As a self-professed solar industry cheerleader, even I have learned that striking up a conversation about solar with my venture capitalist peers will typically yield eyes that either quickly start looking around the room, or start to resemble those of the devil as if I have committed a great sin. The fact is that most dedicated clean tech funds and the Sand Hill Road heavyweights have invested heavily in the sector and I can point to exactly one solar module company exit to-date that could legitimately be bragged about. The sad truth is that solar investments have single handedly laid the knockout blow to several mainstream venture firms that got on the wrong side "all in" bets. Nevertheless, while most of the attention has been cast on the highest profile flameouts, quietly within the four walls of numerous buildings around the world, the survivor start-ups toil away despite a negative margin-pricing market bloodbath and a near impossible fundraising environment.
Skepticism around these survivors is the mainstream view, with arguments that $0.42/watt COGS China silicon modules will be flooding the market within two or three years. Their argument goes on that this cost is below the cost targets of some of the more prominent start-ups that have chosen to disclose their cost roadmaps, and as a result, the endangered are on the inevitable road to extinction. I’ll argue that this mainstream view is fundamentally flawed for three main reasons.
Reason One: While I can’t claim credentials as a cost accountant, when I see a COGS model incorporate a falling cost assumptions for the key commodity input, while the current price is below its cost (silicon), the realism of these ultra low module COGS assumptions certainly becomes a question. Silicon material cost breakthroughs may be possible but this is hard material science with many tradeoffs and it will take time and money to address. A more realistic baseline in our view is $0.50/watt module COGS, dropping to $0.45/watt as difficult efficiency gains are realized.
Reason Two: While the cost roadmaps for several of the more prominent Silicon Valley thin film start-ups have been published widely, the cost roadmaps for the more modest have not. As it turns out, when you look at the materials stacks and manufacturing processes for a few of these players, a sustainable cost advantage over standard silicon is apparent and sub $0.40/watt modules is a matter of how much time and money to get there. The trick is figuring out who can get there the fastest with the lowest investment needed.
Reason Three: Differentiated technologies need not compete directly on module COGS. For example flexible thin film garners a nice premium for use in building integrated PV. Concentrated Photovoltaic (CPV) is unmatched on a levelized cost of energy basis in the high DNI regions of the world, despite their higher upfront cost.
With this logic established, it is clear that there are real opportunities, but that the possibility of 50% plus margins that the technology industry is used to is nothing more than a pipedream. Then the ultimate question becomes, “From some of these survivors, will it still be possible to generate venture capital returns?” The solar market is eclipsing $100 billion, with almost negligible penetration in some of the sunniest regions of the world. It is clear that this is quickly becoming a large and important industry. As it turns out there are some other valuable energy company comparables out there today. At 13% operating margin, Exxon is in fact the most valuable company in the world. Here’s to positive solar margins and the valuable companies they will create.