For solar power, the future looks bright (pg. 2)

By Marc Gunther, Fortune

An unlikely savior

With SunPower running out of money in 2000, Swanson went to his old colleague. Rodgers was intrigued. But before committing, he set out to get a handle on the business, looking into putting solar cells on the roof of Cypress's new headquarters. After running the numbers, he figured that they would generate enough electricity to pay for themselves in about seven years; he ordered panels from Sanyo and Shell.

SunPower did not yet have a commercial product, but Rodgers admired its work for Helios - the plane set a world altitude record of 96,863 feet before its unfortunate demise (unrelated to its solar panels), and he was impressed by the efficiency ratings of its cells. He was not impressed by the company's manufacturing operation, however. "No insult intended - they didn't have a clue how to run a fab," he says. But Cypress, which has three efficient chip plants in the U.S. and the Philippines, knew how to fix that.

The timing was perfect. Researchers at Bell Labs developed solar PV cells in the 1950s. They had been deployed since the 1970s, mostly off the grid. But it took the Japanese and German subsidies of the 1990s to make solar a business; since then, economies of scale have driven down costs as prices for natural gas have risen.

Arnold Schwarzenegger, a fan of solar, soon became California's governor; last year he signed a law that calls for a million solar roofs and provides $3.2 billion in rebates for solar customers.

The industry, meanwhile, revamped its business model. For years companies, including SunPower, aimed to develop large-scale solar farms in remote, sunny locations to compete with big fossil-fuel generators that sell electricity to utilities. Solar thermal power plants, which use the sun's heat to turn water into steam that drives turbines, continue to build utility-scale plants.

But solar PV panels are now mostly sold to businesses and homeowners. "The killer app that changed the industry was the realization that the natural role for PV is distributed power," Swanson explains. "You can generate the electricity where it's needed. You don't need a big solar farm in the desert anymore."

This is obvious now, but it was far from clear when Rodgers first asked Cypress's board of directors to invest in SunPower. They declined. So he loaned the company $750,000 of his own money on the understanding that an extreme makeover would follow. His message was unambiguous: "You're going to have to shut down your American fab and put one in a low-cost area. You're going to have to lose half of your employees, some of whom you love. You're going to have to bring in new management. And if you are willing to do all of that, then and only then will you turn it into a real company."

It took some doing. "We had to make a very rapid transition from a handmade, boutique solar-cell mentality to full-blown, state-of-the-art manufacturing," Swanson says. The company transplanted its manufacturing line from Palo Alto to a Cypress plant in Texas and then to a newly built fab in a suburb of Manila, disrupting the lives of engineers and their families. Rodgers sent some of his best Cypress executives over to SunPower, including Tom Werner, a longtime technology executive and Ironman triathlete who became CEO.

In 2002, Rodgers convinced Cypress's board to get in on this solar action - and the company made its first $9 million investment in SunPower. Two years later Rodgers persuaded his board to buy the rest of the company. It turned out to be a smart move: Cypress has spent $168 million to buy SunPower and invest in plant, equipment, and startup costs.

The 2005 IPO, as noted, was a hit. Last May, Cypress sold 7.5 million shares, bringing in $437 million. As of June 30, Cypress held about 44.5 million shares - representing about 55% of SunPower on a diluted basis - worth about $3.6 billion. The amazing upshot here is that the company's holdings in SunPower account for more than 80% of the market value of Cypress, which has been in business since 1982.

A sunny dispostion

It must be noted that SunPower's valuation reflects a very rosy view of its future. Shares are trading at about 32 times projected 2008 earnings. Besides Cypress, major shareholders include Legg Mason, BlackRock Group, Deutsche Bank, and Janus. "You have mainstream, sophisticated, long-term investors buying into the SunPower business plan," Werner says.

One reason for the optimism is that when you take federal and state subsidies into account, solar is already competitive. SunPower offers some commercial customers a deal that sounds too good to be true - no upfront costs, instant savings on their electricity bills, and long-term price stability.

That's because of a financing mechanism known as a power purchase agreement, or PPA, that's increasingly popular in the solar business. Instead of making a capital investment of $1 million or more in solar panels, a big customer like Wal-Mart can sign a ten- or 20-year agreement to buy at a fixed price electricity generated by the solar panels on its roof. Ownership of the solar installation is retained by SunPower or sold to an institutional investor.

No wonder retail customers are clamoring for more: When Wal-Mart entered into PPAs with SunPower, BP Solar, and Sun Edison covering a total of 22 sites in California and Hawaii, David Ozment, Wal-Mart's director of energy, said the retailer would begin saving money "as soon as the first day of operation."

Can homeowners obtain such risk-free deals? Sadly - annoyingly - no. They can, however, recoup some of their capital costs in states with "net metering," a policy that requires utilities to credit their customers for electricity they supply to the grid. So, for example, on a sunny day, if a house is empty and not running air conditioning, the homeowner's excess electricity goes back to the grid, and the utility prorates the bill. The meter literally spins in reverse. (For a home solar primer, see "This old solar-optimized house.")

Because demand for electricity frequently peaks during hot summer days, utilities benefit, since they can buy solar electricity from thousands of homeowners and won't need as many power plants. That at least is the radical vision of solar enthusiasts, who note that the supply of solar energy is inexhaustible and available to literally every nation under the sun.

Indeed, to overcome a major drawback of solar power - that it's available only when the sun is shining - some dream of building a global power grid so that the sunny side of the earth could supply the dark.

Well, maybe someday. But the more immediate task for SunPower and its rivals is to drive down costs so that solar energy can compete with fossil fuels and nuclear power without subsidies. Rodgers welcomes that fight - he'd like the government out of the energy business entirely. Werner says SunPower can cut its costs in half by 2012, getting the price of solar down to about 12 cents a kilowatt-hour - reaching grid parity with much of the nation.

For Swanson, who has spent his adult life working on solar power, more is at stake than the company's future. He's looked at the science of climate change and has visions of diasporas, conflicts, and starvation. "Given the huge downside risk," he says, "I can't understand how one cannot be worried."

Late in September, more than 10,000 people gathered in Long Beach, Calif., for the solar industry's big annual conference. (The same event drew only 800 people just three years ago.) They listened to celebrities like Ted Turner and Larry Hagman, pondered a dizzying array of solar products and technologies, and buzzed about takeover rumors and rising stock prices.

Could the excitement over solar power turn into another bubble? Credit Suisse's Cavalier, who's been in the energy business for 24 years, doesn't think so. "The reason I do not believe it is a bubble is that I honestly believe that climate change and greenhouse gases are not going away," he says. "And there are a lot of cars yet to be driven and a lot of lights still to be lit all around the world."

We've seen one silicon revolution - it brought us PCs, the BlackBerry, and the iPod. Maybe a second is just around the corner.  Top of page