Silicon Valley becomes Solar Valley

Sunrise industry

While the solar industry as a whole remains small–less than 1% of electricity in the U.S.–it’s exploding — growing an average of 42% annually since 2002. Industry leaders, most based in Japan and Germany, are ramping up production, as are Chinese manufacturers like Suntech, whose founder and CEO, Dr. Zhengrong Shi, is one of China’s richest men. Big companies, including BP, General Electric, Mitsubishi, Sanyo, Sharp, and Shell, all want to grow their solar businesses. In Silicon Valley, meanwhile, venture capital investors like John Doerr and Vinod Khosla, entrepreneur Bill Gross, and Google founders Larry Page and Sergey Brin are backing startups that claim they will revolutionize the industry.

With electricity prices rising, worries about global warming mounting, and the cost of solar energy falling, the business of making electricity from the sun is about to go mainstream in a big way. The Holy Grail of solar is a concept called “grid parity”–meaning that it costs no more to generate your own solar energy than it does to buy electricity retail, off the grid–and there’s smart money betting that solar will get there soon. The stand-out industry star of the moment is a company called SunPower. Main investor is a legendary Silicon Valley character named T.J. Rodgers, whom we’ll meet shortly.

Once given up for dead, SunPower, which makes and installs solar photovoltaic panels for businesses and homes, expects to generate revenues of $1 billion to $1.2 billion and profits of $146 million to $162 million next year. Its customers include Wal-Mart, Johnson & Johnson, Microsoft, Macy’s, Tiffany, FedEx, Toyota, Target, Lowe’s, the governor of Colorado (who has solar panels on the roof of his mansion), and the Department of Defense (which uses solar energy to power Nellis Air Force Base in Nevada, but not its planes). Since going public two years ago, SunPower’s stock price has grown by about 450%, from $18 a share to $82 giving the company a market capitalization of nearly $7 billion. That’s a little bigger than Whole Foods Market.

According to John Cavalier, who is chairman of the energy group at Credit Suisse, the market value of the world’s publicly traded solar companies stood at about $1 billion in 2004 Now, after a slew of IPOs, they are worth about $71 billion. If the U.S. enacts legislation to counter global warming and it adds to the cost of making electricity from coal, natural gas, and oil, solar energy will be among the winners. “The opportunity for solar companies is absolutely tremendous,” Cavalier says.

SunPower stands out for several reasons. It’s arguably the leading U.S. solar company, its solar cells are currently the industry’s most efficient, and it is vertically integrated, meaning that it makes both its solar cells and the panels on which they are mounted, and designs and installs systems for customers. Little known outside the industry, the company wants to build a consumer brand. “We’d like SunPower and solar energy to be synonymous,” says Tom Werner, the chief executive.

At least two things stand in its way. The first is competition, of which there is plenty. The solar PV industry remains fragmented, with as many as 100 manufacturers working to drive down costs. Sharp is the leading one, followed by a German firm called Q-Cells, Kyocera, Suntech, and Sanyo, with SunPower ranked tenth, according to Paula Mints, principal analyst for solar with Navigant Consulting’s PV Service Program.

The other obstacle facing SunPower and the industry is that it still costs too much to make electricity from the sun. Prices vary widely, but it costs about 25 to 35 cents to produce a kilowatt-hour of electricity from solar; retail electricity prices average 11 cents in the U.S. but can be twice that in parts of California, New York, and Connecticut. Today’s biggest markets for solar PV are Germany and Japan, with the former accounting for more than 50% of global demand. That’s not because it’s always sunny in D�sseldorf; it’s because government policy requires utilities to pay above-market prices for solar-generated electricity.

“Absent incentives, I don’t think there would be a solar business today,” says Stephen O’Rourke, a Deutsche Bank research analyst. But O’Rourke believes that solar PV, without subsidies, could reach grid parity in much of the U.S. in four to eight years. “No technological breakthroughs are required to get there,” he says. “It’s a matter of incremental improvements.” And when it happens, it will be huge.

The likely savior of SunPower, TJ Rodgers is a pugnacious 59-year-old CEO of a Silicon Valley chipmaker called Cypress Semiconductor. He is also a staunch opponent of government subsidies and skeptical about global warming.

“The group that is most vehement about global warming represent to me some of the worst people in the world,” says Rodgers . “I dislike them so much, it’s difficult to listen to what they say objectively.” What about Al Gore? “I wouldn’t trust Al Gore as far as I can throw him, which isn’t very far–he’s gotten a little hefty since he left office.” And CEOs like GE’s Jeff Immelt, Wal-Mart’s Lee Scott, and Peter Darbee of PG&E, who worry about climate change? “Every one of the names you just mentioned would flunk his ass in the most rudimentary test about global warming.” Rodgers notes that he and Immelt both went to Dartmouth. (Rodgers is a trustee, currently battling the college administration over who elects the board.) “Jeff Immelt played football,” he says. “I graduated No. 1 in physics.”

All righty then. Let the record show that Rodgers did not rescue SunPower to save the planet. He did so because he believes there’s money to be made from solar power.

Researchers at Bell Labs developed solar PV cells in the 1950s. They had been deployed since the 1970s, mostly off the grid. But it took the Japanese and German subsidies of the 1990s to make solar a business; since then, economies of scale have driven down costs as prices for natural gas have risen. Arnold Schwarzenegger, a fan of solar, soon became California’s governor; last year he signed a law that calls for a million solar roofs and provides $3.2 billion in rebates for solar customers.

