As the renewable energy industry matures, businesses competing in the space are starting to find specific niches they think can win long term, and that change of focus means abandoning some long-held strategic positions. Gone are the days when vertically integrated developers would build solar panels as well as solar farms, and find their own financing. This strategy spread those companies too thin, and tied up capital that could otherwise have been used to fund manufacturing growth. Today, the popular blueprint is specialization, whether it's in component supply, financing, or another part of the value chain.
Making the transition to being primarily component suppliers are industry giants like First Solar (FSLR +0.13%) and SunPower, which were once leaders in the project development business. Residential solar installers Tesla and Vivint Solar are also moving away from financing solar projects themselves, and instead focusing on sales, marketing, and installation. Given how companies are shifting their strategies, I think General Electric (GE +2.66%) could become a big player in solar energy.
Its recent decision to reduce spending on fossil fuel power plants, while simultaneously investing more in wind turbine technology and energy storage, shows a new direction for the company. In line with that new direction, I think GE should make a big splash and buy First Solar, a deal that could give the acquirer the horizontal integration it needs to be a renewable energy power player and the target access to the adjacent technologies it needs to improve its offerings to project developers.
Image source: First Solar.
First Solar is a leader in utility-scale solar
GE is a leader in wind turbine design and manufacturing and First Solar has a similar position in the solar industry. First Solar's thin-film solar panels are ideal for utility-scale projects, particularly in harsh environments like desert locations where solar intensity is highest.
First Solar's manufacturing capacity also covers the global market, as it is based in the U.S., Malaysia, and Vietnam. By 2020, the company will have 5.4 gigawatts (GW) of solar panel capacity, making it one of the largest manufacturers in the world. The business aligns perfectly with GE's global presence in wind turbines and its emerging energy storage solutions. The three technologies together would be a powerful set of solutions.
GE has a complementary component business
General Electric would be taking on a familiar business with First Solar. Its wind business is very similar to First Solar's in many of the ways it brings products to market. Both companies manufacturer the power generation portion of a renewable power plant and sells them to utility-scale developers who finance them. (GE Capital sometimes takes a role as a project owner or financier) The companies could leverage their sales networks and may even be able to combine products in some projects.
GE is beginning to build a turnkey energy storage solution it will sell to utilities and renewable energy developers. In the announcement of the products, the company highlighted how it could complement solar farms to provide additional value to projects.
Wind turbines, solar panels, and energy storage are naturally complementary and all three are beginning to be combined with projects. Wind and solar are being combined because they produce energy at different times -- solar energy is generated during the day and wind turbines produce most of the energy at night -- and energy storage can level out energy supply even more.
Together, wind, solar, and energy storage can be valuable for utilities and energy developers. GE already has a turnkey product for wind and energy storage, so adding a solar solution makes a lot of sense given similar markets their serving.
How a deal could take shape
While GE is selling some assets, it's actually seeing renewable energy as one of its few growth businesses in 2018. Buying First Solar could supercharge that growth. With a current market cap of $7.4 billion, First Solar could easily be acquired by the $117 billion GE, even if a deal required a premium of ~25% from today's market price. GE could then use its capital and adjacent renewable energy businesses to grow First Solar in ways the company couldn't on its own.
For First Solar, the company is doing a good job expanding production and maximizing the value of its solar panel manufacturing, but there's a limit to what it can do on its own. Renewable developers are increasingly looking for more capabilities from component suppliers than just a solar panel. Energy storage is being included in solar projects of all sizes, racking is being offered as part of solar component packages, and inverters are being designed into turnkey solutions as well. First Solar could build partnerships with companies who provide those solutions, but I think it would be better served being acquired by a larger supplier who can incorporate wind, energy storage, and inverters with solar as a full suite of components for renewable energy developers.
I think GE and First Solar could be stronger together than they are separate. Wind, solar, and energy storage are the future of energy, and the companies have a chance to build a manufacturing powerhouse in all three.
