Friday, November 18, 2005

SunPower's IPO, silicon supply, and cleantech investing

The long-anticipated IPO of SunPower happened today, and it shot up more than 40% in one day.

This will undoubtedly bring even more mainstream VC attention to the clean energy market in general, and solar energy in particular. After all, SunPower, with annualized revenues of around $65M, now carries a market cap of $1.5B -- even if that valuation goes down over time as the euphoria wears off, that kind of "pop" will get any investor's attention.

SunPower is certainly a great example of the business opportunity presented by the rapidly-growing solar market. According to Solar Buzz, for instance, solar installations grew 62% from 2003 to 2004, and by all reports the industry has continued to grow rapidly this year as well.

Investors need to realize that it will be difficult for the industry to continue this level of growth, however. Much of this growth has been due to specific regulatory incentives -- solar power is not yet competitive in cost with grid power in most cases, so the pure economic case alone isn't driving most of this growth. Nevertheless, demand for solar is growing quickly and won't stop growing anytime soon.

But then there's the silicon supply issue.

As Tyler at Clean Break and Jim at the Energy Blog pointed out a while back, Piper Jaffray put out a research report on the solar industry last month (pdf available here), with some pretty interesting conclusions:
  • PV modules based upon polysilicon currently make up 91% of the market
  • The supply of polysilicon is constrained, and available polysilicon is sold out already through 2007
  • Polysilicon feedstocks are only expected to grow at 12% through 2007 -- but demand has been growing at least 30% per year
Based upon this information, the report concludes that solar market growth will only be in the single digits next year, and that prices will likely continue to increase for solar modules. They also conclude that PV technologies that don't depend upon silicon are going to see more rapid growth.

What conclusions should venture investors be drawing about the solar market?

First, the good news: PV technologies that minimize or eliminate the need for silicon (so-called "second and third generation" solar) are earlier in their development, and thus are more readily available for venture-stage investments. Even without shortages of silicon, the high cost of silicon was already driving significant innovation in the search for alternatives. If silicon-based PV is going to be unable to meet demand in 2006, then any commercially-available 2G or 3G solar technology is going to see pretty rapid market acceptance. Thin-film and concentrator technologies that are "ready for prime time" may be at an inflection point. And even earlier stage technologies will undoubtedly garner a lot of attention going forward.

But the bad news is that the silicon situation points to a very basic fact about the solar industry going forward -- it is essentially a semiconductor industry. The technologies, manufacturing processes, and even some of the players are the same (SunPower, for instance, was funded in large part by Cypress Semiconductor). And just like with semiconductors, there will be capacity-driven boom and bust cycles. The supply of silicon will be subject to capacity-driven booms and busts, which will flow down the value chain. And then the building of larger and larger PV production lines will also drive periods of undersupply followed by overcapacity, and vice versa. Underlying these cycles will be continued fast growth. But there will be significant price and production fluctuations around that growth trajectory. SunPower picked the right time to IPO, given where we are in the cycle right now...

Finally, while solar has been getting a lion's share of the cleantech investing press lately, I would expect to see SunPower's successful IPO as having a somewhat counter-intuitive effect of broadening mainstream VC interest into other areas of clean energy. The successful IPO will help draw attention to clean energy technologies, but there's already been a lot of recent funding activity in 2G and 3G solar. There will be increased capital deployed in solar, no doubt. But mainstream VCs will be forced to also look elsewhere within the clean energy sector if they are to find significant new opportunities. And that's a good thing, for everyone involved in the industry -- innovators, entrepreneurs, LPs, specialized funders, and mainstream funders with an interest in the space.

Now, let's all hope we see continued strong performance out of SunPower going forward.


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