The Solar Hype Cycle: Don’t Let The Sun Go Down On Me
The other day the Boston Globe had a piece on solar technology coming of age in which Caltech chemistry professor Nathan Lewis stated: “We’re not in a hype cycle…If you go to Silicon Valley and around Route 128, everyone and their brother who used to make computer chips are now trying to make thin-film solar cells.”
Dr. Lewis seems to ignore that he gleefully gave a textbook definition of a hype cycle. And an out-of-control hype cycle is literally what we’re in when it comes to solar energy.
There are dozens of separate subsectors of research, development and production that fall under the solar energy banner. I am going to skip passive solar, solar water heaters and solar thermal (which I actually like) and cut right to the solar energy sector most encumbered with hype, technical issues, mad money, and conflicts with reality—photovoltaics.
Photovoltaics (PVs) convert sunlight directly into electricity. Basically, they are those ugly glass boxes you see over at the Porter Square Plaza in Cambridge. Production of photovoltaic cells has been doubling every two years, since 2002, making it the fastest-growing energy technology sector in the world.
PVs break down for the most part into crystalline silicon PV, inorganic thin film, multi-junction PV, and organic and Gratzel PV systems. In a nutshell, you have the old, thick, expensive ones and newer, thinner, cheaper, often flexible ones. The issues making them problematic as an energy solution are that PVs cost too much to make, install, and maintain—oh, and they also only work when the sun is out.
To the cost issue of PVs, you hear a lot about companies working toward “price parity” and “grid parity”—i.e. a cost per megawatt on a par with electricity from fossil fuels—but nearly any number you see in print is half baked. Over and over again, companies have failed to translate the efficiencies achieved in lab experiments into durable solar panels that can be mass-produced cost effectively. Miasolé, for instance, has been getting 8 to 10 percent efficiency in the lab but only 4 percent or so in a mass-production form. Once you account for installation, maintenance, and repair costs for homes and business—which often add more than 50 percent to the base cost of PV panels—it’s clear that PV solar is never going to be cost-effective as a replacement baseload power source.
So if you were to go the Al Gore route of building a national, grid-replacing, mega solar farm in Nevada, we’d all go broke and die. It’s an inconvenient truth (ouch!) that besides destroying 5 million acres of land (about seven times the size of Rhode Island; wait until the environmentalist hear about that!) and another 7.5 million acres of adjoining land to support the system, it would cost around $21 trillion dollars to build a solar farm large enough to meet U.S. power needs—and we’d still have to keep the current energy grid up and running and ready to go for the two-thirds of the time when the sun isn’t doing its job.
In addition, though solar has this reputation of being a green technology, the reality is that PVs are full of gross pollutants, gnarly residues and nasty chemicals. Making PVs requires toxic heavy metals such as lead, mercury and cadmium—and throw in silicon tetrachloride to boot. Then there’s the mining operations needed to get many of the materials. And for good measure, don’t forget that PVs are made in factories. The plant at Suntech, one of the world’s biggest PV makers, is powered by a coal plant. Oh, the delicious irony.
On top of all of this, the PV industry is truly dependent on subsidies. The government now pays 30 percent of the cost to businesses to invest in solar to meet their energy needs. For consumers, there’s a Federal tax credit of $2000 for your renewable energy system (solar or wind) after rebates. States throw in a hearty helping of additional incentives, as in the case of California, which offers a subsidy for residential solar of as much as $2.50 per installed watt, depending on a system’s expected performance.
Even with all those subsidies, and even with oil at $140 a barrel, and even when you add in the federal and state taxes on oil production, solar still doesn’t reach break-even with fossil fuels, except in some start-up’s PowerPoint presentation.
Worst of all, this hype is bad for the environment. Focusing so much on PVs means that we’re moving investment dollars away from other clean energy technologies that have much more potential. I often hear folks at clean energy forums state that the United States needs to emulate Germany by creating more incentives to build PV farms. What’s not mentioned is that it takes six years for a German PV plant to generate the amount of power used to make the PV cell.
So PV solar costs too much, isn’t exactly green, isn’t as good as claimed, and depends on government support. What else can be wrong with it? Investors—and their bad habit of 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.
Next up: I continue my snarky remarks on several other green energy technologies, and eventually get around to saying which ones I like.
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