CPV: The Zero Billion Dollar Market

More than one hundred people gathered last night at an EBC (Environmental Business Cluster) event at the Tech Museum in downtown San Jose, Calif. to hear the story of GreenVolts, a Venture Capital-funded startup aiming to take HCPV (High Concentration Photovoltaics) to market.

There really isn't a CPV market – it's a new technology, yet to be deployed in any meaningful scale. Companies like Amonix, SolFocus and Concentrix have managed to deploy a few megawatts here and there but the power being generated is negligible in comparison to other solar technologies like flat panel silicon-based PV or solar thermal. The real metric in question with CPV, as with any energy source, is Levelized Cost of Energy (LCOE) and CPV has no track record to prove its' LCOE advantage. The price of triple-junction solar cells and two-axis trackers, maintenance, installation and other costs remain unproven and risk-laden for CPV.

We've covered CPV in detail:

• CPV Part 1: List of HCPV Players 

• CPV Part 2: List of LCPV Players 

• CPV Part 3: List of PV Chip Vendors for CPV 

• CPV Part 4: CPV Poetry Slam with Sunrgi  

CPV minimizes the use of silicon, which was a reasonable value proposition when the price of polysilicon was $500 per kilogram a few years ago. But  today, with the price of polysilicon stabilizing at between $50 and $70 per kilogram – CPV's value proposition starts to evaporate.  That makes life for a CPV startup pretty challenging.

I'm on a Boat (Featuring B-Cart)   

About four years ago Bob Cart was on a sailboat in the Pacific with his pregnant wife when his solar epiphany occurred. The boat used solar panels, big, bulky and inefficient ones. So he asked himself: "Why not pick the biggest problem to solve?" He decided to enter the renewable energy market to try to solve the "big, gnarly problem" of energy.

Moonlighting in his garage, he filed for a $95,000 grant with the CEC (California Energy Commission) and filed a patent. While the grant percolated – he entered the California Cleantech Open (CCTO ) and won in the renewable category and swimsuit competition – $50,000, office space and some other goodies that allowed them to get going. He also eventually received the $95,000 grant. Cart was now the CEO of a modestly-funded CPV startup.

Since then GreenVolts has raised more than $45 million from Oak Investment Partners and other investors in three rounds:

• $2 million seed

• $10 million Series A

• $34 million Series B

PG&E and the CPUC Encounter GreenVolts

Hal LaFlash of PG&E encountered GreenVolts as a judge on the CCTO.  He has since favorably scored GreenVolts' RFO application for a 2-megawatt energy project on project viability, believing that "this was a viable technology that could make a difference."  The 2-megawatt project was deemed of sufficient size to prove the technology and help GreenVolts reduce their costs. In Hal's words, "It was more a qualitative thumbs-up, not a quantitative thumbs-up."

Paul Douglas of the CPUC was initially somewhat less enthusiastic. The CPUC looks for least cost, best bids and all bids are ranked by those metrics, while viability is a soft metric.  He viewed PV as a subsidized technology suitable for rooftops and not a really a utility project.  Since then he seems to have come around, believing that, "To get to the aggressive California RPS we need to diversify our portfolio with 10 megawatts and below projects on the distribution network, not in the desert."  And GreenVolts does meet those requirements.

2012: Something Completely Different

On a slightly different note, unrelated to GreenVolts, the ubiquitous Hal LaFlash flashed-forward to 2012 and saw the following:

• PG&E's smart meter roll-out will be complete by 2012

• Up to 4,500 megawatts of wind power will be online from the Tehachapi wind farm project  

• The need for big-time energy storage to cope with that much wind power and other renwables on the grid

Small Matter of Actually Executing

This was a heartwarming story about a smart startup that was able to raise cash from the state, from business plan competitions and from VC-investors. It filed patents and won small contracts with major utility players.  It's had the requisite board room shake-up. Now all GreenVolts has to do is build a reliable and innovative product, deploy it in an economical fashion, and generate energy at grid-parity and a competitive LCOE.

We listed a bit of scuttlebutt surrounding KP-funded fuel cell vendor Bloom Energy in a recent blog post (see Bloom Rumors).

Here are some of the items we've tried to verify with Bloom over the past few months:

• News of an alleged $150 million dollar funding round and $1.45 billion valuation
• Rumors of an enormous government contract and a multi-million dollar order backlog from Coca-Cola and FedEx
• Why they’re using Advanced Equities to help them raise their next round
• The curious fund-raising tactics used by one of their investors, Northgate Capital

Add to that the additonal info uncovered in News and Rumors, Part II:

• East Tennessee will be the location of a 100-kilowatt demonstration fuel cell developed by Bloom that could be a precursor to the potential siting of a manufacturing facility in Tennessee
• Bloom's system is a 25-kilowatt unit and they put four together for a 100-kilowatt system
• Their first 100-kilowatt unit went to Google 
• eBay ordered four of the 100-kilowatt units
• The units run on natural gas which gives them about 48 percent efficiency overall
• Bloom is having production problems.

