Robert Kittell, P.E., Senior Managing Director, Newmark Knight Frank and Robert Hess, Executive Managing Director, Consulting, Newmark Grubb Knight Frank (March 2011)
Across the country, solar developers are signing 20- to 30-year power purchase agreements (PPAs) with local utilities for multiple-megawatt solar power plants. Along with tax incentives, economic development professionals often structure arrangements for manufacturing facilities to initially sell solar panels to these proposed utility-scale projects. It remains to be seen if there will be new demand to sustain these photovoltaic (PV) module plants after initial orders are filled. A mature industry will likely include consolidation and closures, so investors and developers face a number of potential industry outcomes.
The U.S. solar industry faces challenges similar to the wind industry: A market size driven primarily by policy, an uncertain political and economic climate, and generation costs many times higher than traditional gas and coal-fired plants. Subsidies, feed-in tariffs, and mandates are all subject to shifting political winds, while commoditization, cutthroat competition, procurement risk, and over-supply cycles loom large. Despite this uncertainty, most forecasts are still projecting robust growth for the U.S. solar industry. Congress showed bipartisan support by recently passing a one-year extension of the Section 1603 Treasury Grant Program for solar projects.
Even for the grid-tied market, policy and local economics dwarf even the most fundamental element of the solar power generation equation - insolation, the sun's ability to provide power - in driving PV manufacturing demand. Add to this the massive capitalization requirements, the need for a skilled labor force, complex operational and supply chain challenges, potential acquisitions or consolidations, along with risk mitigation, reversibility, and global factors, the real estate portfolio optimization equation begs for a comprehensive approach with a structured decision-making methodology.
An unsophisticated approach may boil down to a PV manufacturer with tremendous growth opportunities, but with simultaneous capitalization constraints and top line growth demands from investors. The easy answer would be to go where the incentives are. Though this approach may lead to short-term viability, ignoring the economic geography may lead to a high-profile collapse of the enterprise.
In California and Massachusetts, some of yesterday's alternative energy success stories have become today's uncomfortable headlines: plant closings, millions of lost taxpayer dollars, and hundreds of disenfranchised workers. The end result? The inevitable acquisition of a project pipeline by a well-positioned competitor or the offshoring of a manufacturing operation, depriving a community of its quest for a greener economy.
Improved productivity, supply chain initiatives and leveraging scale are driving down solar's per-watt costs dramatically. Manufacturers who embrace applied economic geography will place themselves at a competitive advantage and are setting the foundation to become the long-term industry success stories.
Leveraging Geography for Competitive Advantage
After spending three years studying and advising in this realm, we believe that much of the alternative energy industry is struggling with the concept of "where to locate," and that it ties back to the underlying principles of "knowing thyself." An enterprise must be able to identify and acknowledge its true differentiators, core short-term and long-term markets (non-policy driven), core values, operating baseline, five-year plan, and critical needs of the business before it seeks to optimize business geography initiatives.
Newmark Knight Frank strongly believes when we advise manufacturing companies that this is about a total cost equation and, where possible, a total quantification of all qualitative factors that contribute to a location decision. We integrate labor, operations, logistics, regional differentiators, risk, and soft factors - then filter against data sets, both desktop and empirical (substantiated by ground truth) to indicate geographic plausibility. Addressing incentives and economic development opportunities is crucial no doubt to these capital driven and cash starved assets in the alternative energy sector. However, once these federal and local incentives go away, it will be back to basics:
• competitive structural costs
• the ability to innovate and respond to market forces with the right mix of physical, human and political capital
• a reasonably optimal position within a domestic or global supply chain - and flexibility to respond to the rapidly changing supply chain landscape of alternative energy
• a business climate and local partners in the state/community who want your industry and operations to be successful, profitable, and sustainable.
The mission critical outcome must be an enterprise built upon solid financials and human factors that are rooted in compatible economic geography - for the long term. Short-term opportunistic variables must be acknowledged (an available building that allows for quick start-up, a recent customer order requiring proximity, a private equity investor who has other operations that they want to be included in the search), but in the end it will be about whether the business process matches the geography.
The wind and solar industries face a confluence of market factors that includes huge potential, high risk, formidable competition, vast government support, and staggering capitalization requirements. These drivers have created a business dynamic with potential outcomes ranging from "fantastic failure" to "moonshot." The manufacturers that focus on matching geography to enterprise needs will position themselves best to achieve operational excellence and economic sustainability