Solar Flare

When French inventor Auguste Mouchout patented the world’s first solar-powered motor, he touted the device as an antidote to the industrializing world’s dangerous dependence on coal. And with financing from a royal patron, he set out to deploy the technology in sunny, coal-poor Algeria. The year was 1861.

Mouchout’s business plan—like most pioneering efforts in building solar infrastructure—ended in failure. Its demise resulted not from technological shortcomings so much as the fluctuations of commodity markets. Coal prices, which were quite high when the project began, fell over the intervening years. Solar power proved too expensive to compete.

With a century-and-a-half of innovation failing to yield a cost-competitive means to harness the sun’s energy, venture capitalists’ newfound optimism for solar looks on the surface like another case of history repeating itself. While rising oil prices and bigger government subsidies make the technology a more alluring alternative to fossil fuels, neither incentive carries any promise of permanence.

On the investment side, rising late-stage valuations of private solar companies and frothy share prices of many newly public ones make for a precarious risk portfolio. Backers of the materials and manufacturing companies that deliver the greatest cost reductions per kilowatt hour over conventional silicon solar installations stand to be richly rewarded. The threat looming for the rest, however, is that large outlays on solar will prove another case of overexposure.

Sunny money

Looking at the flow of money into the photovoltaic industry, it’s easy to get the impression a great leap forward is imminent. Today, solar power companies are benefiting from an alternative energy investment boom unseen since the days of OPEC oil embargoes and three-hour gas lines. Developers of photovoltaic technologies have ranked among the top-performing IPOs of the past year. Solar stocks, with few exceptions, have posted double-digit annual percentage returns for the past three years.

Venture investors have picked up their investment pace significantly in the past two years. They pumped $590 million into 49 solar technology and/or photovoltaics companies last year, up from $254 million in 41 such companies the prior year, according to Thomson Financial. It is worth noting that VCs invested the same aggregate amount in the past two years ($845 million) than they did for the the prior five years combined. Also, for each of the five prior years the annual number of investments was roughly half of what it was in the past two.

The funding spike comes as overall investment in clean technology is on a tear. Consulting firm Clean Edge estimates that venture investment in energy technologies, nearly tripled last year, topping out just over $2.4 billion as funds flocked to renewable power and fuel plays. Markets are also projected to grow sharply. Clean Edge forecasts that the solar photovoltaics industry, which includes modules, system components, and installation, will grow from $15.6 billion in 2006 to $69.3 billion by 2016.

It’s not some illusory market.”

Steve Westly, Founder, The Westly Group

While officials eventually approved that installation, residents of planned communities elsewhere will encounter resistance to solar installations that are seen as eyesores, predicts Marlene Bourne of Bourne Research, a research firm that tracks technologies used in next-generation photovoltaic panels. That resistance won’t change until generation capability can be integrated into building materials, says Gunderson, noting that: “Even if solar panels were free, there are a lot of people who wouldn’t install them because they aren’t easily integrated into a structure.”

And they’re far from free. William Reilly, former head of the Environmental Protection Agency and a senior adviser to private equity firm Texas Pacific Group, told a gathering of clean technology investors in San Francisco about his own experience putting in panels at his home: “I had the installers themselves tell me, ‘Well, nobody would ever do this except to make a statement, or if they had a lot of money.’”

Eventually, today’s solar startups will produce energy generating infrastructure that is both significantly cheaper and more aesthetically appealing than what’s currently available, say venture investors. With so many visionaries sharing the same vision, however, good solar deals at compelling valuations have gotten harder to find.

Too hot?

John Rockwell

, managing director at DFJ Element, told attendees at a Silicon Valley technology investment conference in March that he sees the solar sector as somewhat frothy. While there may still be “a few good exits” he predicts the sector is set to cool down some.

Certainly things were getting heated last year. As venture funds allocate more dollars to alternative energy startups, valuations have been rising for sought-after solar deals, Koch says. A case in point was one of NGEN’s investments last summer—a $3.5 million stake in an oversubscribed Series A round for SolFocus, which develops technology to concentrate sunlight over smaller surface areas. In other cases, Koch says, swelling valuations have prompted NGEN to pass on otherwise enticing deals.

Growth in the number of later-stage solar startups has also played a role in pushing valuations skyward. That’s largely because early stage funds got active in solar in 2003 and 2004, says DeRosa. The companies they backed have been raising follow-on rounds as they prepare to commercialize products.

