For solar power, the future looks bright

Solar energy is now very real. And at hot companies like SunPower, the 'green' that matters is money - by the billions, writes Fortune's Marc Gunther.

By Marc Gunther, Fortune

(Fortune Magazine) -- Several years ago a solar-powered, propeller-driven unmanned aircraft named Helios took off on a test flight from the Hawaiian island of Kauai. NASA had designed Helios to be powered all day by sunlight and all night by fuel cells. The "eternal airplane," it was called.

Alas, Helios failed to live up to that inspired bit of branding. Thirty minutes after takeoff, the $15 million flying machine broke up and fluttered into the Pacific Ocean. "It was kind of sad," recalls Dick Swanson, who designed the solar cells on Helios, "although in retrospect it wasn't a technology that has much practical value."

Rodgers is a rarity: a caustic enviro-skeptic and alternative energy tycoon.
Swanson, an ex-Stanford prof, spent years on solar tech.

Swanson, a brainy, soft-spoken 62-year-old engineer, gave up a tenured position on the faculty at Stanford to start a solar-energy company in 1985. Since then he has watched other bright ideas and impractical plans come crashing down - that was the story of the solar business for years.

His company, SunPower, was no exception. It lived off research grants and boutique assignments, like making solar cells for a Honda automobile that won a 1,700-mile race across Australia. "We did anything we could to survive," Swanson says.

Today, like the rest of the solar energy industry, SunPower is heating up. With electricity prices rising, worries about global warming mounting, and the cost of solar energy falling, the business of making electricity from the sun is about to go mainstream in a big way.

The Holy Grail of solar is a concept called "grid parity" - meaning that it costs no more to generate your own solar energy than it does to buy electricity retail, off the grid - and there's smart money betting that solar will get there soon. In the case of SunPower, that money comes from a legendary Silicon Valley character named T.J. Rodgers, whom we'll meet shortly.

Once given up for dead, SunPower (Charts), which makes and installs solar photovoltaic panels for businesses and homes, expects to generate revenues of $1 billion to $1.2 billion and profits of $146 million to $162 million next year. Its customers include Wal-Mart, Johnson & Johnson, Microsoft, Macy's, Tiffany, FedEx, Toyota, Target, Lowe's, the governor of Colorado (who has solar panels on the roof of his mansion), and the Department of Defense (which uses solar energy to power Nellis Air Force Base in Nevada, but not its planes).

Since going public two years ago, SunPower's stock price has grown by about 450%, from $18 a share to $82 when Fortune went to press, giving the company a market capitalization of nearly $7 billion. That's a little bigger than Whole Foods Market.

While the solar industry as a whole remains small - less than 1% of the electricity in the U.S. - it's exploding. The market for solar photovoltaic (PV) panels, which use cells made of crystalline silicon to turn sunlight into electricity, has grown by an average of 42% annually since 2002. Industry leaders, most based in Japan and Germany, are ramping up production, as are Chinese manufacturers like Suntech, whose founder and CEO, Dr. Zhengrong Shi, is one of China's richest men.

Big companies, including BP (Charts), General Electric (Charts, Fortune 500), Mitsubishi, Sanyo, Sharp, and Shell (Charts), all want to grow their solar businesses. In Silicon Valley, meanwhile, venture capital investors like John Doerr and Vinod Khosla, entrepreneur Bill Gross, and Google founders Larry Page and Sergey Brin are backing startups that claim they will revolutionize the industry.

According to John Cavalier, who is chairman of the energy group at Credit Suisse, the market value of the world's publicly traded solar companies stood at about $1 billion in 2004. Now, after a slew of IPOs, they are worth about $71 billion. If the U.S. enacts legislation to counter global warming and it adds to the cost of making electricity from coal, natural gas, and oil, solar energy will be among the winners. "The opportunity for solar companies is absolutely tremendous," Cavalier says.

An industry leader

SunPower stands out for several reasons. It's arguably the leading U.S. solar company, its solar cells are currently the industry's most efficient, and it is vertically integrated, meaning that it makes both its solar cells and the panels on which they are mounted, and designs and installs systems for customers.

Little known outside the industry, the company wants to build a consumer brand. "We'd like SunPower and solar energy to be synonymous," says Tom Werner, the chief executive.

At least two things stand in its way. The first is competition, of which there is plenty. The solar PV industry remains fragmented, with as many as 100 manufacturers working to drive down costs. Sharp is the leading one, followed by a German firm called Q-Cells, Kyocera, Suntech, and Sanyo, with SunPower ranked tenth, according to Paula Mints, principal analyst for solar with Navigant Consulting's PV Service Program.

The other obstacle facing SunPower and the industry is that it still costs too much to make electricity from the sun. Prices vary widely, but it costs about 25 to 35 cents to produce a kilowatt-hour of electricity from solar; retail electricity prices average 11 cents in the U.S. but can be twice that in parts of California, New York, and Connecticut.

Today's biggest markets for solar PV are Germany and Japan, with the former accounting for more than 50% of global demand. That's not because it's always sunny in Düsseldorf; it's because government policy requires utilities to pay above-market prices for solar-generated electricity.

"Absent incentives, I don't think there would be a solar business today," says Stephen O'Rourke, a Deutsche Bank research analyst. But O'Rourke believes that solar PV, without subsidies, could reach grid parity in much of the U.S. in four to eight years. "No technological breakthroughs are required to get there," he says. "It's a matter of incremental improvements." And when it happens, it will be huge.

"I am interested in green," T.J. Rodgers declares. "I have shareholders." The unlikely savior of SunPower, Rodgers is the pugnacious 59-year-old CEO of a Silicon Valley chipmaker called Cypress Semiconductor (Charts). He is also a staunch opponent of government subsidies and skeptical about global warming.

"The group that is most vehement about global warming represent to me some of the worst people in the world," Rodgers tells me when we meet at Cypress's headquarters in San Jose. "I dislike them so much, it's difficult to listen to what they say objectively." What about Al Gore? "I wouldn't trust Al Gore as far as I can throw him, which isn't very far - he's gotten a little hefty since he left office."

And CEOs like GE's Jeff Immelt, Wal-Mart's Lee Scott, and Peter Darbee of PG&E, who worry about climate change? "Every one of the names you just mentioned would flunk his ass in the most rudimentary test about global warming." Rodgers notes that he and Immelt both went to Dartmouth. (Rodgers is a trustee, currently battling the college administration over who elects the board.) "Jeff Immelt played football," he says. "I graduated No. 1 in physics."

All righty then. Let the record show that Rodgers did not rescue SunPower to save the planet. He did so because of Dick Swanson and because he believes there's money to be made from solar power.

Rodgers and Swanson were Stanford grad students together in the 1970s, when both studied with Nobel laureate William Shockley. "There are few people in my life who I run into who are clearly smarter than me," Rodgers says. "At Stanford there were two: Shockley and Swanson."