By Daniel Englander
Depending on whom you ask, Bechtel, Chevron (NYSE:CVX) and Lockheed Martin (NYSE:LMT) are either three of the most respected or most reviled companies in Corporate America. They employ thousands of people; provide technology and resources essential for America's continued ability to assert itself on the world stage; and play a key role in shaping federal policy and regulations on energy, the environment, national security and defense, and the economy. The constant demand for large infrastructure, oil and advanced weapons systems doesn't hurt either – especially considering how the U.S. Government usually needs some advanced weapons to defend the large infrastructure used to extract oil.
But peel back the onion a little more and you will find Bechtel, Chevron and Lockheed Martin have something else in common: They are all important players in the U.S. solar industry and, taken together, represent a trend whose strength is positively correlated with the deepness of the recession. Chevron Energy Solutions is one of the California Solar Initiative's most active installers, with 87 large-scale PV projects at some stage in the program. Bechtel is not so secretly working with a well-known Chinese solar company on its U.S. projects. Lockheed Martin has taken its expertise designing PV arrays for space applications to the utility-scale market, partnering with Starwood Energy to offer packaged engineering, procurement, and construction (EPC) and structured financing deals.
What each of these companies possesses, and what makes them a threat to pure-play PV project developers, installers and EPC contractors, are enormous balance sheets and considerable expertise designing, building and managing complex projects. Why are these qualities important? First, consider the development of the U.S. PV market. Solar installations in the U.S. are trending larger over time. In 2007, nearly 35 percent of U.S. PV projects were between 1 kilowatt and 20 kilowatts, 60 percent were between 20 kilowatts and 2 megawatts, and 5 percent were larger than 2 megawatts. By 2012, GTM Research and the Prometheus Institute estimate 30 percent of cumulative projects in the U.S. will be ground-mount systems, while residential systems will comprise close to 20 percent of the market and large rooftop projects will make up around 50 percent of total installations. Large ground-mount and rooftop systems are the fastest growing segments of the U.S. market, and will represent the highest percentage of installations of the 5.4 gigawatts of cumulative capacity we estimate will be added by 2012. When the shovel hits the dirt on most of these projects, it is more likely the hard hats will bear the Bechtel logo than that of Namaste Solar.
The experience of another large-scale market bears this out. Spain's pre-September 2009 feed-in tariff incentivized big projects – most systems installed in Spain during the PV gold rush were between 5 megawatts and 10 megawatts. And while a number of pure-play developers, including Fotowatio, Renovalia, Conergy (OTC:CEYHF) and Phoenix Solar stamped their names on some of that market's biggest projects, the impact of energy and industrial conglomerates did not go unnoticed. Consider that Acciona (OTCPK:ACXIF), Iberdrola (OTCPK:IBDRY), Abengoa (OTCPK:ABGOF) and Elecnor were established infrastructure firms building transmission lines, dams, highways, bridges and fossil fuel power stations long before they became big players in the downstream PV market. In other words, experience counts.
The second reason is directly related to the current state of the credit markets. Asset financing has contracted significantly from its peak in early 2008 and tax equity has virtually disappeared from the market. Scarce capital and tight credit are forcing bank credit committees to pass on projects they would have approved only 12 months ago. The few projects receiving second looks now are airtight, addressing each project risk aspect. Important among these is EPC and supplier risk: Can the engineer credibly guarantee system performance? Will the O&M contractor be solvent in two years, five years or 20 years from now to service the project? How able is the EPC firm to guarantee construction deadlines and system costs? An industrial contractor like H&M Company or Mortenson Construction might be able to check all these boxes and back it up with construction financing where a smaller PV integrator might not.
This is not to say that today's installers and integrators are on the losing side of a difficult battle. It's quite the opposite, actually. In addition to continuing their domination of the rooftop market, pure-play PV project companies have a number of competitive advantages over their newer, larger rivals – experience navigating a byzantine array of state solar policies, PV-specific system engineering expertise, creative and innovative business models for getting projects done with scarce capital, and track records working with a global module and component supply industry – just to name a few. Additionally, some of the heavy hitters with deep pockets, like SunEdison or a+f GmbH, will compete aggressively and well against these new entrants.
The entrance of companies like Bechtel and Lockheed Martin to the solar industry is a net positive for the industry. A recent survey report (.pdf) from the Solar Electric Power Association found, among other things, that "utilities do not have as much faith in the abilities of solar developers and EPC contractors as they do in the abilities of similar entities in the coal and combustion turbine industries." In planning the build out of large-scale PV, which we believe will occur in the U.S. within the next four years, utilities and independent power producers, at least initially, will turn to companies they have turned to for decades to build their power stations. Over the long term this competitive situation may play out differently, but for now the barbarians have breached the walls and their presence is not as bad as one might expect.