Ditch Solar Manufacturing, Look to Software, Services

Where can solar startups find opportunities when their playground is increasingly dominated by giants from other industries? That’s a question that some Silicon Valley solar company executives and investors have pondered for some time now, and manufacturing no longer seems a profitable pursuits for many.

Consider this: The biggest news announced around Solar Power International in Los Angeles this week has come from the likes of General Electric (s GE) and LG. GE has been vocal about its interest in the solar market, and on Tuesday, it outlined precisely when it can offer products and services and what they will be. It plans to start rolling out cadmium-telluride solar panels via Colorado-based PrimeStar Solar (GE is its biggest investor) in 2011, and it’s now offering copper-indium-gallium-selenide (CIGS) panels from Solar Frontier of Japan. Don’t forget GE is also selling inverters and its project engineering expertise.

LG also announced Tuesday that it’s coming to America to sell its several lines of silicon-based solar panels. It plans to invest $820 million in research and manufacturing over the next five years to generate billions of dollars in revenue during the same period. Meanwhile, Hyundai Heavy Industries, the big shipbuilder in Korea, said Monday it would build a 400-megawatt CIGS solar cell factory in its homeland with a French partner, Compagnie de Saint-Gobain, through a joint venture called Hyundai Avancis.

The encroachment of the conglomerates, combined with the rapid growth of the Chinese solar companies in recent years, has made venture capitalists and Silicon Valley startups rethink their strategies. In manufacturing, there really isn’t much room for new comers who dream of building massive factories. The days of new Nanosolars and Miasoles emerging in 2010 are over. Private investors aren’t so willing to part with their money, and too many manufactures are vying for government subsidies.

Damoder Reddy, co-founder and CEO of venture-backed Solexant, said investors are “extremely shy” about investing in solar manufacturers, particularly since many of their solar investments haven’t paid off. Reddy is still on a march to build his first full-scale factory. Solexant, which prints nanocrystal form of cadmium-telluride compound on metal foil and then sandwiches the cells in glass, is planning a $40 million, 100-megawatt factory in Oregon.

Contract manufacturing and intellectual property licensing will increasingly become an important part of the business models for Silicon Valley technology developers, just as they did for semiconductor startups in the last 20 years. Some solar startups already are moving in that direction. Stion, while building its own factory, also has signed a deal with Taiwan Semiconductor Manufacturing Co. to make its CIGS panels. (TSMC rose to prominence because chip startups could no longer afford to build their own factories.) Innovalight ditched its solar cell manufacturing plan and began selling silicon ink that can boost power generation of solar panels made by the likes of JA Solar and Yingli Green Energy.

Manufacturers that are already producing lighter-weight solar panels that can carpet flat roofs without racks or be built into roofs and other construction materials can still gain a first-move advantage, mainly because it’s a space that many larger manufacturers don’t want to invest in right now. State incentives that encourage adding solar to new homes help to promote these building-integrated photovoltaic (BIPV) products, which don’t stand out nearly as much as conventional solar electric system erected on the rooftops. Success in this field will depend largely on the interest of builders and roofing and other building material companies.

A change in California’s solar incentive program earlier this year allowed builders to bring in a partner who can finance and own solar electric systems on new homes, and that opened up new opportunities for BIPV offerings, said Tom Harvey, director of sales and marketing for SunRun, which has financed solar shingle installations in a new Southern California community built by Toll Brothers. SunRun charges homeowners a monthly fee for using the solar electricity.

The builders “are more concerned about aesthetics. Price isn’t as important as ensuring that their homes look a certain way,” Harvey said.

SunRun also offers an example of the opportunities that haven’t been fully explored. Solar, unlike the chip industry, sells not just goods but also services. Companies like SolarCity are expanding their services to include energy auditing and installation of solar water heaters and other equipment to make homes and businesses use energy more efficiently. Hybrid systems that can generate solar electricity and thermal energy to heat and cool buildings also seem promising.

Valuable services will require innovative software for everything from engineering and installing to monitoring and maintaining solar electric systems. There’s room for companies that can develop good software to help consumers and businesses manage their solar electric systems and overall, monthly energy consumption and expenditures. Some companies developing home energy monitoring gadgets and software are already eyeing this opportunity, but the market is too new to have created clear winners.

For more research, check out GigaOM Pro (subscription required):