I'll add one more tidbit to this list:

• The San Francisco Airport is currently evaluating a Bloom Energy fuel cell unit.

Bloom had no comment about these claims – at least the last five times I approached Stu Aaron, their VP of Marketing.  But I'll keep trying.

The financial crisis has dealt a serious blow to utility-scale renewable energy project financing. Large-scale wind and solar assets have always been distinguished by their capital-intensiveness and lack of resource costs, but now that the world's financial resources have constricted, those factors define the assets. Financing a $500 million wind farm with a 20-year IRR of 11 percent may be an appealing proposition in boom times, but it appears less attractive when investors are on the brink of insolvency.

Although many of the newer financing options have now vanished, the financial crisis and ensuing changes to incentive structures have opened up some new windows for developers. Here's a brief analysis of some of the major trends in renewable energy project financing, pre- and post-crisis.

Prior to the Recession

Increasing availability of project-level debt: As large lenders became more comfortable with renewable technologies and standardized debt-financing structures, more developers were able to attain limited-recourse debt to develop projects. This generally produced the lower average LCOEs than pure equity projects, and enabled smaller developers to build larger projects. 

Importance of tax appetites of project investors: Prior to the financial crisis and ensuing recession, many projects were built on the back of Tax Investors, who would reap the benefits of the federal Investment Tax Credit (ITC) and Production Tax Credit (PTC) for renewable energy facilities, in addition to retaining some equity stake in the project. Developers found Tax Investors critical sources of project capital, and as confidence in federal tax incentives increased, developers were able to secure financing from Tax Investors at lower rates. According to a 2007 report from the Lawrence Berkeley National Lab, in 2006 only five of the 13 leading wind developers in the U.S. had the tax appetite to retain ownership of their projects. The remaining eight partnered with tax investors, often large investment banks.

Increasing corporate financing: Over the past few years, many of the largest developers of wind and solar installations had begun to develop projects as sole owners, utilizing only internal equity financing. Large developers were growing in size as market consolidation proceeded, and the emerging corporations had increasing internal capital availability. 

Since the Recession

Absence of project-level debt: The financial crisis has restricted the total capital available for large projects, and what capital remains is being channeled towards less risky projects. In addition, uncertainty regarding the future of renewable energy incentives makes potential lenders hesitant to part with their limited remaining funds. (Will there be a national Renewable Energy Standard? How much will a cap-and-trade program impact fossil-fuel electricity prices?) Developers now find it difficult to secure project-level debt, and many smaller developers that depended on such financing structures for their projects will struggle to stay afloat.

Institutional investors replacing Tax Investors: For a time, the financial crisis eliminated the value of the ITC and PTC. If former Tax Investors no longer earn enough to be seeking the value of tax credits, there is no value to the incentives. Luckily, the American Recovery and Reinvestment Act of 2009 (the stimulus package) allowed taxpayers who were eligible for the ITC or PTC to take a grant from the U.S. Treasury in lieu of the tax credits. This opens up the market to investors without heavy tax appetites, and we can expect to see more institutional investors, rather than tax investors. These may be some of the same entities that would have invested for tax purposes, but they are no longer constrained by the magnitude of their tax burden in order to take advantage of the ITC and PTC.

Increasing utility development: Even prior to the recession, utilities were increasingly considering development and ownership of renewable assets rather than purchasing the power and associated environmental attributes through Power Purchase Agreements (PPAs). Utilities could often receive lower prices for their energy through ownership, and integrated resource planning often made the ownership of renewable energy more inviting. Now, utilities will be forced to take a closer look at project ownership as the number of available independent projects decreases. In addition, utilities' rate-regulated status keeps them somewhat sheltered from the worst of the financial crisis, leaving them more room to develop and finance projects on their balance sheet.

It's a brave new world for renewable energy developers. The long-term future is bright, and financing will return as capital markets open up. But in the meantime, the name of the game is survival.

Just two-thirds into the second quarter of 2009 and VC investment in greentech has already exceeded last quarter’s dollar and deal totals.  Our official total for the second quarter, so far, is $907 million – but factor in the “undisclosed rounds” of which there were many – and the total easily exceeds one billion. 

VC investment in greentech is tracking this quarter’s uptick in corporate and PE  investment according to various company reports, investment banks and NEF.