The industry, meanwhile, revamped its business model. For years companies, including SunPower, aimed to develop large-scale solar farms in remote, sunny locations to compete with big fossil-fuel generators that sell electricity to utilities. Solar thermal power plants, which use the sun’s heat to turn water into steam that drives turbines, continue to build utility-scale plants. But solar PV panels are now mostly sold to businesses and homeowners. “The killer app that changed the industry was the realization that the natural role for PV is distributed power,” Swanson explains. “You can generate the electricity where it’s needed. You don’t need a big solar farm in the desert anymore.”

This is obvious now, but it was far from clear when Rodgers first asked Cypress’s board of directors to invest in SunPower. They declined. So he loaned the company $750,000 of his own money on the understanding that an extreme makeover would follow. His message was unambiguous: “You’re going to have to shut down your American fab and put one in a low-cost area. You’re going to have to lose half of your employees, some of whom you love. You’re going to have to bring in new management. And if you are willing to do all of that, then and only then will you turn it into a real company.”

It took some doing. “We had to make a very rapid transition from a handmade, boutique solar-cell mentality to full-blown, state-of-the-art manufacturing,” Swanson says. The company transplanted its manufacturing line from Palo Alto to a Cypress plant in Texas and then to a newly built fab in a suburb of Manila, disrupting the lives of engineers and their families. Rodgers sent some of his best Cypress executives over to SunPower, including Tom Werner, a longtime technology executive and Ironman triathlete who became CEO.

In 2002, Rodgers convinced Cypress’s board to get in on this solar action–and the company made its first $9 million investment in SunPower. Two years later Rodgers persuaded his board to buy the rest of the company. It turned out to be a smart move: Cypress has spent $168 million to buy SunPower and invest in plant, equipment, and startup costs. The 2005 IPO, as noted, was a hit. Last May, Cypress sold 7.5 million shares, bringing in $437 million. As of June 30, Cypress held about 44.5 million shares–representing about 55% of SunPower on a diluted basis–worth about $3.6 billion. The amazing upshot here is that the company’s holdings in SunPower account for more than 80% of the market value of Cypress, which has been in business since 1982

It must be noted that SunPower’s valuation reflects a very rosy view of its future. Shares are trading at about 32 times projected 2008 earnings. Besides Cypress, major shareholders include Legg Mason, BlackRock Group, Deutsche Bank, and Janus. “You have mainstream, sophisticated, long-term investors buying into the SunPower business plan,” Werner says.

One reason for the optimism is that when you take federal and state subsidies into account, solar is already competitive. SunPower offers some commercial customers a deal that sounds too good to be true–no upfront costs, instant savings on their electricity bills, and long-term price stability. That’s because of a financing mechanism known as a power purchase agreement, or PPA, that’s increasingly popular in the solar business. Instead of making a capital investment of $1 million or more in solar panels, a big customer like Wal-Mart can sign a ten- or 20-year agreement to buy at a fixed price electricity generated by the solar panels on its roof. Ownership of the solar installation is retained by SunPower or sold to an institutional investor. No wonder retail customers are clamoring for more: When Wal-Mart entered into PPAs with SunPower, BP Solar, and Sun Edison covering a total of 22 sites in California and Hawaii, David Ozment, Wal-Mart’s director of energy, said the retailer would begin saving money “as soon as the first day of operation.”

Can homeowners obtain such risk-free deals? Sadly–annoyingly–no. They can, however, recoup some of their capital costs in states with “net metering,” a policy that requires utilities to credit their customers for electricity they supply to the grid. So, for example, on a sunny day, if a house is empty and not running air conditioning, the homeowner’s excess electricity goes back to the grid, and the utility prorates the bill. The meter literally spins in reverse. (For a home solar primer, see sidebar.) Because demand for electricity frequently peaks during hot summer days, utilities benefit, since they can buy solar electricity from thousands of homeowners and won’t need as many power plants. That at least is the radical vision of solar enthusiasts, who note that the supply of solar energy is inexhaustible and available to literally every nation under the sun. Indeed, to overcome a major drawback of solar power–that it’s available only when the sun is shining–some dream of building a global power grid so that the sunny side of the earth could supply the dark.

Well, maybe someday. But the more immediate task for SunPower and its rivals is to drive down costs so that solar energy can compete with fossil fuels and nuclear power without subsidies. Rodgers welcomes that fight–he’d like the government out of the energy business entirely. Werner says SunPower can cut its costs in half by 2012, getting the price of solar down to about 12 cents a kilowatt-hour–reaching grid parity with much of the nation.

For Swanson, who has spent his adult life working on solar power, more is at stake than the company’s future. He’s looked at the science of climate change and has visions of diasporas, conflicts, and starvation. “Given the huge downside risk,” he says, “I can’t understand how one cannot be worried.”

Late in September, more than 10,000 people gathered in Long Beach, Calif., for the solar industry’s big annual conference. (The same event drew only 800 people just three years ago.) They listened to celebrities like Ted Turner and Larry Hagman, pondered a dizzying array of solar products and technologies, and buzzed about takeover rumors and rising stock prices. Could the excitement over solar power turn into another bubble? Credit Suisse’s Cavalier, who’s been in the energy business for 24 years, doesn’t think so. “The reason I do not believe it is a bubble is that I honestly believe that climate change and greenhouse gases are not going away,” he says. “And there are a lot of cars yet to be driven and a lot of lights still to be lit all around the world.” We’ve seen one silicon revolution–it brought us PCs, the BlackBerry, and the iPod. Maybe a second is just around the corner.

Bookmark It