Downstream Solar Companies, Funds Drive Strong Solar Investment

The social and environmental, as well as economic, benefits of making greater use of clean, renewable energy are clear as day, whatever your opinion about climate change and our role in causing it. With performance and reliability steadily improving, costs declining sharply, and the advent of third-party financing that makes installing solar photovoltaic (PV) systems more affordable for more people, investor interest has taken a decided shift downstream to solar finance and installation companies such as SolarCity (SCTY.DL), SunPower (NASDAQ: SPWR) and SunEdison (SUNEQ).

Individual investors can take a cue from their larger, professional counterparts. Tracking investments by venture capital (VC), private equity (PE) and other large, professional investors, the latest market data on U.S. solar industry investment from Mercom Capital illustrates the trend.

Solar industry venture capital (VC) funding surged 72% higher year over year in 2014's second quarter, fueled by investor interest in downstream solar industry participants, including Sunrun and Sungevity, as well as SunPower and SunEdison, according to Mercom Capital Group.

Overall, total global corporate funding in the solar energy sector -- VC, PE, debt financing, and public market financing by publicly listed companies -- totaled $6.3 billion in 2Q 2014 as compared to $7 billion in Q1, the market research company reports in its "Solar Q2 Funding and M&A Report."

"It was a solid quarter for the solar sector in terms of fundraising. VC funding was up, public markets remained strong and we are seeing new and innovative financial structures. Residential/commercial solar funds continue to raise record amounts," Mercom Capital Group CEO Raj Prabhu said in a press release.

Strong Q2 VC/PE solar sector funding, especially downstream

Three large deals were largely responsible for the Q2 surge in solar industry VC funding, which includes PE and corporate VC. Downstream solar energy companies attracted the bulk of VC/PE financing for the quarter, which in total encompassed 10 deals and accounted for $388 million of the total $432 million across 21 deals Mercom tracked for this investor sector in Q2.

A pioneer in the third-party solar financing market, residential solar energy systems provider Sunrun's raising $150 million was the largest VC/PE deal in Q2. Accel Partners, Foundation Partners, Madrone Capital, and Sequoia Capital numbered among the investor group.

Rounding out the top 5 Q2 VC/PE solar sector deals, Sunnova Energy raised $145 million and Sunrun competitor Sungevity tapped VC investors for $72.5 million. Brite Energy Solar, another residential and commercial solar energy systems and services provider, raised $14.2 million.

On the upstream, manufacturing end of the solar energy industry value chain, Siva Power, formerly known as Solexant, raised $15 million from VC/PE investors. Siva Power manufactures CIGS (Cadmium Indium Gallium Selenide) panels that are touted as alternatives to thin-film CdTe (cadmium telluride) solar panels manufactured by the likes of industry leader First Solar (FSLR 2.17%).

Strong interest in solar project financing and third-party solar funds

Turning to solar project financing, Mercom recorded 33 large-scale deals totaling $3.5 billion during Q2. The largest was $820 million for Megalim Solar Power's 121 megawatt (MW) concentrating solar power (CSP) project in Israel.

Here in the U.S., $450 million in project financing was agreed to for the 150-MW Tenaska Imperial Center West solar project in California. The project is being developed by Tenaska Solar Ventures, an affiliate of Omaha-based Tenaska, one of the largest independent, private energy companies in the U.S.

U.S. solar energy project developers are also casting their nets overseas. First Solar sealed a deal for $290 million in funding for its 141-MW Luz del Norte solar project, and SunEdison raised $190 million for the 72.8-MW Maria Elena solar project. Both are to be built in Chile.

Corporate and other investors continued to show strong interest in third-party residential and commercial solar energy funds in Q2. SunPower raised $492 million in capital across three different funds from investors that included Google, Admirals Bank, and Hannon Armstrong Sustainable Infrastructure Capital. In total, investors plowed over $1.3 billion into third-party residential and commercial solar funds in Q2.

Despite their advances and growing use, companies in the U.S. solar and renewable energy sectors continue to face stiff challenges. But the past decade's worth of experience, as well as the activities of large, well-heeled professional investors, can serve as guideposts for smaller, individual investors.

Solar, wind, biofuels, and other forms of renewable energy offer up a cleaner, healthier energy future, and investors of all stripes can earn healthy returns by capitalizing on growing uptake and use. Renewable energy yield companies, or yieldcos, such as Abengoa Yield, NextEra Energy Partners LP and SunEdison spinoff Terraform Partners open up another channel for investors to tap into.