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Generating Returns on Renewable Generation: How Manufacturing Economics will Impact Investments in Wind, Solar, and Ocean Power
Freesky Research, Feb 2010, Pages: 34
Annual financing transactions for wind, solar, and ocean power technology suppliers will surpass $5 billion in 2010. But as government's share of funding declines, manufacturers and investors alike will increasingly depend on production economics, not global politics, to achieve high returns on invested capital. And the cost characteristics of these three generation technologies will continue to diverge.
Many of the differences in underlying cost structure get glossed over by LCOE, or levelized cost of energy calculations, which by placing all cash flows into an NPV analysis, hide key fixed/variable cost relationships that determine industry structure, and investor willingness to fund specific generation technologies. While utilities have long used this measure to compare natural gas to coal to nuclear and other sources, its value is limited when looking at modern renewables, particularly when traditional utilities own less than 15% of wind, wave, and solar's total output. Additionally, key financial metrics for wind, solar, and ocean vary greatly, with wind producing far more revenue per dollar invested in manufacturing capacity than solar does, while solar's cost of goods sold benefits from inventory cycles that are 50% shorter than wind's.
These manufacturing cost relationships flow down to electricity purchasers, and also determine what type of funding best suits each technology category. And while venture capitalists and IPOs get most of the press, the renewable electricity manufacturing industry depends heavily on more mundane types of financing, including syndicated bank loans and large convertible debt issuances. The average listed solar manufacturer, for example, receives less than a quarter of its public financing from its IPO.
While presenting transaction data, this report is not just a summary of recent funding rounds.
It looks at financing from the needs of manufacturers, and incorporates research on all types of debt and equity issuances, rather than looking at just VCs or just IPOs.
Key findings include:
- Regardless of whether a PV supplier uses a-Si, CIGS, CdTe, or even crystalline silicon, the most important metric to determine how quickly it will reach profitability is fixed asset utilization
- While there are excellent opportunities for startups in wind, solar, and ocean power manufacturing, venture capitalists will account for less than 20% of total industry financing
- PV module manufacturers might gain by acquiring installers, but there is little financial benefit to merging with each other
- While there is still operational risk in developing wave power parks, ocean power buoy manufacturers will have lower break-even points than wind or solar suppliers
The study also considers how the industry's funding mix will change as it grows past government subsidies.
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