Last week's revelation that First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) will be joining forces to create a yieldco for solar projects has come with mixed reactions. Many Wall Street analysts cheered the move, raising price targets on both stocks, but not everyone has been so bullish.
SunEdison (NASDAQOTH:SUNEQ) founder Jigar Shah said last week on The Energy Gang podcast that the two companies are "showing weakness" by not launching their own yieldcos, and regular solar bear Gordon Johnson of Axiom Capital said they're just "putting their poor assets into a yieldco".
What could be at play here is another move entirely, driven by Total (NYSE:TOT), which has quietly become a puppet master in renewable energy. Let me explain how this may be a move for the company to bring even more renewable generation assets under its wing.
Total is the renewable power you never saw coming
Quietly, Total is building a renewable energy powerhouse right under our noses. We know the French oil giant owns two-thirds of SunPower and is beginning to invest in solar projects itself, but it has also made investments in ancillary solar businesses that could prove valuable long-term.
It has a stake in energy storage company Sunverge, which just happens to be SunPower's energy storage partner. It's invested in Stem, which makes energy storage and energy management products. Late last year, it invested in energy storage start-up Aquion Energy, a company that thinks it has a differentiated way to store energy. I don't think these investments are being made by accident.
In SunPower, Total has the manufacturer of the most efficient panels in the industry, with large exposure to distributed solar like rooftop solar and a global footprint. It's surrounding that business with energy storage and management capabilities, which SunPower is rolling out to its distributed customers in 2015.
If Total is indeed trying to build a solar powerhouse, the next logical step is to expand its utility scale footprint and reduce competition between SunPower and its biggest rival, First Solar. It can accomplish this by making them partner on a yieldco. Two world class utility scale developers with investment around the world will presumably share some basic technology (SunPower's automated cleaning and First Solar's efficient installation methods) as well as agree not to fight over the same projects.
The result for Total is influence over two of the industry's best solar companies with investments in a suite of services that could augment their projects long-term.
Is a buyout of solar assets in the future?
In the recent Energy Gang podcast, Jigar Shah suggested that the joint yieldco is setting the stage for Total getting First Solar to buyout SunPower, meaning it's an exit strategy for Total. I actually think the opposite is the case. I think the long game is Total building enough of a stake in the solar industry's best companies that it can choose to buyout the best companies whenever it wants.
If SunPower's technology continues to lead the industry and it can grow production cost effectively, it would be worth a few billion dollars to buy it out in a few years and own a top position in distributed solar. If First Solar's plans to improve efficiency prove successful and it's able to regain its spot atop the utility scale solar market, returning to high margins, it would make sense to acquire it and have SunPower focus on distributed solar and First Solar focus on large scale solar.
The energy storage and management market is much more nascent, but most industry observers believe this is a huge opportunity -- and Total is keeping just enough of an interest in some promising players that it could buy the best one out when it knows which business strategy will win and fold it into offerings from SunPower or First Solar. In this way, Total can mix and match businesses that work the best together. I think dabbling here and there in a wide variety of industry-leading companies is intentional on Total's part.
What Total doesn't want to do is make a big bet on solar today and be wrong by getting technology wrong or investing in the wrong business model. So it keeps acquiring stakes in promising companies with the goal of eventually buying only the best in breed from a more mature solar market.
In a decade, if Total ends up owning the best rooftop solar manufacturer, the best energy storage company, and the best utility solar company it will be these smaller moves that will have set the table. I think Total is flying under the radar and quietly becoming the puppet master in the solar industry, and it's playing a long game that people aren't going to see coming until it has already won.