So much for the negativists with their talks of greentech bubbles and the death of venture capital – although, there certainly are still difficulties with the venture capital model.

Fred Wilson of Union Square Ventures has crunched some numbers and claims that “VC doesn’t scale.”  He has determined that: “You cannot invest $25 billion per year and generate the kinds of returns investors seek from the asset class,” and that, “The number that the asset class can take on each year is around $15 billion to $17 billion. It's interesting to note that the industry raised $4.3 billion in the first quarter of 2009. That's a good thing. If we can keep it to that level, or less for a while, then we may be able to downsize and get returns back on track.”

We are already seeing smaller funds, smaller investments, leaner, more capital efficient companies and lowered exit multiple expectations.  This starts to look like a return to reality for VC investors, their limited partners and the entrepreneurs in their portfolio companies.

Year               Total VC in Greentech       Number of Deals
2005                      $820M                         74
2006                      $2350M                       124
2007                      $3478M                       222
2008                      $7584M                       350
Q1 2009                $836.1M+                    59
Q2 2009 So Far     $907.5M++                  62

VC Stats (Stats from the NVCA)

Forty U.S.-based venture capital firms raised $4.3 billion in the first quarter of 2009, according to Thomson Reuters and the NVCA. This represents the lowest number of funds to raise capital since the third quarter of 2003. On the upside, the actual amount of capital raised was higher than the $3.5 billion raised in the fourth quarter of 2008.

• Revenues at VC-backed companies accounted for 20.5 percent of the nation’s GDP

• VC-backed companies represented 8.6 percent of all employment

• There are 12 million jobs at public firms that were once VC-backed

• There were 1,171 new VC-backed companies in 2008

• There were six IPOs and 341 M&A transactions in 2008

• It takes on average 9.6 years to get VC-backed companies public (or 6.5 years for an M&A transaction)

If you're a crystalline silicon-based cell or module maker, life is hard right now. Module prices have been in free fall since the fourth quarter of 2008, plummeting from $4.00/W in September to $2.25/W at present. At the same time, demand has trended sharply downwards as well during this time (so much for short-term price elasticity, right?). And that's just the beginning of their woes: year-end cell crystalline silicon capacity for 2009 is estimated at over 14 gigawatts. When one reconciles that with around 6 gigawatts or so of demand (and it remains to be seen if we'll even get there), of which 1 gigawatt or so will be installations using First Solar modules, it doesn't make for a pretty picture. And if things couldn't get any worse, many of these companies have millions in debt repayments due over the course of the next twelve months (unlike a number of thin-film firms, which are venture-funded).  

Put this all together and you have a struggle for survival of Darwinian proportions; much blood will be spilled, and not everyone will make it through to the other side. Over the next few years, the market will be increasingly restricted to only to those companies with the best products, lowest cost structures, and most successful business models. The task, then, is to identify which crystalline silicon-based technologies, business models, and companies will be in a position of strength to weather the storms versus those most likely to be at risk from the shakeout that is currently well underway in the PV industry.

This question framed the considerations of GTM Research's recently published report, Surviving the Shakeout: Winners and Losers in Crystalline Silicon PV. Aiming to comprehensively lay out what it will take for a crystalline silicon-based cell/module manufacturer to succeed over the next two years, it conducts a comparative analysis of the 50 most prominent crystalline silicon-based cell and module manufacturers in the market over eight key performance metrics, namely:

1. Degree and nature of vertical integration

2. Cost structure

3. Balance sheet strength

4. Polysilicon procurement arrangements

5. Technology differentiation

6. Manufacturing scale

7. Proximity to demand

8. Brand recognition

Figure 1: Determining Metrics for Crystalline Silicon Cell/Module Manufacturing Business Model

A quantitative assessment was carried out for each metric for each crystalline silicon cell and module manufacturer, and companies were ranked based on a weighted average calculation. Cost structure and balance sheet strength (as indicated by the larger circles in Figure 1) are considered as first-order drivers, meaning that they were weighted higher in the final assessment than other factors. To whet the appetite, below is a sample section from the report.

Technology Differentiation

As pertains to PV, the term "technology differentiation" is largely synonymous with one variable: conversion efficiency at the cell and module levels. Efficiency matters for the following reasons:

1. Gains in efficiency drive cost reductions at all steps of the manufacturing process on a dollar-per-watt basis, from the cost of the feedstock to module conversion: all else equal, higher efficiency means higher energy output for the same cost.

2. Efficiency gains also lower area-related or balance-of-system costs (i.e., wiring, foundations, labor, etc.). BOS costs scale inversely with module efficiency, since higher efficiency means fewer panels are required for the same output. Therefore, given equal module cost, higher efficiency drives a lower installed cost, and thus lower cost of electricity.

