that can create better terms and enhanced revenue and ROI.

About the author

Martin Meyers is the Director of Marketing Intelligence for Clean Energy Associates, a solar and storage technical advisory firm, providing quality assurance and independent engineering solutions worldwide. Since 2008, CEA has reduced buyers’ risks and improved returns on investments via quality assurance, technical and financial due diligence and engineering services covering more than 125 GW in over 65 countries.