Silicon Valley becomes Solar Valley

Sunrise industry

While the solar industry as a whole remains small–less than 1% of electricity in the U.S.–it’s exploding — growing an average of 42% annually since 2002. Industry leaders, most based in Japan and Germany, are ramping up production, as are Chinese manufacturers like Suntech, whose founder and CEO, Dr. Zhengrong Shi, is one of China’s richest men. Big companies, including BP, General Electric, Mitsubishi, Sanyo, Sharp, and Shell, all want to grow their solar businesses. In Silicon Valley, meanwhile, venture capital investors like John Doerr and Vinod Khosla, entrepreneur Bill Gross, and Google founders Larry Page and Sergey Brin are backing startups that claim they will revolutionize the industry.

With electricity prices rising, worries about global warming mounting, and the cost of solar energy falling, the business of making electricity from the sun is about to go mainstream in a big way. The Holy Grail of solar is a concept called “grid parity”–meaning that it costs no more to generate your own solar energy than it does to buy electricity retail, off the grid–and there’s smart money betting that solar will get there soon. The stand-out industry star of the moment is a company called SunPower. Main investor is a legendary Silicon Valley character named T.J. Rodgers, whom we’ll meet shortly.

Once given up for dead, SunPower, which makes and installs solar photovoltaic panels for businesses and homes, expects to generate revenues of $1 billion to $1.2 billion and profits of $146 million to $162 million next year. Its customers include Wal-Mart, Johnson & Johnson, Microsoft, Macy’s, Tiffany, FedEx, Toyota, Target, Lowe’s, the governor of Colorado (who has solar panels on the roof of his mansion), and the Department of Defense (which uses solar energy to power Nellis Air Force Base in Nevada, but not its planes). Since going public two years ago, SunPower’s stock price has grown by about 450%, from $18 a share to $82 giving the company a market capitalization of nearly $7 billion. That’s a little bigger than Whole Foods Market.

According to John Cavalier, who is chairman of the energy group at Credit Suisse, the market value of the world’s publicly traded solar companies stood at about $1 billion in 2004 Now, after a slew of IPOs, they are worth about $71 billion. If the U.S. enacts legislation to counter global warming and it adds to the cost of making electricity from coal, natural gas, and oil, solar energy will be among the winners. “The opportunity for solar companies is absolutely tremendous,” Cavalier says.

SunPower stands out for several reasons. It’s arguably the leading U.S. solar company, its solar cells are currently the industry’s most efficient, and it is vertically integrated, meaning that it makes both its solar cells and the panels on which they are mounted, and designs and installs systems for customers. Little known outside the industry, the company wants to build a consumer brand. “We’d like SunPower and solar energy to be synonymous,” says Tom Werner, the chief executive.

At least two things stand in its way. The first is competition, of which there is plenty. The solar PV industry remains fragmented, with as many as 100 manufacturers working to drive down costs. Sharp is the leading one, followed by a German firm called Q-Cells, Kyocera, Suntech, and Sanyo, with SunPower ranked tenth, according to Paula Mints, principal analyst for solar with Navigant Consulting’s PV Service Program.

The other obstacle facing SunPower and the industry is that it still costs too much to make electricity from the sun. Prices vary widely, but it costs about 25 to 35 cents to produce a kilowatt-hour of electricity from solar; retail electricity prices average 11 cents in the U.S. but can be twice that in parts of California, New York, and Connecticut. Today’s biggest markets for solar PV are Germany and Japan, with the former accounting for more than 50% of global demand. That’s not because it’s always sunny in D

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