New industries generally go through a relatively predictable cycle. A nascent industry is formed with a large number of players with different advantages, competition increases as the industry grows, that results in a bloodbath as companies fight for position, and once the battle is over, the winners consolidate to form a small number of big players.
This was true in oil & gas, steel, railroads, computer chips, and lots of other industries. The solar industry is going through the same cycle; it's in the consolidation phase right now.
Solar powers begin to emerge
As consolidation takes place in an industry, leaders begin to emerge. We can see that today in solar as companies acquire both scale and technical capabilities that make future growth possible. Here are just a few of the important acquisitions that have taken place in solar over the past two years:
In 2013 and 2014, SolarCity (NASDAQ:SCTY.DL) transformed its business by buying Zep Solar and Silevo. Zep was one of the leading racking companies in residential solar and brought standardization to the installation process along with a commercial product that expanded a new market for SolarCity. Silevo is a manufacturing company that plans to introduce a product that will increase efficiency above commodity solar panels.
In 2013, First Solar (NASDAQ:FSLR) bought GE's solar assets that are now transforming the company's panels into high-efficiency thin-film.
Canadian Solar bought Recurrent Energy from Sharp for its 4.0 GW project pipeline, including 1.0 GW in late-stage opportunities.
SunEdison (NASDAQOTH:SUNEQ) bought First Wind, Solar Energy Storage, and Vivint Solar in the last few months, expanding its asset base and the services it can provide to customers.
NRG Energy has acquired Roof Diagnostics and the Northeast sales and operations teams of Verengo Solar, among other acquisitions.
Sunrun acquired REC Solar's residential business last year, vertically integrating the finance company.
Clean Power Finance recently agreed to merge with Kilowatt Financial to form Elevate Power. Together they'll offer a number of financing and service options to solar installers.
This week, SunPower (NASDAQ:SPWR) bought 1.5 GW in solar power development assets from Infigen Energy, consolidating the downstream solar business even further. SunPower is one of only a small number of companies to own every part of the supply chain from panel manufacturing to long-term assets.
The strategy of consolidating companies into a smaller number of players is common, and in solar, it's also the right thing to do. Under one roof, companies can pool resources to make financing and installing systems more efficient.
Market movers begin to emerge
When looking at the solar landscape, I think there are four companies to watch, and then a lot of bit players below them.
First Solar and SunPower are vertically integrated manufacturers and project builders that have technology differentiation over competitors. As the industry matures, I expect these two to become technology leaders, adding capabilities like energy storage and smart controls to their platforms.
SunEdison has made itself into a power through acquisitions. It is now second in the U.S. in residential solar and a global leader in utility scale projects. The company doesn't make money today like First Solar and SunPower do, but it's building a network of assets that make it bigger than anyone else in renewable energy. Scale is power for SunEdison.
SolarCity is often seen as the face of solar in the U.S., and it's by far the largest residential solar installer. Elon Musk is the Chairman of the Board and a major shareholder, so this isn't a company to overlook as the industry evolves. Some of the acquisitions I outlined above show that SolarCity is willing to do what it takes to put itself in a strong strategic position as the market grows.
Not only are these four companies the biggest consolidators in solar, they're the most important to watch to see how the industry evolves. As they grow, costs fall, financing options open up, and new markets emerge as well. Consolidation is key to their expansion, and at the end of the day, these could be the four big players in solar decades from now. That's where investors want to have their money in this booming market.