3. Efficiency becomes a key consideration when space is a constraint – meaning that in such cases, higher efficiency technologies will obtain a premium and differentiate a company's product. This is precisely the value proposition of "super mono" technologies such as SunPower's back-contact cell and Sanyo's HIT product.

Figure 2 assesses technology differentiation for the top 25 companies on a five-point scale. Aside from current cell and module efficiencies, two other factors were taken into consideration in the final analysis:

1. Near-term technology roadmap:  Even though this report has a 12 to 18 month focus, it is necessary to take into account near-term targets and innovations into the analysis, as most cell and module manufacturers are striving to continuously improve efficiencies. Examples include Suntech, which will be retrofitting its existing capacity with its high-efficiency (19%+ monocrystalline cell) "Pluto" technology over the course of the year, and Gintech's 16.4% efficiency "Duoro" product, which it began shipping in March 2009.

2. Alternative technology presence: many producers have placed side bets on other technologies as well, whether through internal divisions, subsidiaries or joint ventures with other firms. These investments serve as a hedge against the rise of alternatives to traditional crystalline silicon-based technologies, and would allow them to take advantage of a scenario where one of these alternatives emerges as a market leader. This factor only really comes into play, however, if the alternative can scale to material levels in the near-term, and not all options are equally viable. As illustrations, Sharp's amorphous silicon division (2009 capacity of 160 megawatts) is considerably more meaningful at the moment than Q-Cells' CIGS presence (6 megawatts) through its subsidiary Solibro, and the value proposition of upgraded metallurgical silicon (UMG) technology has been significantly compressed following the sharp drop in polysilicon prices of late.

Figure 2: Crystalline Silicon PV Technology Differentiation Assessment, Top 25 Firms

The full report contains similarly data-driven and in-depth analysis of each of the eight metrics discussed above, along with conclusions pertaining both to individual companies and business models, and final rankings for the top 50 crystalline silicon PV manufacturers in the industry that allow a crystalline silicon-based manufacturer to accurately assess its competitive position in relation to its peers.

Until recently, the electronics used in PV systems – inverters and Balance of System (BoS) have been an overlooked and underinvested part of the solar ecosystem – despite being a multi-billion dollar market that has not seen a lot of innovation.

But this year, there has been a surge in investment and entrepreneurial activity in solar BoS.

The investment climate is changing – the once stagnant inverter and balance of plant market is being shaken up by VC investment and entrepreneurial innovation. In addition to being a sector with room for technical innovation and performance enhancement, the inverter market is also more capital efficient than the solar panel manufacturing sector.  And capital efficiency is this year’s VC mantra.

New thinking in inverters by VC-funded entrepreneurs is challenging the conventional wisdom in solar installations with the potential for lower materials and labor cost and higher overall system conversion efficiencies.  These new distributed inverter architectures have the potential to disrupt the $1.8 billion PV inverter market.

Here’s a table of the new entrants into the distributed inverter field:

And here’s a rundown on this year’s distributed inverter company news so far.

Enphase Energy (Microinverter)

• Entered an agreement with Suntech to market Enphase's microinverters to Suntech's U.S. dealer network

• Closed $22.5 million in financing led by Madrone Capital Partners with Bay Partners, Third Point Ventures, RockPort Capital Partners and Applied Ventures

 

National Semiconductor (DC-DC)

• Acquired ACT Solar in order to enhance its distributed MPPT product line

• Signed a memorandum of understanding with Chinese solar panel maker Suntech Power, which plans to evaluate National’s distributed MPPT product

 

SolarEdge (DC-DC)

• Closed a $23 million Round B led by Vertex Venture Capital with Walden International, Opus Capital and Genesis Partners

• Entered an agreement with BP Solar to explore commercialization of embedding SolarEdge’s power harvesting system directly into BP’s Solar modules

• Entered a strategic partnership in which Gehrlicher Solar, a PV system integrator, incorporates the SolarEdge product into its PV system integration portfolio

• Entered a joint design agreement with Schott Solar to develop and test power harvesting systems embedded into Schott Solar’s modules

SET (Sustainable Energy Technology) (Microinverter)

• SET (TSX VENTURE:STG) received $7.6 million in financing to launch its next generation solar inverter with funding led by Doughty Hanson  

Tigo Energy (DC-DC)

• Closed $10 million second-round of funding led by Israel Cleantech Ventures with existing investors OVP, Matrix Partners, and Clal Energy

There are lots more details on these disruptive new technologies and this emerging market in the latest issue of the Greentech Innovations Report.