Let’s suppose you’re a startup that has a solar technology with a lower dollar-per-watt cost than the status quo. Now all that stands between you and commercial success is raising money for a pilot line, and then for a new factory.

You start running the numbers. To benefit from economies of scale and build a vertically integrated 1-gigawatt factory, from polysilicon to modules, you would need to raise between $700 million and $1 billion -- a bit less if targeting specific segments of the value chain, but still on the order of hundreds of millions of dollars.

This might sound like a lot of money -- and it certainly is -- but relative to other capex-intensive industries like integrated circuits or airlines, this initial investment isn’t unusually high. New integrated circuit (IC) fabs usually run in the mid-to-high single-digit billions of dollars; new aircraft per-unit prices are in the low hundreds of millions of dollars. So what makes it so hard for PV companies to raise money for new factories?

The difference is that IC manufacturers and airlines, after years of consolidation, have enjoyed stable and respectable operating margins in recent years. In contrast, the operating margins of PV manufacturers have been highly volatile for most market leaders, ranging between -30 percent and +30 percent over the last five years.

Figure 1: Operating Margins for Select PV Manufacturers

Source: MIT PV Lab & NREL CEMAC, from Bloomberg


With low margins and subsequent low retained earnings on their balance sheets, PV manufacturers often have to choose external options for capex financing, such as increasing the debt-to-equity ratio -- in other words, borrowing more money from debt holders against their assets, thereby increasing leverage. Many companies have opted to take this path, although a few notable exceptions exist, as shown below.

Figure 2: Debt-to-Equity Ratio for PV Manufacturers

Source: MIT PV Lab & NREL CEMAC, from Bloomberg

Debt is not intrinsically evil. Those who argue the merits of debt point to the fact that some leverage is healthy, even necessary, for companies, and it can magnify earnings for equity owners. By way of personal analogy, it’s hard for many of us to imagine affording our lifestyles -- our education, our first car, or our first home -- without debt. But debt becomes troublesome when it becomes financially unsustainable, often suddenly and unpredictably, because of an unforeseen expense (such as a medical bill) or a sudden decline in revenue (such as a job loss). Returning to PV manufacturers, the burden of debt is palpable when large capital investments are needed or when selling prices (margins) decline.

Two unfortunate consequences of high capex and low margins

There are two noteworthy implications of the combination of high capex and low margins. The first is low sustainable growth rates. We calculate the PV industry’s maximum sustainable compound annual growth rate to be 10 percent to 20 percent. In contrast, the PV industry actually expanded at a CAGR of 51 percent between 2003 and 2013.

When margins plunged around 2010, many companies continued to add debt, some increasing their total debt burden to over $1.8 billion in 2015. This contributed to volatility; over the past decade, 15 different companies appeared in the “Top 5 largest PV manufacturers” list, and six are no longer independently operating.

The second implication of high capex is technology lock. On the startup side, it is challenging for innovative manufacturing technologies to gain industry acceptance -- especially the capex-intensive ones. Examples abound of technologies that met respectable performance targets but failed to gain market traction, including new cell architectures, new processing tools, and new feedstock refining methods.

When established companies chose to expand, they opted for more established and less risky technologies. Many startups were caught in a capex catch-22: without additional debt, they could not expand their manufacturing capacity and de-risk their technology by growing to a competitive scale, which is usually necessary to access additional low-cost debt. This phenomenon has become more prevalent after private equity and venture capitalists have significantly withdrawn their equity investments after numerous instances of bankruptcy and erosion of shareholder wealth. Industry-wide, the rate of adoption of innovative technologies may slow if this situation continues.

Innovating in a high-capex and low-margin environment

The good news: There are examples of other industries that managed to innovate within similarly high-capex and low-margin environments. Some characteristics of successful historical innovation include:

  • Increase throughput and streamline manufacturing: A fraction of the upfront equipment cost must be recovered with the widgets sold every day. If tool throughput increases, the capex expense per widget decreases. A notable recent example in PV is low-pressure phosphorus diffusion furnaces, which enable wafers to be more closely packed in the quartz boats. The lower concentration of surface phosphorus enables improved electrical current and a thinner oxide layer, with beneficial downstream capex and performance implications. Consequently, such tools have been moving into commercial production, despite a challenging financial environment. While the low-pressure phosphorus diffusion furnace represents an improvement of an individual tool, even greater gains may be possible by re-imagining material flows end-to-end through an entire process line. When designing its manufacturing equipment and material flows for the Mach3 razor, Gillette replaced intermittent-motion with continuous-motion handling. This increased manufacturing throughput by ~3x, allowing manufacturing to continue in South Boston, one of the United States’ hottest real estate areas. There appears to be ample room for PV manufacturers to replicate this model.
  • Accelerate equipment design: Equipment design is an area ripe for innovation. While the build-it-and-test-it iterative approach cannot be entirely obviated, the advent of multiphysics simulation packages has allowed part of the design cycle to shift to computers, reducing the development costs for new manufacturing equipment. With improved process simulation software, this trend is expected to continue.
  • Develop a multistage investment horizon: It can take time, patience and sustained investment to change our approach to manufacturing. In the case of plate glass, the development of the now-ubiquitous float glass process required a decade of sustained investment within a privately held company, Pilkington. The higher-throughput float glass process reduces cost of tool ownership, lowers per-unit costs, and enables larger product form factors. Float glass now enables new applications (like PV modules) that were unthinkable with the old “cast-grind-polish” approach to glass manufacturing.

In summary, innovating in a high-capex, low-margin environment is a challenging but necessary challenge for the solar PV R&D community. The first step is to recognize the capex barriers to scaling both existing and innovative technologies. Next, we can learn from successful examples in other industries to guide capex innovation in energy technologies.

By considering the importance of manufacturing throughput upfront, streamlining manufacturing, accelerating the equipment design cycle, and sustaining investment in innovation, the solar community stands a good chance of achieving our sustainable growth and cost-reduction goals, even in an unfavorable business environment.

For more on capex, please see our open-access paper: “The Capital Intensity of Photovoltaics Manufacturing: Barrier to Scale and Opportunity for Innovation."