An Unexpected Player in the Solar Market

If you were looking for a reason to invest in Lockheed Martin (NYSE: LMT  ) , here's an unconventional one: solar power.

That's right: The global security company has entered the solar power space -- and it has big plans.

A widening market
As the government ramps up incentives and funding for solar power and other renewable energy sources, solar has shown the potential to be the next "megatrend."

This year, the federal government will dedicate $170 million to solar power projects alone. Congress has renewed the solar power investment tax credit for eight years. Most importantly, the need to build solar-powered utilities comes as states have enacted aggressive renewable portfolio standards that require utilities in those states to progressively generate a certain percentage of power through renewable means.

Lockheed is prepared to take a bite out of this space.

A big bite, it hopes
Lockheed is positioning itself to become a large player in the solar space as an engineer of "concentrated solar-power plants."

"Lockheed isn't just a defense company," Chris Myers, vice president for solar energy programs at Lockheed Martin, said in an interview. "We are a global company providing IT services to the government and commercial enterprises, and now we're offering energy diversification systems. So from our global security perspective, it's very in line with our business."

The company teamed up exclusively with Starwood Energy, the energy arm of private equity firm Starwood Capital, in late 2007 to pursue North American solar generation projects. That partnership materialized in May, when Lockheed made the first of more deals to come with Starwood Energy to design and build a 290-megawatt concentrated solar power plant for Arizona Public Service Co.

Pending regulatory approval, the project is scheduled to be completed by 2013. The plant is expected to provide enough electricity for 73,000 Arizona customers, and Myers estimates that it is likely to generate more than $1 billion in revenues for Lockheed.

Aside from the Arizona project, Myers says Lockheed currently has about 34 projects in the pipeline -- 12 projects expected in the next two years and 22 more after that at potentially more than $1 billion each. "There are just a lot of utilities looking at how they can meet renewable standards," Myers said. "[Also], given national security for the United States, an energy-diversified portfolio makes a lot of sense -- especially from a clean environment perspective."

In addition to pursuing utility scale projects in the commercial market, Lockheed is also exploring the development of solar power on civilian Department of Defense installations that have renewable energy goals. "These bases have lots of land that can be utilized," Myers said.

Demand is voracious
Myers says he sees a big market for solar that will continue to grow. Demand for renewable energy is expected to double by the year 2030, according to a 2008 study by the Energy Information Administration. "We cannot continue to build coal plants to meet that desire if we're going to keep the environment clean," Myers said. "We have to have a renewable mix."

As a result, Myers says he expects widescale adoption of solar by consumers and businesses. "Demand for electricity is growing," he said. "Regulation is dictating that utilities build renewable power plants. The desire to have a lot of coal plants is not there. From an environmental perspective, from an energy-diversity perspective and from a regulatory perspective, the drive to renewable energy is there. We see a big market."

As for the skeptics who challenge the workability of these plants, Myers says concentrated solar power plants are very similar in operation to a natural gas or coal plant. You have power when you need it -- not only when the sun's out. "We're advancing the movement here of renewable energy as working [like] a normal energy plant," he said.

Lockheed's advantage
As the utility-scale solar market heats up, pure-play solar companies such as SunPower (Nasdaq: SPWRA  ) , First Solar (Nasdaq: FSLR  ) , Suntech Power (NYSE: STP  ) , and Yingli Green Energy (NYSE: YGE  ) are expected to gobble up a slice of the pie. So what chance does Lockheed have?

"We have a lot of flexibility in getting into the marketplace, from a project financing perspective and from a permitting perspective in different states," says Myers.

Due to the banking crisis, power companies have faced difficulties raising funding for major projects, and are still figuring out how to obtain federal loans and grants. Enter Starwood Energy.

Lockheed has its own funder, Starwood Energy, to finance its deals. Starwood is experienced in both project financing and the energy space. In 2007, it financed Neptune, a 65-mile, 660-megawatt underground (and sea) transmission project.

Lockheed will also be able to fall back on its engineering expertise. "What's missing [in the market] are investment-grade engineering procurement construction companies that can build and guarantee the performance of these plants," said Brad Nordholm, CEO of Starwood Energy. Concentrated solar plants are different than normal solar plants. In order to funnel the sun's power into a steam generator, engineering and manufacturing is required. And that's what Lockheed does best: engineering.

"By putting together Lockheed's strengths and our strengths, we have the ability to deliver the complete package to utilities," said Nordholm. "We think that gives us a leg up on our competitors."

For related Foolishness:

Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. Suntech Power is a Motley Fool Rule Breakers recommendation. The Motley Fool has a disclosure policy.


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