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Renewables at a Crossroads

Investment opportunities in an evolving environment.

Fortnightly Magazine - June 2011

technologies will force investors to make significant bets on certain technologies, companies, or markets. For instance, they must consider which technology solutions will dominate in five years and what downstream companies will stand to benefit.

One way to help mitigate these uncertainties is for investors to target companies in the manufacturing and chemical industries that are focused on the higher-margin segments of the renewables value chain. Specialized Technology Resources (STR) is one such company in the solar PV space. PV modules rely on a thin, transparent laminate—a so-called “encapsulant” derived from advanced chemical processing—to protect cells from moisture, ultraviolet rays, and heat. A leading specialist in the encapsulant market, STR has maintained gross margins above 30 percent for several years.

Another potential high-risk, high-reward investment choice relates to emerging renewables technologies. A dramatic reduction in cost or a significant improvement in efficiency could displace incumbent technologies and companies. Several companies in the solar industry, including Nanosolar and MiaSolé, are aggressively investing in R&D to serve two very different markets: utility-scale power and consumer electronics specialty products. Outside investment in a startup renewable energy company offers enormous upside potential in the best case, but the challenge is to pick the right technology and company.

Ultimately, a successful technology play will require a combination of specialty product and innovation capabilities, established positions in adjacent value-chain verticals, an ability to develop a new customer base, an understanding of the renewables marketplace, and the flexibility to adapt to a dynamic market.

Meeting the Test

Given the more challenging renewables market and political environment, now is the time for companies and investors to take a hard look at their capabilities to ensure that they are sufficient to create a sustained competitive advantage. Truth be told, many companies currently participating in the market don’t meet this test and will likely exit the market in the coming years. Those that survive will need to isolate and strengthen their capabilities, hone their strategies, take advantage of industry consolidation to build scale, and partner with an increasingly diverse array of specialized players to reach and influence the market for their products and services.

To be sure, some of the key policy mechanisms and other supports that triggered the boom in renewables have weakened in the face of one of the most severe economic downturns in modern history. In some ways, though, the renewables sector is richer and more dynamic today than when the boom began. Clear industry leaders are already starting to emerge, but plenty of opportunities remain for those with the vision and the capabilities to power the next era for global energy markets.