Lighting up the $1 trillion power market

Silicon Valley has changed the world once. Now, thanks to a wave of investment and innovation in solar power, it's on to the next revolution: a massive disruption of the U.S. electricity market.

(Business 2.0 Magazine) -- There's a missile-bunker vibe you get when walking into Solaicx, a Silicon Valley startup that manufactures the silicon wafers that are the building blocks of solar panels.

In one half of the nondescript Santa Clara warehouse, three men sit hunched on a wood platform 8 feet above the cement floor, their eyes locked on two monitors. The screens show data and video gathered from a 24-foot-tall steel tower. The tower begins in a squat, gourd-shaped base and tapers to a cannon-size column with a long drum spinning slowly on top. Thick power cables snake down its sides. Another sci-fi-looking tower rises up off to one side of the building.

Inside the tower that has everyone's attention, molten silicon is being added to a thin, 8-inch-long rod, or "seed," of silicon. After 15 hours of precise spinning and pulling, the seed will grow to a mirror-finished ingot about 4 feet long and weighing more than 150 pounds. If it's perfect - and that is the point of Solaicx's cutting-edge technology - it will form a single crystal matrix, which is then trimmed and sliced into 1,000 wafers that sell for $5 apiece and are used by companies like General Electric (Charts) to build the most efficient solar modules on the market today.

An $11 billion solar energy market

Bob Ford, Solaicx's CEO, bounds down from the platform and brushes a hand along an already cool ingot waiting to be cut into wafers. His finger stops on a thin seam running laser-straight down the side of the overgrown crystal. "That's what you want to see," Ford says. "It means every atom is aligned. I've had guys literally knock on our front door asking if we can supply them with $5 million worth of these wafers a month. We can sell as much as we can make."

In fact, before Solaicx even flipped the switch on its first silicon crystal grower, GE promised to buy every wafer the four-year-old company can crank out.

Solaicx is one of dozens of Silicon Valley firms driving a sizzling $11 billion worldwide market in solar energy, part of a rapidly expanding alternative-energy economy that promises to shake up the way power is produced and consumed as profoundly as the region's computer and Internet companies upended global communications and commerce in the late 20th century.

The signs of world-changing transformation are everywhere: Venture capitalists are pouring hundreds of millions of dollars into Valley solar startups pursuing technological breakthroughs to make sun power as cheap as fossil fuel. Three of the largest tech IPOs of 2005 were for solar companies, including San Jose-based SunPower (Charts), a spinoff of chipmaker Cypress Semiconductor.

Other old-line Valley tech companies are also jumping into the market. Among the most significant is Applied Materials (Charts). The world's largest chip-equipment maker will begin producing machines to manufacture solar wafers, laying the groundwork for an industrial infrastructure that should lower the cost of producing solar cells. For the first time in many years, high-tech manufacturing plants - yes, factories - are being built in Silicon Valley.

On the ballot in California

Why the gold rush?

Solar is not the only alternative-energy source generating interest in the Valley: Biofuels, fuel cells, and hydrogen power are all attracting their fair share of investment. But solar energy has just the sort of oversize potential that the titans of tech saw in computing: a free and practically inexhaustible power source that rises every day.

Fears about global warming have triggered public and political demand for renewable energy, which is expected to become a $167 billion global market by 2015. In September, California enacted landmark global-warming legislation to force the state's largest industrial polluters to reduce their greenhouse-gas emissions 25 percent by 2020. The new law will likely lead to the creation of a California carbon market, allowing clean-energy producers in the world's sixth-largest economy to sell carbon credits to polluters who can't or won't reduce their spew. A similar regional market is being developed by New York and six other Northeastern states.

California is also committing $3.2 billion to fund a drive to install solar panels on a million rooftops by 2018, and a November ballot initiative backed by Silicon Valley heavyweights such as venture capitalists Vinod Khosla and John Doerr and Google (Charts) co-founder Larry Page would tax Big Oil to provide $4 billion in funding for alternative-energy research, programs, and startups.

