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19 July 2019

GE sells off “awkward child” solar developer to BlackRock

Everyone has reported that GE and multi $trillion investor BlackRock are planning to partner to create a solar industry developer. The overuse of the word “powerhouse” was evident in most coverage. It will target US businesses only, it will not be global and it is simply a management buyout, dressed up as a merger of minds. No powerhouse here, move away.

This is GE contributing its solar energy arm into a Blackrock funded business. Think of this as GE getting out of solar, not GE inviting a big investment name into its solar business. The company will be renamed Distributed Solar Development (DSD), and it will design, build, own and operate distributed solar and storage systems for industrial customers and report to the renewable energy business of BlackRock.

Apparently GE executive Erik Schiemann launched GE Solar in 2012 and it has grown to 60 employees, has developed 125 sites and created total capacity of 3 GW mostly in the industrial, commercial and government sectors. GE is planning to retain 20% of the business; BlackRock takes an 80% stake.

The announcement talks about distributed solar energy, but what it means by that is not necessarily grid connected. It does not mean that it plans to innovate in home solar installations.

DSD at present builds about 100 MW of on-site solar projects a year and hopes to quadruple that project pipeline. Excuse me while we do the math – 100 MW x 4 = 400 MW a year. Or does it mean something else? For instance that it has a multi-year pipeline of around 300 MW, and in any given year it builds out 100 MW, and so it needs to move to a pipeline of 1.2 GW. It could mean anything, but it looks like it will grow organically, while having a captive investor base. It would feel good to be in a company like that, a bit like a start-up.

BlackRock Real Assets says it will supercharge its existing development expertise with capital and points out that it manages $6 trillion in assets, operates one of the largest renewable power equity investment platforms in the world with $5 billion invested in over 250 solar and wind projects globally, with a total generation capacity of over 5.2 GW.

We understand that when you take over a business like GE as CEO, you have to carve out all that is distracting and stick to your knitting. But when your knitting is building airplane parts that sit in plane models which are currently grounded, and which will inevitably face the decarbonization of the aircraft industry, or your knitting is gas turbines, and you freely admit to having installed 10,000 Gas turbines, but are finding it tough to make new “decarbonized” sales, then why wouldn’t you “keep” the one business which is isolated from climate change – solar. But no.

“This investment will deepen our clients’ access to the tremendous growth potential in the US solar industry,” says David Giordano, global head of renewable power at BlackRock. “

This is little more than an acquihire for BlackRock, and as such, it’s worth doing, but painting it as a merger and calling it a “solar powerhouse” is little short of farfetched.

Of course as it will operate as a standalone company it will be free from the crushing weight of the GE overhead, and operations will be streamlined. Finance companies are very good at that sort of thing.

Schiemann started DSD seven years ago, when the prevailing business model was centered on building installations that customers would finance and own. The idea behind DSD was to lower the relatively high barrier to entry. By bringing GE’s resources to bear, DSD wanted to provide consistent, soup-to-nuts service, that would make going solar an easy decision.

What’s happening here is that throughout GE, there are many businesses that are intrinsically more profitable than installing solar plants – at least in the short term. And so from a balance sheet and ongoing profit perspective, practically giving it away to BlackRock means that it can eventually get paid a little for its assets – systems it owns and runs – and cash in.

DSD will now build, operate solar, finance and own installations. This is not a novel idea for European energy companies like EDF, EDP and Iberdrola and many others, but apparently solar is not usually done like that in the US.

One facet sold as a feature is that DSD puts together optimal solutions, so does not favor GE built products – given the culture in GE that must really grate. It had no factories no huge big service contracts – other GE groups would have hated it and bulled it, and then when they saw distributed solar power as a threat to the traditional power business, it should have been obvious that other groups in GE would want it gone. BlackRock can sell all of that as a “good thing,” while GE never could.