The Solar Hype Cycle: Don’t Let The Sun Go Down On Me
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creating impossible expectations, stoking the fires of hype, and inflating a huge bubble that could pop at any time.
Let’s start with thin film PV maker First Solar, which is up something like 900% since its IPO. The company is sporting a $20 billion market cap after $196.9 million in revenues for the first three months of the year. Think about that for a second. We aren’t talking an online or software play. We are talking a company producing a physical good. This little bit of valuation lunacy has triggered a VC feeding frenzy on similar solar plays with NanoSolar and Miasolé already having valuations of well over $1 billion before selling much of anything.
All told last year, VC investments in solar power (and almost all of it in PVs) reached around $1.36 billion, up from $400 million in 2005. The bulk of those investments went into backing various thin-film technologies—55 in 2007 alone. More than 100 thin-film companies are vying for a slice of the market, according to a recent Lux Research report, which forecast that thin-film solar will occupy 28 percent of the solar market by 2012. As the report noted, “This exceptional rate of growth demonstrates that VC firms believe solar is far from its peak.” Gaia help us. (Disclosure: I am a co-founder of Lux Research and a shareholder. However, I no longer have any operational or oversight role with the company. )
And with all the investment focus going to solar power, an interesting situation has developed—overcapacity. In a classic “who’d a thunk,” we are entering a prolonged period in which PV supply is outpacing demand. Lower barriers to entry will contribute to lower production prices and lower margins. This turn of events won’t likely last forever, but do you really want to be investing in one of the 100-plus new entrants in a market that is already producing more than the market can handle?
This is a good time to note that no VC-backed companies even IPOed in the second quarter. Furthermore, the average size of the solar IPOs that have occurred has been dropping since 2005. Solar equipment maker GT Solar, a pretty solid company that makes equipment for manufacturing PV cells, went public last week and fell 11.6 percent in its first day of trading and continued to fall over 20 percent more.
And here is the potential really bad news for investors. Some big players in private equity and on the research side have hypothesized that the price of PV solar cells is about to plummet so quickly that manufacturers will enter a netherworld where they are making enough to keep the lights on but not enough to make a formidable profit. That’s going to make shareholders and potential shareholders really happy. It’s also going to give birth to a whole new foreign energy “boogieman” as China becomes the dominant solar player in a way that dwarfs OPEC’s role in oil. With its centralized manufacturing base, the Chinese can wait out any market downturns and work with small margins in a way public U.S. companies can’t. They will gradually gain control of the PV market in much the same way that the Japanese took over the small battery sector a couple decades ago.
So as you can tell, PVs as an investment area really bum me out. I don’t find the technology all that thrilling either. PVs will certainly be a piece of the global energy puzzle, but will have nothing like the role of coal, oil, hydroelectric, nuclear, and even other green technologies. If you’re looking for a sure winner in this crowded mess of a field…good luck. One spin of the roulette wheel seems like a safer bet for cleantech investors these days.
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