Solar Survivors: Bay Area Startups Innovate Under the Radar

7/23/14Follow @mlamonica

The solar industry has had a brutal shakeout, making it very difficult for any solar energy startup to introduce next-generation cell technology. But, despite the fierce global price competition—and the flight of many venture investors from solar—there are a few signs that interest in novel solar technology is picking up.

Milipitas, CA-based Solexel on Tuesday said it raised $31 million in a Series D round from new and existing investors. San Jose, CA-based Siva Power earlier this month raised $5 million of a planned $15 million round for technology development. And last month, Elon Musk-backed SolarCity bought Fremont, CA-based Silevo in a deal that could be worth as much as $350 million and said it intends to build a solar panel factory in upstate New York.

These companies were all founded between 2005 and 2007, at the tail end of a wave of venture capital investment in solar startups, many of which were based in Silicon Valley. Using new “thin film” materials and manufacturing technologies, they promised to slash the price of solar from conventional silicon cells. But many of those solar hopefuls failed—who can forget Solyndra?—or were bought at great losses to investors, as Miasole was.

The main problem was that their cost targets didn’t keep pace with the rapid drop in prices, which was largely driven by Chinese solar panel producers. Financing solar startups is complex, too: most venture investors simply don’t have the resources, or the appetites, to spend hundreds of millions of dollars to fund construction of new factories.

To survive, solar manufacturing startups need innovative technology and access to partner companies with big balance sheets. Solexel’s round was led by roofing company GAF, which produces shingles for the residential market and commercial rooftops, says Mark Kerstens, Solexel’s acting CFO. It also brought in money from new and existing financial investors, which include Kleiner Perkins Caufield & Byers, Technology Partners, Northgate Capital, and DAG Ventures. SunPower, a large solar panel maker and project developer, is also an investor.

The money will finance the company for the next year as it plans its next major step: building a multi-megawatt pilot line in California that will use full-size equipment, says Kerstens. The plan is to operate this equipment to work out technical issues and then essentially replicate it at a commercial plant. “We will be taking the identical tools and building a 200-megawatt plant in Malaysia once we have demonstrated manufacturability at scale on our pilot line,” he says.

In the traditional silicon solar manufacturing process, wafers are cut from large cylindrical blocks of very pure silicon called ingots. Those wafers are then processed to make cells, many of which are assembled into a solar panel. Solexel’s process is radically different: it produces flexible silicon cells from a gas, saving costs on the amount of silicon and other materials used. To make its plant in Malaysia, the company expects to receive some government incentives and is considering financial or strategic partners to help finance it, Kerstens says.

Brad Mattson

Brad Mattson

The story at Siva Power also illustrates how the technical and financial hurdles for solar manufacturing startups are far higher than a few years ago. When CEO Brad Mattson joined the company in 2011, Siva Power, then known as Solexant, had plans to build a 100-megawatt factory in Oregon to produce panels with cells made from thin-film material cadmium telluride using a roll-to-roll process similar to printing. Mattson immediately killed that plan and started a complete technology and business overhaul. “Building that plant would have been like running into a brick wall,” he says.

Over the course of more than a year, he developed a roadmap to hit much lower price targets using completely different technology. Ultimately, engineers concluded that the company could only reach competitive prices using thin-film material made of a combination of copper, indium, gallium, and selenide (CIGS) using a process called co-evaporation on very large glass plates.

Telling the board that Siva needed to triple its research and development budget and scrap its founding technology idea was “painful,” says Mattson, who had previously evaluated solar deals as an investor at VantagePoint Venture Partners. “We had spent $30 million on a roll-to-roll pilot line, and that was the straw that almost broke the camel’s back,” he says.

Siva Power now hopes to raise $15 million this summer to build a key piece of machinery to make its CIGS solar cells, and then raise another $100 million by the end of this year to build a very large factory. With Silicon Valley venture capitalists reluctant to invest in solar, Mattson is trying to raise money from private equity firms or national governments willing to provide incentives for domestic solar manufacturing. “This is the hardest $15 million I ever raised,” says Mattson who has worked in the semiconductor industry for 25 years.

Despite the financial headwinds for solar cell companies, the general spending environment on solar technology appears to be improving. Much of the cost reductions in solar panels over the past five years have been through brute force: Chinese companies, in particular, built giant factories that lowered costs through economies of scale and flooded the market with products. But now, some people argue that more technical innovations will be needed to lower prices further and to meet global solar demand.

Installer SolarCity, a pioneer in residential solar financing, acquired Silevo to get access to its cell technology and fuel its future growth, company executives say. With more efficient panels, SolarCity can pack more power-generating capacity on a rooftop and lower labor and other equipment costs. “In order to have solar power compete on an unsubsidized basis with fossil fuel energy coming from the grid, it’s critical that you have high-efficiency solar panels and a total installed cost as low as possible,” chairman Musk said during a conference call announcing the deal.

A number of other companies are trying to improve efficiency and lower costs in different ways. In addition to Solexel and Siva Power, there are thin-film producers RSI and Scifiniti in San Jose, as well as thin-film silicon cell maker Crystal Solar in Santa Clara, CA. In the Boston area are Bandgap Engineering, which is developing a nanowire treatment to boost the efficiency of traditional silicon solar cells, and 1366 Technologies, which has developed a cheaper method for producing silicon wafers.

“There is a strong push for differentiation. The industry is heavily commoditized—80 percent of the product is virtually indistinguishable,” says Solexel’s Kerstens. The company’s solar cells are flexible and lightweight as well as being more efficient than standard silicon cells, which means its cells are well suited for being embedded into roofing material. “When you combine high efficiency… with a differentiated form factor, it just opens up a whole new range of applications that haven’t been served very well.”

Over the past few years, much of the entrepreneurial activity—and venture capital interest—has been on “downstream” solar, or finding ways to lower installation costs and finance panels with leases to avoid the upfront costs. But as the global glut of solar panels gets absorbed, more startups seem to be betting that manufacturers will start investing in “upstream” solar, or techniques to improve performance of panels and lower the cost of production.

“We need a lot of innovation to lower the capital intensity of solar,” argues Siva’s Mattson. “I’m a believer in the upstream side, but we’ll have to see if [investors] see it, too.”

As of now, few, if any, solar manufacturing startups that survived the shakeout can say they are producing panels at commercial scale. But given Silicon Valley’s rich history in semiconductors, it could still play a role in bringing down the price of solar closer to the grid in the years ahead.