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14 November 2019

SunPower goes the way of all US solar firms – dumps manufacture

In a major strategic shift, US solar company SunPower has announced its plan to split the company in two, creating two independent businesses to focus separately on the technology and project development sides of the solar industry. With uncertainty mounting around tariffs and subsidies in the US’s renewables sector, SunPower will hope that this move will reassure shareholders and provide protection from Chinese solar manufacturing competition.

To some extent US shareholder perception was at the heart of this change – losses last year perhaps showed that SunPower is not large enough to mix it with the global solar panel manufacturers, but is better off working purely at home in the US market, emulating the successes of SunRun, Vivint and SunOver and to some extent Tesla.

While from a technological viewpoint there is little to recommend a “services play” with little intellectual property resident in the new SunPower company – instead what it is good at is distributing high quality solar panels to the residential market and to a lesser extent to commercial and industrial partners, solely in the US.

What it does NOT seem to be good at, at least to investors, is making a better mousetrap, or in this case a better solar panel. Few would argue that the high quality Maxeon panels were anything other than top of the line, but now it will broaden its base – offering energy storage, with a solar panel which has a built in inverter, to output AC. Suddenly it becomes three businesses, not one, and it would have been unlikely to make it on the world stage as a manufacturer of all three. To us a big owner, with plenty of cash, prepared to take on the world, might have been preferable to this move, but to the US investor pack, which can clearly see rivals making a strong go of this, the new strategy takes them away from risk.

The separation, announced on Monday, will see SunPower split into two ‘pure play solar companies’, creating a spin off business called Maxeon Solar Technologies, which will develop “advanced solar panel technologies deployed globally at scale”. This will be aided by an investment of $298 million into the business from Chinese wafer maker Tianjin Zhonghuan Semiconductor (TZS), which will own 29% of the new manufacturing company. Oil company Total will continue to own a piece of this business also. In a way this is the business to watch, it will likely grow faster, but potentially eat more R&D dollars.

The deal was done as a spin-out to shareholders – so sunPower will not have any ownership in Maxeon, but it will have a complex and closely tied distribution deal, and technology and brand sharing arrangements, for a few years at least.

Maxeon will be based-out of SunPower’s existing Singapore facilities. Without rigid ties to a single energy service company, along with investment from TZS and continued support from heavy investor Total, Maxeon will aim to increase innovation in the residential solar market, producing a low-cost supply chain for Capex savings. The spin-off will also now accelerate the expansion of new technologies such as the Maxeon-6 PV modules, which claim a significantly reduced LCOE to previous generations and cell efficiency of up to 26%.

SunPower’s aim will be to dominate US distributed electricity generation, focusing on downstream solar systems, sold direct to homes and small businesses. Without an R&D distraction in solar panels, the company claims that a Capex and Opex-light model will see project costs fall, both increasing the company’s ability to compete in the marketplace as well as protecting shareholder value.

This will also allow SunPower to increase its attached-storage efforts, which it expects will be included in over 30% of future projects. The primary focus of SunPower will be on the domestic marketplace, having stockpiled panels to meet the increased demand caused by the phasing out of the Solar Investment Tax Credit (ITC).

“We believe that the solar industry is entering a period of extended growth where success will be driven by value chain specialization, technology innovation and economies of scale,” said SunPower CEO Tom Werner, claiming that the “new structure and investment will create two focused businesses, each with unique expertise to excel in their part of the value chain.” But of course in a US market that has no extension to the ITC, this new business may directly hit a wall.

It is pretty widely understood in renewables, that solar systems which attack the utility grid market bring renewable power to market at a much cheaper LCOE. Residential solar may go on to drive solar globally, but right now the big pipeline in solar is for utility scale projects. However they don’t really need a player like SunPower – they need a cheap panel maker, other suppliers who manufacture in high volumes, and long 3 year development phases, which are kept together by engineering firms and finally deliver utility scale once the bankability button is pressed to invest.

