CleanBeta

Is the Sun Setting on Solar Energy?

A wave of solar-energy companies are scrambling to adjust to the lingering credit crisis in capital markets. While investors and analysts are still bullish on the sector’s long term prospects, the next year or two could see a major shake up in the crowded solar energy space.

The looming threat of global warming and soaring energy prices have attracted vast amounts of capital into clean energy companies in the past few years. In 2007, the sector attracted $2.2 billion in venture-backed investments, up 45% from 2006. Biofuels production jumped from 4.9 billion gallons in 2006 to roughly 6.5 billion gallons last year. Meanwhile, in 2007, the United States added 314 megawatts of new solar energy systems to the grid, up by 125% from the previous year.

Although wind power remains the undeniable leader in clean energy generation, solar energy has become the most visible symbol of the sector’s emergence and a favorite of many investors. In the past two years, solar energy has become an especially hot spot in the clean energy sector. In 2007, solar energy start-ups raised the lion’s share of new investments in the sector, or roughly $600 million in capital raised in 39 deals.

And then the party came crashing to a halt, courtesy of the credit crisis. The question is: how bad will the hangover be? Or, more importantly, how long will it last?

The energy game is ill-suited to the stereotypical garage inventors who sparked the internet revolution. The key difference is that technological innovation is a very small part of the picture. Future generations of solar energy technologies will achieve cheaper and more powerful equipment, but a number of solar energy technologies are ready for prime-time today even without those improvements, especially in states like California where government policies have given them an added boost.

The relentless pursuit of technical improvements has brought solar and wind power prices down enough to compete with conventional energy generation technologies in many markets. Success in both wind and solar energy depends on scale, or the ability to lower costs by producing large amounts.

The trouble is that a number of solar energy companies have major projects in the pipeline that seek to scale up their operations to commercial size. In other words, they need to find a sizable chunk of change in the tightest credit conditions seen in decades. The bottom line: energy projects depend on scale and scale depends on capital.

“Unless you can scale it, it doesn’t matter,” said Vinod Khosla while speaking at MIT last week.

A generation of promising start-ups are trying to scale up operations at the very moment it has become difficult to find the money to do so. Credit is tight and cash is still more so. Several companies have pulled the plug on planned IPOs. In January, Imperium Renewables, a venture-backed biodiesel producer that operates the largest biodiesel plant in the US, shelved IPO plans to raise as much as $345 million, citing “current market conditions.” Last week, Germany’s solar energy start-up Schott Solar, which originally planned to announce its offering price range on Sunday, decided to delay its IPO until credit conditions improved.

To make matters worse, the collapse of the investment-bank Lehman Brothers has become a liability for many solar energy companies. In recent years, Lehman had become a principal underwriter for solar energy companies raising money or financing debt to build factories and solar farms.

Evergreen Solar, a solar panel maker in Marlboro, Mass., appears particularly vulnerable to Lehman’s collapse. Evergreen loaned Lehman Brothers 30.9 million shares of its common stock in a recent deal with Lehman to help the company raise more than $375 million through an offering of senior convertible notes.

If these devaluations accelerate, the sector could see a wave of consolidation or significant investment from much larger companies like industrial giant General Electric. This has already begun to some extent. In 2007, Chevron-Texaco’s venture capital arm bought significant stakes in two solar energy companies, including BrightSource Energy, a developer of utility-scale solar plants, and Konarka Technologies, a developer of photovoltaic materials.

The bad news for solar energy companies is that the credit crisis will likely claim several casualties in the clean energy sector. The good news is that those who can stick out the downturn will likely do as well if not better than originally expected in a few years from now. In a poll of nearly 300 venture capitalists, corporate buyers, bankers and entrepreneurs, 79% of the respondents expect “a strong stream” of IPO activity to begin in 2010 or later, according to a recent survey by the auditor KPMG.