"There are huge forces at work right now," says Sunil Paul, an Internet entrepreneur turned alternative-energy investor. "With the subsidies that are already in place in California, and markets for carbon credits emerging, you have the perfect conditions for innovative companies to capture a piece of the $1 trillion U.S. electricity market. As a startup you have a massive number of customers to go after. And as an investor, it not only makes straight-ahead business sense to put money into these companies, but you can also be excited that you are doing something that's good for the planet. That is a powerful combination."

The end of solar's dark days

Silicon Valley's solar flare began smoldering during the dark days of the new millennium. In 2001 it seemed as if the plug was being pulled, in more ways than one, on the Internet boom that had made the Valley the epicenter of what was then known as the new economy. While tech startups watched their billion-dollar valuations vanish in a flash and the dotcom death toll grew daily, rolling blackouts swept the Valley as California's yearlong energy crisis intensified.

With the region in meltdown, some tech entrepreneurs began quietly starting solar companies. For instance, when Barry Cinnamon's online shopping site collapsed, he founded Akeena Solar, a solar panel installation firm. "Solar power is a real brick-and-mortar business," he explains, "with an incredible long-term demand built in."

Solar, though, hardly seemed like the next big thing. Long a cottage industry whose customers tended to live off the grid, solar energy saw its fortunes wax and wane with government subsidies and the price of oil. Solar panels were expensive, and the basic technology had not changed much in 30 years. In short, solar was a green business that didn't produce much green.

All of which, of course, made it ripe for technological innovation, Silicon Valley's stock-in-trade. And solar is fundamentally a silicon-based business. By happy coincidence, many of the same materials and processes that the Valley has used for decades to make silicon wafers for computer chips can be reengineered to manufacture silicon solar wafers.

Among those heading back to the garage after the bust were veterans of the Valley's old-guard chip companies, whose fortunes went into a tailspin along with those of their dotcom customers.

At the same time, tech companies like Google, Microsoft, (Charts) and Yahoo (Charts) faced spiking energy demands from running the hundreds of thousands of servers they need to power an economy increasingly conducted over the Internet. A single rack of high-performance servers consumes as much electricity as a suburban home. A large data center has hundreds of these racks, drawing as much power as a typical university. Electricity costs can exceed the price of the computers themselves.

For Microsoft, the 2001 blackouts served as a wake-up call. "We weren't going to sit idly by and let it happen again," says Microsoft executive John Matheny, who runs the software giant's Silicon Valley campus. "That's when we started investigating alternative power."

So did a number of entrepreneurs tinkering in garages and anonymous office parks, fueled by the same conditions that gave rise to the computer industry a generation ago: ready access to capital, the presence of top-notch research universities Stanford and UC Berkeley, and an almost messianic belief that the world's most intractable problems can be solved by technology.

SunPower founder Richard Swanson likens solar to the chip industry in the early '70s, when he was a Stanford professor. "It was an extremely fun and dynamic industry," he says. "But unless you were in it, it was practically invisible until the IBM PC came out in 1981."

Taking on Big Oil

Semiconductor industry veteran Gary Conley knows the feeling. He toiled under the radar for seven years to develop his solar technology.

Conley founded H2Go in 1999 to develop ways to produce cheap hydrogen. The company ended up creating a solar module - since the production of hydrogen required a cheap power source - and launched SolFocus last November to commercialize the technology. The timing was right. "In November we were two guys in my garage," Conley says. "Now we've got 23 employees and $32 million in venture funding in the bank."

SolFocus shows how the booming market in solar has touched off a feeding frenzy among investors in Silicon Valley. Originally the company was going to close a $25 million round of funding in October, but the deal was consummated in July because so many investors were clamoring to get SolFocus growing quickly and bring its technology to market. The company is ramping up its production of solar modules and hiring six new employees a month, mostly materials and optical scientists and engineers.

Like other solar startups, SolFocus is trying to lower the cost of solar arrays by using less silicon - which is costly and currently in short supply - while at the same time making them more efficient.