Going forward, more solar investments are likely to be later-stage. Even with venture capitalists continuing to pour money into cleantech, DeRosa predicts early stage solar companies will have a harder time getting funded, as VCs focus on getting more mature technologies to market. Startups entering the business today will have to compete with venture-backed companies that already have several years of product development under their belts.

Solar as it stands today is very uneconomic compared to other forms of energy generation.”

Michael DeRosa, Managing Director, DFJ Element

“There always could be room for some paradigm-shifting, pathbreaking event,” DeRosa says. “But a lot of those deals have been done.”

Bourne, meanwhile, worries that investors are putting too much money into solar technology too soon. “My caution is that this technology is so new,” she says. “And while there are great possibilities, I think the implementation of commercial products is far further out than the investment levels would otherwise indicate.”

The bright side

Solar entrepreneurs and leading venture backers contend that conditions today support a more optimistic outlook. The potential for new technologies to radically reduce installation costs, combined with expanded production capacity and growing interest in conservation among consumers, they say, make it reasonable to conclude that while solar has failed in the past, now is its moment to shine.

It helps that costs have a history of falling in a predictable fashion says Beebe, citing what he calls the “Moore’s Law of Solar.” The law, which he credits to SunPower founder Richard Swanson, states that with every doubling of production, there’s a twenty percent reduction in the cost of solar.

Over the long term, solar cost reductions have averaged about 5% a year, Beebe says. But with so much investment in the sector, Beebe is convinced we’ll see a much more radical price reduction—of somewhere between 30% and 50%—in one of the next five years as new manufacturing facilities come online.

“Everything we’re looking at in solar today is looking to cut costs not by a factor of 50% but by three or four times,” says CMEA’s Gunderson, adding that while partners have viewed dozens of business plans, they’ve committed to only one investment in the sector focused on thin film products for commercial buildings.

Such forecasts aren’t so far-fetched if one considers projections of some venture-funded startups laid out in DOE’s solar funding announcement. By 2014, the agency says, Nanosolar projects it will get the cost of solar down to $0.052 per kilowatt hour, while Miasole is shooting for $0.053 per kWh over the same period. By comparison, in December, the average price for all power in the United States was $0.085 per kWh and $0.098 for residential power, according to the Energy Information Administration. (One kilowatt-hour is enough power to run a 100-watt light bulb for 10 hours.)

My caution is that this technology is so new. And while there are great possibilities, I think the implementation of commercial products is far further out than the investment levels would otherwise indicate.”

Marlene Bourne, Founder, Bourne Research

Warming up

VCs aren’t just touting speculative seed-stage startups, either. The supersized funding rounds secured by thin film solar startups are earmarked for manufacturing facilities, several of which plan to begin churning out product in the next year.

Solyndra will have a sample product in June, as well as a plant under construction, Gunderson says. The company’s technology aims to maximize the amount of electric power generation for a given roof area by eliminating the shadowing effect of placing one row of panels next to each other.

Slightly earlier to market will be Nanosolar, which secured a $76 million round in late June to build a plant for making printed solar cells. The company is currently building manufacturing operations in San Jose, Calif., and Luckenwalde, Germany, and plans to begin commercial production later this year. Nanosolar claims its technology makes it possible to roll-print solar cells that require only 1/100th as thick an absorber as a silicon-wafer cell yet deliver similar performance.

The third key trigger that could dramatically boost solar adoption is consumer appetite for renewable energy. Broader media coverage of climate change issues, government initiatives to reduce carbon emissions, and even the lessons children are learning in elementary school about global warming, point to the conclusion that solar is prime for mainstream adoption, says California politician-turned-cleantech-investor Westly.

The growing revenue of solar installers provides further evidence that consumers are warming up to the technology, says Westly, pointing to a recent PIPE his firm did for solar installer Akeena. The company, which installs panels on home rooftops, is seeing its business growing at 100% a year, he says.

De ja vu

But consumer tastes are notoriously fickle. While conservation is a noble cause, it may be naïve to expect consumers to personally foot the bill to help save the planet through costly rooftop installations.

For now, it’s not hard to get the sense solar investors are following a similar trajectory as their predecessors. A prime example was Kleiner Perkins Caufield & Byers General Partner Ray Lane, who has transitioned in the past two years from heading Oracle to investing in clean technologies. At a March speech to Silicon Valley investors, Lane laid out his vision for building vast solar farms. He estimated that an area of 150 square kilometers in the Nevada desert, covered with the highest-grade panels, could supply the United States with electricity.

But the ideal stretch of desert for a solar farm, Lane continued, would be North Africa, preferably close to the Mediterranean coast.

“If I could do it there and transmit electricity to Europe,” he mused. “Not a bad idea.”