Sunday, January 31, 2010

My thoughts on the Samsung-Ontario deal

The deal Samsung-Ontario deal provides incentives to the large South Korean conglomerate to locate significant wind, solar and component manufacturing here in Ontario and also obliges them to develop a significant amount of wind and solar parks in exchange for favourable terms.

Overall my belief is that it is good thing for the province, for green energy and for the renewables business writ large in the province. It will certainly create some losers, but I believe that by in large what it does is to validate the importance of what is happening in green energy in the province and that it will significantly propel the place of Ontario in the world of renewable energy. Perhaps even the number of zeros in this deal will finally awaken our financial giants and stir their interest.

I work with a number of start-up manufacturers including Power Panel, SolGate and previously with Menova Energy*. The impact to these businesses varies. Power Panel is focused on the world market and has a unique product, but I believe that the Samsung deal will bring more interest, capital and expertise to the Ontario market and thus that this deal will also lift Power Panel's boat. This too would be the case for Menova if they are able to eventually get their products out the door.

For SolGate, however, the story is more tenuous. SolGate is a direct competitor to Samsung as the small Vaughn based manufacture makes photovoltaic modules, like the ones that Samsung plans to manufacture in large quantities here. Referring to the image above, SolGate is in the third step of the value chain (module creation). At the announcement of the feed-in-tariff on the 24th of September in 2009, SolGate was the only PV module manufacturer in the province. Since, a litany of companies have announced that they will be coming to manufacture in Ontario, though so far these announcements seem more like casts of fishing line to see what they might catch. In the interim projects can meet the domestic content requirements by ordering locally assembled inverters and racking systems until these requirements become more stringent in 2011. So what does this mean for SolGate? First, Samsung will not likely be in production for 2011, or it will be in limited production then. Same perhaps for Canadian Solar and other candidate manufacturers who are no doubt clamouring for similar deals with the government such as Samsung's. There may be a window in which SolGate's panels fill a gap in the market, particularly if Ontario assembled inverters run in short supply. There is considerable posturing by the panel manufacturers who are trying to determine how much to manufacture in Ontario -- too small and they cannot build their panels and achieve sufficient economies of scale to export, but if demand is too weak than they lose considerable capital.

Has the Samsung deal dissuaded some? Yes perhaps. What is sure is that some will delay their entry (or re-entry) until they can reach similar deals, or until they are able to get a trade ruling from the WTO in their favour (such as Arise alluded to on Friday). Thus in the next couple of years there should be a market for made-in-Ontario panels by SolGate. The prices for these panels should also command a premium as demand picks up. As happened in Spain, too, when scale-backs, or reductions of incentives were announced project developers rushed to complete projects before the deadline dates. The ability of a local manufacturer to meet that demand and to deliver will provide SolGate with a second period of opportunity. This may also apply to Centennial who plans to move from Quebec to Ontario.

Moreover, referring to my sentiments above, it is likely that there will be some positive glow from the Samsung deal across the industry and even a few rays of this light should fall on SolGate. By the time the big guys enter fully SolGate will have had time to channel its efforts (and windfall capital) into producing a unique, or at least better product to fill niches left unfulfilled by these hulking producers. Or, perhaps SolGate may go the way of our many small brewers like Sleeman's, now owned by Sapporo. The drama of the markets are yet to be written, but I'm betting it will be one heck of a story.

* Menova Energy - I left this position because they were not paying me and I am still owed months of wages and expenses.