The company's photovoltaic technology uses small lenses and curved mirrors to concentrate sunlight onto solar cells made of germanium, sort of a high-tech version of using a magnifying glass to focus sunlight on a piece of paper to set it aflame. Within a few years, the company hopes to make solar cheaper than power derived from fossil fuels.

"We see ourselves as competing against Chevron rather than another solar energy company," Conley says. "There are tremendous opportunities in the rooftop solar market. The 10 largest shopping centers in the country alone could produce 6 gigawatts of power with a rooftop solar array."

Still, SolFocus will face competition from several other solar concentrator companies, including Valley neighbors Pacific SolarTech and Solaria, which landed $22 million in VC funding in September. "There is a gold rush feeling to all of it," says Solaria CEO Suvi Sharma. "But there's also real gold here - or, in our case, sunshine."

Struggling with 'What's Next'

Perhaps no startup has benefited more from the solar gold rush than Nanosolar. The Palo Alto company, co-founded in 2002 by Internet entrepreneur Martin Roscheisen, got its start with an investment from Paul and Google's Page and Sergey Brin; all told, it has racked up more than $100 million in funding so far.

Nanosolar is pursuing a technology that produces solar cells on a film that's a 100th the thickness of conventional silicon wafers. The cells are made from copper, indium, gallium, and diselenide, elements that, while more expensive than silicon, are used in such small amounts that the overall cost is low.

Nanosolar's thin-film cells are produced by a process that in many ways resembles printing. Light-sensitive semiconductor particles are mixed into a kind of ink, which is printed onto a thin substrate of metal foil that's continuously pulled off a series of rolls. This highly efficient "roll-to-roll" technology makes it possible to produce a large volume of solar cells in a relatively small manufacturing space, further reducing costs.

"The Valley has its periods where everyone's grappling with what's next, and now we see that the energy market is a very solid and meaningful market opportunity," says Roscheisen, whose previous startups, eGroups and TradingDynamics, were sold for a combined $1.2 billion before the boom went bust. "New technology is going to make a difference in solar, and that's what we do best here."

The company is housed in a modest, low-slung building across the street from Palo Alto's airport, and the buzz of private planes taking off and landing permeates its offices. Nanosolar has built a thin-film solar factory in miniature, complete with a small clean room for testing how the cells respond to extremes of temperature, pressure, and light.

Its ultimate goal: integrating thin-film cells directly into building materials. A skyscraper's glass windows, for instance, could be embedded with thin-film cells, giving them energy-producing capabilities.

German and Japan: A step ahead

The possibility of such a breakthrough has many investors salivating. Nanosolar's backers include Valley heavyweights Mohr Davidow Ventures and Benchmark Capital, as well as OnPoint Technologies, the venture vehicle of the U.S. Army. Nanosolar plans to build a manufacturing facility next year - along with a smaller plant in Germany - that will eventually produce 430 megawatts' worth of solar cells per year. That would nearly triple the nation's manufacturing capacity and make Nanosolar one of the world's largest solar producers.

Thanks to aggressive government subsidies, Germany and Japan are currently the global leaders in solar production, with Japan's Sharp Electronics the world's biggest manufacturer of solar cells. But in September, Silicon Valley took a big step toward the industrialization of solar when Applied Materials launched an ambitious drive to repurpose some of the technologies it now uses to build machines that make silicon wafers and flat-panel video displays.

Microprocessors and solar cells are both made from polysilicon, a refined crystalline form of silicon that can be sliced into wafers. Applied is betting that advances in materials science, improvements in manufacturing techniques, and mass production will further lower the price of solar cells, just as chipmakers have managed to squeeze the cost of processors over the years, turning personal computers into a mass commodity.

Although solar power is still two to three times more expensive than energy derived from fossil fuels, solar prices have declined steadily. In 1980 the cost of generating solar power with a silicon cell was about $30 per watt; today it averages $3 to $4 a watt. Applied's goal is to bring the cost down to $1 per watt, making it competitive with conventional power sources.

