Does BrightSource’s Shelved IPO Spell Trouble for the Solar Sector?

Presidio Graduate School’s Macroeconomics course for Spring 2012, is authoring a series of articles. The articles on this “micro-blog” reflect reactions and thoughts on news items, economic theory, and other issues as they pertain to the concept of sustainability.  Follow along here.

By T. Burke Pemberton

The U.S. solar energy sector has been taken for a bumpy ride of late. While according to the U.S. Census the industry represents just .03 percent of total domestic electricity production, it has seen 30 percent year-over-year growth for the last 20 years. The industry received a major boost during the recession from tax credits and investment incentives stemming from the economic stimulus package. Then, it took a beating in early 2011, as a surplus of solar panels on the global market caused prices and profit margins to drop for solar PV manufacturers.

Despite these setbacks, the sector has still showed great promise in recent months as more solar was installed in the third quarter of 2011 than in all of 2009 combined. However, recent developments like solar power-plant developer BrightSource Energy shelving its IPO, or full-service solar provider SolarCity announcing this week its plans to go public, has many industry stakeholders shrugging their shoulders as to what lies ahead for the future of the sector.

It’s important to note that BrightSource Energy doesn’t make the typical solar PV panels you see mounted on roofs and parking garages. The company builds large concentrated solar power plants that use fields of mirrors to reflect the sun’s energy onto towers. BrightSource is currently building a giant $2.2 billion cluster of plants in the middle of the Mojave Desert, financed by the federal government and Google, Inc. With a huge project and backers like that, it begs the question: Why did the company decide to cancel its IPO at the last minute?

According to BrightSource, various events have led its executives to believe the IPO was not well-timed. For example, the Volatility Index increased by 33 percent, the DJIA and S&P both fell 2.4 percent, and the Nasdaq Cleanedge Index fell 6.6 percent. While true, economic indicators are merely the result of a multitude of macroeconomic conditions at play that are affecting the future prognosis of the U.S. solar and renewable energy sector.

For starters, new shale discoveries, advancements in oil-field technology, a highly supportive political climate, and an established drilling infrastructure have all lead to a dramatic surge in the U.S. natural gas market. Production of liquefied natural gas has increased twelve-fold since 2000, representing one quarter of national gas output—a proportion that could double by the year 2035. The price of natural gas has dropped below 2002 levels as the United States has become a gas exporter for the first time in 50 years. According to the Energy Information Administration, power supplied by natural gas-fired plants in the U.S. is expected to rise by 17 percent this year.

While increased production of natural gas bodes well for the U.S. economy in the short-term, it’s not exactly what the renewable energy sector had in mind when President Obama said we need to reduce our dependence on foreign oil. Nonetheless, the current administration remains stalwart in its outward commitment to renewables and its awareness of historical volatility in the fossil fuel sector. Earlier this month, U.S. Energy Secretary, Steven Chu, said a four-fold drop in solar module costs over the past three years, and a likely decline by half again in the next eight years, means renewables deployment will continue.

Yet there are other circumstances in the energy sector have led to uncertainty for renewables. In August 2011, Solar PV manufacturer Solyndra, funded by $527 million in federal stimulus loans, filed for bankruptcy. This was widely attributed to China’s massive subsidization of its national solar PV manufacturing sector through low-rate loans from state-owned banks and the procurement of cheap or free land. Surprisingly, in March, Chinese Premier Wen Jiabao announced that China is shifting its national energy policy entirely to accelerate the use of new-energy sources such as nuclear energy and natural gas, and is putting an end to blind expansion in the solar and wind sectors in 2012.

Solyndra’s collapse and China’s energy policy shift have created a political lightning rod, bringing the relevance of federal support for the renewable energy sector into question, and providing fodder for arguments supporting the continued subsidization of the fossil fuels industry. Ongoing political debate ensues as stimulus tax breaks for renewables are set to expire this year. The uncertainty surrounding incentives and subsidization for renewables has shrouded BrightSource’s business model in risk, as its ‘concentrated solar thermal’ technology requires huge upfront capital expenditures to acquire the land and infrastructure necessary to operate.

China clearly won the first round of the solar PV sector by developing economies of scale and driving the cost of solar panels down so low that developers are now able to use them to build entire power plants, an idea that just a few years ago would have been considered far too expensive. The drop in the price of solar panels has helped SolarCity, which leases and installs solar systems for residential customers, and supports the rationale for shelving the BrightSource IPO. It has also led the U.S. Commerce Department to impose tariffs on imported Chinese solar PV panels–tariffs that could increase if it is found that China has used predatory pricing to drive U.S. producers out of the market—and could actually result in a surge in the price of solar panels. Rising prices in the solar PV sector could bode well for BrightSource’s business model, and could hurt SolarCity, creating questions--or possibly explaining the urgency--surrounding its decision to go public.

With all that is going  on in the sector, it is no wonder that solar companies are lobbying Congress for a few more years of government support. The government continues to subsidize the fossil fuel industry at a rate thirteen times that of the renewables sector. In order for solar to compete with the natural gas market, and for Secretary Chu and the Obama administration to make good on their commitment to renewable energy, the playing field in the energy sector may need to be leveled out—a scenario that seems unlikely in the midst of an election year. Perhaps BrightSource is aware of that, and plans to keep its IPO on the shelf until after the election has finished.