Thursday, June 17, 2010

Solar: Vinod Khosla: "What Really Matters in Thin Film Solar Startups?"

From Greentech:
Venture capitalist Vinod Khosla opines on thin film solar and the potential of “new Black Swan improbable pyro-nano-quantum-thingamajig technology.”
Thin film modules have always promised to disrupt the PV industry landscape because they utilize significantly less material and vastly simpler processing than traditional crystalline silicon panels. Thin films have pushed new cost and scalability frontiers.  Unfortunately, many have relatively low efficiencies and yields. Most current thin-film startup efforts do not appear differentiated enough to justify the hundreds of millions invested in them.

Today, the industry's number-one panel manufacturer is a thin-film company, First Solar. First Solar (FSLR) has consistently demonstrated industry-leading manufacturing costs and margins. It has reached module costs of $0.80 per watt and is on a path to $0.50-0.60 per watt, with capex well below $1 per watt that is declining with scale, using a highly replicable production platform. It has grown from 25 megawatts to 1.3 gigawatts of annual production capacity in just five years, while operating with gross margins above 40 percent compared to 20 to 30 percent for most industry companies. With FSLR’s 10 to 12 percent efficiency as the benchmark , any startup, in my view, needs to show 13% efficiency now and a clear path to 15 percent or more efficiency at 90 percent production yield by 2011-12 on large sized monolithic panels to carve out a stable place in the marketplace. Of course they need to concurrently meet FLSR costs too, at much smaller scale (< 100 megawatt) in 2010, unless they have hundreds of millions of dollars of "staying power".  Only with these targets can they claim "superior technology".

Having evaluated dozens of ventures among the 100+ (estimate!) that have started up in the sector and observed disruptive innovations across many industries, I have no doubt that First Solar will face competition more quickly than anybody expects.  New materials, quantum dots, cheaper capital equipment, lower installation costs, fast CVD, nanoparticle coatings, organics, finely controlled bandgap shifting, light splitting into colors, dual and triple junction cells, intermediate band cells, enhanced absorption coefficients, better or cheaper light concentration, wavelength shifting, nanoparticles, even pyro-electric supplementation, foils, flexcells, BIPV and a million other loony or brilliant schemes have all been or are being attempted. Most will fail to meet the cost and scalability challenge, but a few will succeed. In the meantime, more importantly to current investors and to me, it appears that many (most?) of the high profile thin film startups will also fail to get enough of an advantage to overcome First Solar's head-start on scale, manufacturing optimization, experience learning and cost. They will fail to compete in the near future, and by the time they get to their "second generation," a new Black Swan improbable pyro-nano-quantum-thingamajig technology will disrupt their new plateau.

To this point, many of the Silicon Valley thin-film start-ups have raised hundreds of millions of dollars quickly in an attempt to take on the crystalline incumbents and First Solar. Unfortunately, most have suffered serious technical challenges and yield/reproducibility issues, and have been unable to scale up or hit their cost objectives. I believe most, including the most visible ones, are unlikely to.  From an investor's point of view, it is not fun when a start-up uses $300 million to $1 billion in capital to achieve a $1 billion dollar market cap, as A123 has done and some thin film startups are struggling to do. Raising more venture funding is something that companies boast about, but generally is a negative from the investor's perspective. It is hard to get  a multiple of invested capital if $300 million to $1 billion has been raised by a thin film startup, to barely get to the incumbents cost structure when Sunpower is  trading at similar valuations. Using three hundred million dollars usually reflects poorly, not favorably, on the management team unless the platform is already in production at high yield on large panels at cost and performance that more than marginally beats the incumbent. I have not yet seen a thin film startup show this kind of cost/performance advantage over FSLR yet.  
>Temporary advantages that short-sighted entrepreneurs target should be approached cautiously even if market entry seems fast.  VCs backed many companies focused primarily on addressing the high cost of poly-silicon that resulted from material shortages starting in 2005.  By 2008, the poly-silicon shortage disappeared, and today the viability of numerous thin film vendors whose business models were based on high silicon prices is in serious jeopardy.   Personally, I don't think any technology from a startup (leaving aside some larger companies with very deep pockets and operational expertise) below 13 percent efficiency (First Solar++) in 2010 (15 percent by 2011-12) will carve out a sustainable market position in a large niche, no matter what its cost is. The balance of system (BoS) costs, which are about half of the total installed system cost today, simply become prohibitive at lower efficiency. I am even skeptical of some startups expecting to command very high price premiums because they have lower installation costs. A few tens of cents per watt advantage may be conferred or some specialty market niches may make sense but broad market penetration is unlikely. Even BPOS advantages will not support an extra $0.50-100 per wat in larege market segments. Of course, specialty markets such as building integrated photovoltaics (BIPV) or satellite cells have their own set of rules.

In addition to having undifferentiated products, many thin-film start-ups also suffer from relying heavily on highly customized or self-designed production equipment to deposit the films and reach long term cost targets.  As a result, their capital cost is substantially higher as they struggle to replicate the skills of Applied Materials and other equipment vendors. Just as Applied Materials will struggle to develop a cost-effective solar cell process, solar cell vendors will struggle to develop the equipment expertise that Applied Materials has acquired through decades of learning.  I personally expect that any startup that is developing their own manufacturing equipment will have a large gap between the promise of a technology and delivery time and its reality; those promised cost advantages will be hard to come by.  Anecdotal feedback from the field seems to support this skeptical point of view to date.  To achieve low prices, it is not enough to have low costs; you also need to scale quickly to amortize the massive capital investments required.  Fast growth is only possible with a process that uses tested equipment, and with a proven material supply chain.  An investor must be wary of an overly innovative and complicated process that uses custom equipment or the invention of a new supply chain. Some of the technologies with custom approaches/equipment like the foil guys or other custom cell configurations have ended up with significantly more complex process steps as well as reproducibility and yield issues. This further undermines their ability to hit cost targets/projections and no startup has shown ability to overcome these limitations. Projections are easy but achieving them in unique, complicated processes is hard. If they don't have 90 percent yield on a 10 megawatt pilot line six months after starting the line, they likely will struggle for a while getting it. On the other hand, a standard process invites direct competition by low-cost producers resulting in severe margin pressure. We at Khosla Ventures have generally preferred large material innovations to equipment/process innovations for this reason....MUCH MORE