Sharp Acquisition of Recurrent Energy: Will Sharp be Assembling Modules in Ontario?

Sharp’s acquisition of Recurrent Energy –  a solar developer with one of Ontario’s largest project pipelines – raises an intriguing question: Will Sharp be assembling Ontario content compliant panels in the province in the near future?  Probably – but not necessarily.

Following the acquisition Recurrent stated publicly that they will continue to have the right and ability to source the most cost effective product and that Sharp will not be obligated to offer discounts to Recurrent.  We received a response from Recurrent public relations reiterating that Sharp does not currently have plans to manufacture in Ontario.

Financial Rationale

Regardless of the official position of the companies, this deal would seem to make most financial sense if Sharp provides the technology and financing for the vast majority of the Recurrent contracts.  Given that more than half of Recurrent’s contracted pipeline is in Ontario, and Ontario contracts essentially stipulate that modules be assembled in the province, it seems likely that Sharp plans to build a module assembly plant in Ontario. The alternative is for Recurrent to place a significant order with an Ontario-based Sharp competitor – which seems unlikely. When manufacturers buy project pipelines, they do so in order to capture more of the value chain and secure demand for their own technology – those seem to be the financial motivations behind Sharp’s acquisition.

The only one scenario that will keep Sharp manufacturing out of the province would be if Recurrent has already inked a deal with another equipment manufacturer for their Ontario-based projects. Given the timeline involved in negotiating acquisitions of this kind, we find it unlikely that Recurrent would have entered into any such arrangements.

Political Implications

An interesting twist to the story is that Sharp is a Japanese company.  Japan recently launched an official complaint with the World Trade Organization against Canada related to the FIT program.  As a consequence we expect Sharp to be under political pressure not to set up shop in Ontario just weeks after the complaint was launched. This pressure could delay or influence the type of announcement we hear regarding Sharp’s plans for fulfilling Recurrent’s Ontario pipeline.  If political considerations were paramount, one could imagine Sharp making a show of removing Recurrent from the province or selling the projects.  But this would make little financial sense and companies don’t usually make $300 million purchases to make a political point.  And from an official Japanese viewpoint, Ontario may not be important enough to Japan to warrant such pressure.

Sharp’s Options for Fulfilling Recurrent’s Ontario Pipeline

Sharp has several options in Ontario.  It could chose one or a combination of these options:

• Sharp could build a plant in Ontario.  This would take time.  Unless Sharp has already secured a manufacturing facility and has manufacturing equipment already on-site, it is unlikely to be producing panels until well into 2011.  This could cause delays for Recurrent or require them to source at least some of their product from other suppliers.
• Sharp could utilize an Ontario-based OEM manufacturer such as Celestica or Silfab to manufacture on their behalf, using Sharp cells and other technology.  The advantages of utilizing a third party are speed of production and reduced long-term commitment.  Some of the profit along the value chain would then need to be shared with the 3rd party, which could be a disadvantage to Sharp in the long-term but decrease the short-term risk.
• Sharp could buy an existing manufacturer (of which there are only 3 in Ontario with operations currently) or one that will be ready to produce shortly.  Of the manufacturers that are up and running, only ATS/Photowatt would have sufficient capacity to service Recurrent’s needs in the short term. With ATS just having announced a JV with Q-Cells that does not look like an option.
• Sharp could allow Recurrent to source panels from another manufacturer.  However, this would negate much of the financial rationale for purchasing Recurrent in the first place.

October Update: A 5th Option is that Sharp will work on a silicon solution whereby Ontario-made silicon is used in Japanese-made panels and shipped to Ontario.  Recent direct and indirect signals from major industry players, including Sharp, suggest that this is a favored strategy. This depends on adequate supply, Sharp’s comfort with the quality of upgraded metallurgical silicon (the only type of silicon currently produced in Ontario), and clarity on what is needed to demonstrate compliance with silicon domestic content requirements.  Click here for more analysis on the impact of silicon supply in Ontario.