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Investors: Here comes the sun

Despite some lingering skepticism, venture capitalists are taking a new look at solar energy.

Tim Woodward has now "tripled down" on his investment on solar power.

As a managing director with San Francisco-based venture capital firm Nth Power, he oversees a variety of clean-energy investments, including a rare follow-on investment for the VC firm in a publicly listed company, Evergreen Solar.

Woodward first invested in the Marlborough, Mass.-based company before its initial public offering and then participated in a subsequent private placement. But even that wasn't enough for the venture investor. Woodward is now spending thousands of dollars to install the company's solar modules on the roof of his house.

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For Woodward, the economics of solar power make sense for his home. Government agencies and neighboring businesses and seem to share Woodward's enthusiasm. "Irrespective of being in the business, in California with the right exposure, solar power can make economic sense," Woodward says.

Indeed, nearby school districts and commercial developments, such as Toyota Motor's sales and marketing building in Torrance, Calif., are a few of the projects behind the 35 percent growth rate in solar power consumption that experts say is fueling solar power module manufacturing worldwide.

The resulting demand for photovoltaic semiconductor chips used in making solar modules has contributed to at least five initial public offerings of solar power companies worldwide since 2000. And there's more to come.

Sunnyvale, Calif.-based SunPower, a subsidiary of San Jose, Calif.-based Cypress Semiconductor, is prepping for its own IPO, which is expected later this year. And in Germany, investors are laying odds that Q-Cells will soon hit the public markets. Q-Cells, which makes solar modules, is backed by Apax Partners of New York and Good Energies of Basel, Switzerland.

But this first generation of solar chip companies has some serious solar technology innovators trying to overtake them. Tucker Twitmyer, a partner with Wayne, Pa.-based EnerTech Capital Partners, points to a second generation of companies using silicon chips but trying to gain more efficiencies from solar modules by using new manufacturing or collection technologies. Among them: Evergreen Solar, Santa Clara, Calif.-based Solaicx and Albuquerque, N.M.-based Advent Solar.

Then there's the so-called third generation of companies using technologies that may transform the industry by using flexible plastics and thin films to generate electric current. Two examples: Konarka Technologies in Lowell, Mass., and Palo Alto, Calif.-based Nanosolar.

"Most of the VC activity is taking place in the second or third generation of technology," Twitmyer says. "But actually the vast majority of the revenue is being made on the first-generation silicon approach."

That's the rub for venture investors. The way in which the technology interplay among these generations of solar power chips develops over the long term will determine which of these companies succeed as standalone outfits, which of them ends up as acquisition targets for others, and which of them end up nowhere.

The goal: $1 per watt
The top priority for now is the quest for efficiency, or how much of the sun's energy can be converted to usable electricity relative to the cost of manufacturing the device. Current solar modules convert about 20 percent to 30 percent of the sun's energy to electric power at a cost of about $6 to $7 per watt.

That's too expensive; the cost must be closer to $1 per watt, analysts say. But Ron Pernick, co-founder and principal with Clean Edge, a San Francisco-based market research and consulting company specializing in energy and environmental technology, notes that for every doubling of solar power output, costs have come down by about 18 percent. At the same time, the cost of natural gas has increased by a similar factor.

And as Woodward discovered while researching his solar roof, the cost of offloading some of the peak energy demands onto solar modules makes sense in sunny climates like California and the Southwest. Plus, California offers a tax break to buy solar power modules, which means the use of solar power during peak hours costs less per watt.

With each generation of solar technology driving more efficiency, those costs should continue to fall, Woodward and other venture investors argue. Most agree that first-generation technologies will derive their cost reductions from economies of scale, while second-generation technologies should be able convert solar energy more efficiently, as well as boost economies of scale.

But third-generation technologies that could render solar energy ubiquitous--not just as a power supply for buildings but as a way to charge your cell phone while it's in the pocket of your solar-powered jacket. That technology, however, remains some time off; Konarka's solar substrates, for example, are plastics that can't yet stand the wear and tear of building use, let alone the everyday rough and tumble of clothing.

"Companies that are getting investors' attention should have a proprietary manufacturing technique and or new materials system, and this is just a tough thing to do."
--Erik Straser
General partner, Mohr Davidow Ventures

Still, Nicholas Parker, co-founder and chairman of the Howell, Mich.-based Cleantech Venture Network, sees the industry coming of age, thanks to new materials as well as more partnerships between "clean energy" venture firms and large, generalist firms.

"VCs that want to get into this space are making one of two bets, or sometimes both," Parker says. "They can invest in improvements in existing technology, and get them into the market in two to four years. Or they can make the swing-for-the-fences type of deal like NanoSolar or Konarka."

Venture investors are looking for both types of deals. EnerTech's Twitmyer says he recently invested in Advent Solar because the company's products can easily be integrated into an existing photovoltaic cell manufacturing line without swapping out equipment. This means it might make an acquisition target down the road.

"If you have a credible path to get to $1 per watt, then that's enormous," Twitmyer says. "The majors," he says, referring to large Japanese solar power module producers such as Fujitsu and Sharp Electronics, "need a fundamentally improved technology to make a big jump (in reducing cost), and Advent offers to do that," he argues.

There are, of course, skeptics. Erik Straser, general partner with Mohr Davidow Ventures in Menlo Park, Calif., traditionally an IT-type venture investor, is scouting cautiously for solar power transactions but says he hasn't seen one he's willing to put his money behind.

The reason: He wants to understand whether the company is making an incremental technological advance or a disruptive breakthrough that will change the industry. Straser believes solar power could become a commodity product and is searching for companies that offer a competitive advantage that will remain a compelling investment even as more companies try to get into the business.

"It depends on the nature of the competitive advantage," Straser says. "Is it a proprietary process or product attribute or purely something where economies of scale give the advantage? The last case is not that attractive. Companies that are getting investors' attention should have a proprietary manufacturing technique and or new materials system and this is just a tough thing to do."

Straser's focus is on the risk of taking something from a laboratory and then trying to manufacture it on a large scale. "One of the places you can get stuck in this market is if you don't quantify the time to product," he says. "You have to transfer a lot of intellectual property to a manufacturing process."

Indeed, he wants to invest when he sees solar chipmaking becoming more like the PC industry, in which various hardware and software components get plugged into a ubiquitious final product. In solar power, Straser is waiting until the makers of photovoltaic cells, the solar modules and the companies that integrate the systems into a building's existing electrical system all join forces.

For Straser, the Dell of the solar chip industry could be Pasadena, Calif.-based Energy Innovations, which is part of Bill Gross' Idealab Holdings incubator. It has raised $10 million and has already acquired a local systems integrator to add to the team and control the installation process.

Its president, Andrew Beebe, says the power generated by its product will cut in half the cost of solar energy generation, enough to make it cost-competitive in California, which has subsidies for solar power. "We have never been closer to breaking the cost barrier," he says. "When we do, the landscape changes forever."

Beebe's solar dream: "Coal and natural gas will never drop significantly in cost. So when we cross their cost threshold and keep dropping since we have no fuel cost, we've accomplished something remarkable, both from a profitability standpoint, as well a change-the-world standpoint."

When Straser decides to invest in Energy Innovations, perhaps that will mark the tipping point for other venture capitalists.

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