In SunPower’s call to investors, executives talked about redundancy of a vertically integrated ‘one-stop-shop’ in the solar industry. Essentially, in an industry which is now claimed as mature, established channels have replaced previously fragmented routes to market, and a ‘jack-of-all-trades’ business is likely to be inefficient in terms of costs. With a constant discussion back and forth between manufacturing and project-based sides of the business, SunPower highlighted that company-wide decisions often lacked focus on the consumer, which may be addressed by separating into two companies of simplified structure.

SunPower’s value surged dramatically last year from $4.55 dollars per share in December 2019 to over $15 this September, following the company’s acquisition of SolarWorld’s assets, making SunPower the US market leader in terms of solar manufacturing capacity. With access to an Oregon-based manufacturing facility, SunPower would be able to avoid the 30% trade-tariffs imposed by the Trump administration, placing itself at the forefront of the US residential solar marketplace, along with rivals SunRun and Tesla.

Since September the stock has fallen, partly due to increased competition from Hanwha and First Solar, who have opened US-based manufacturing facilities to avoid tariffs. Current market leader SunRun published quarterly performance data on Wednesday, showing that the company will fall short its annual growth target of 16%, which is blamed on a “labor shortage” in spite of a strong consumer demand. SunPower’s investor presentation made it clear that business as usual would take it past SunRun almost immediately, promising shareholders a far higher valuation.

The wavering exclusion of bifacial solar from the tariffs has also caused uncertainty within the industry. While tariffs are supposed to be extended to bifacial in the near future, which would see domestic manufacturers become incrementally more competitive, recent opposition through the courts from developers such as Invenergy has seen the exception continue. Uncertainty from this also comes alongside concerns around the phase-out of the ITC, which many developers are campaigning to extend. If this follows the same course as the Production Tax Credit (PTC) for onshore wind however, amendments are unlikely to be made in the build up to a US election.

The combination of all these factors are likely the reason for struggling stocks in the current US solar industry, and SunPower’s separation will place its energy services company in direct competition with market leaders such as SunRun and Vivint. There is currently no strongly established market leader for residential solar in the US, with companies like Tesla complicating things somewhat if it follows through with promises to ramp up solar efforts next year.

SunPower’s sole focus on domestic distributed generation will be an attempt to grab as much of this domestic market share as possible in the current confusion. SunPower will have an enterprise value of approximately $1.0 billion upon completion of the separation in the second quarter of next year, which is significantly less than its competitors: Sunnova – $2.0 billion; Vivint – $2.1 billion; SunRun – $3.8 billion.

However, based on current output, one would expect a serious upside to this. SunPower deployed over 442 MW of capacity in the last quarter, compared to 122 MW by Sunnova, 221 MW by Vivint and 403 MW by SunRun. By reducing expenditure through the proposed separation, SunPower will aim for its enterprise value to rise to match the multiple of its competitors.

The largest threat is likely to come from manufacturers entering the US and undercutting existing costs, especially if tariffs are eventually removed. Large manufacturers such as First Solar have much larger production capacity, exceeding 5.4 GW a year, dwarfing that of the SunPower. This means smaller manufacturers will have to scale accordingly in a tariff-free world. SunPower’s decision to throw its manufacturing company over to Singapore and seek investment from TZS seems to be an acknowledgement of this, as they hope to scale the production of their Maxeon 5 and Maxeon 6 technologies with Chinese assistance and low-cost supply chain.

SunPower will hope to capitalize on the likely boom of solar plus storage in the US, especially in its home state of California where policy is progressive. All new build houses in the state are set to require solar panels from next year onwards, which aligns itself nicely with SunPower’s new proposed business model.

Rival Vivint adopted a different tack this week, launching what it calls a PPA (Power Purchase Agreement) in California, which is actually a way of leasing solar plus storage without the home owner having to buy equipment outright. It allows Vivint to sell excess power to whomever it likes. This is the next stop for SunPower too.