The company predicts that its annual sales of solar gear will reach $500 million by 2010. "Even if solar energy production grew 25 percent a year for the next 40 years, it still wouldn't supply a quarter of the expected growth in electricity demand," says Mark Pinto, Applied's chief technology officer. "That's a good story to be involved in."

Abundant opportunities

While many of Silicon Valley's solar startups are still little more than a twinkle in their VCs' eyes, the opportunity is already generating big cash for some small players, including Cinnamon's Akeena Solar. The company, which was started in 2001 with a $1,000 bankroll and no business plan, has quickly grown into one of the nation's largest solar power installers.

On a bright, cloudless September afternoon in the Valley, the kind of relentlessly dazzling California day that makes it seem as though the sun will shine forever, a dozen workers are busy putting the finishing touches on a huge array of 645 solar panels being installed on the roof of a biotech company just south of San Francisco International Airport. The solar system will soon generate more than 134 kilowatts of electricity, enough to power about 20 homes.

The Black Eyed Peas blast from a nearby boom box as sun-burnished workers secure the large flat solar modules to the roof and begin interconnecting them with electrical wire. The translucent panels glisten in the sunshine, the light reflected by the presence of the element that gave the area its nickname.

"Silicon Valley," Cinnamon says, "is moving from a place that uses silicon to make something that consumes energy to one that uses silicon to produce energy." Net sales for the Los Gatos, Calif., company during the second quarter doubled to $2.8 million from a year earlier. Cinnamon now has 50 employees and is hard-pressed to keep up with demand.

Across San Francisco Bay in Berkeley, PowerLight, the nation's biggest solar panel installer, is experiencing a similar boom.

Sales have been growing at an average of 49 percent since 2001, and revenue will hit $250 million this year. In April the company completed the largest solar installation in Silicon Valley, putting 31,000 square feet of SunPower solar panels on the roofs of Microsoft's Mountain View campus. They now generate 15 percent of the complex's electricity.

Worries about another bubble

As the solar economy expands, investors see opportunities in consolidating smaller installation firms, as well as in new markets such as battery technologies for storage of solar energy and software to operate the systems.

The advent of a California carbon-trading market will create demand for brokers and software to manage inventory and trades. Not surprisingly, solar is sparking the sort of optimism not seen in these parts since the go-go dotcom days.

"I believe that the Valley will be the place from which the next wave of solar and other alternative-energy technologies will emerge," says T.J. Rodgers, CEO of Cypress Semiconductor, whose SunPower subsidiary has seen its revenue soar from $10 million in 2004 to a projected $230 million this year.

Still, some people worry that the solar market is in danger of becoming, shall we say, overheated. Khosla, who has pinned his venture fund's hopes on biofuels, thinks solar is overhyped. "Even with subsidies, solar is quite uncompetitive," he said in a speech in September.

The solar market certainly will need to overcome several significant hurdles before it becomes a truly mainstream source of energy.

Solar panels will need to become smaller and lighter so they can be part of the roofing material itself. Costs will have to be squeezed to get the price of solar power below the game-changing $1 per watt. The current bottleneck in silicon supply will have to be resolved. And California's global-warming law is sure to end up in the courts. As in any boom, many startups will fail, and what seem like promising technologies today will ultimately prove to be as ephemeral as rays of sunshine.

Still, there's no doubt that the realities of the energy market are radically different than they were in the 1970s, when solar power made its first and largely unsuccessful commercial push. Higher gas prices are probably here to stay, the Middle East is certain to remain volatile for the foreseeable future, and global warming, alas, isn't going away anytime soon.

Little wonder, then, that the view from Valley rooftops is of blue skies ahead. Now it's up to the wizards of Silicon Valley to prove to the world that in the search for solutions to the planet's toughest problems, there's always something new under the sun.

Tom McNichol is a contributing writer for Business 2.0. Michael V. Copeland is a senior writer.

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