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Venture capitalists embrace solar energy

The solar industry is benefiting from a new breed of enthusiasts: venture-capital firms interested in a different type of green.
/ Source: The Associated Press

When Rusty Schmit landed his first job 25 years ago as an engineer for Motorola Inc., he was given a choice: specialize in weapons or solar power.

"I thought about it for a nanosecond and chose solar," he said, adding that the writings of militant conservationist Edward Abbey _ not dreams of fast cash _ encouraged him to take the environmentally friendly route.

These days, the chief executive of solar-cell maker Advent Solar Inc. is benefiting from a new breed of solar enthusiasts: venture-capital firms interested in a different type of green.

Schmit's closely held Albuquerque concern pays the bills using more than $15 million in venture funding from Battery Ventures VI LLP, which overlooked the booming oil and gas market to make its first energy investment in solar power last month.

The $2 billion Wellesley, Mass., venture-capital firm isn't the only one warming to the renewable-energy niche.

In the first three quarters of this year, U.S. venture-capital firms funneled $67.7 million into the solar-energy sector, up from $31.4 million for all of 2004, according to the National Venture Capital Association, an Arlington, Va., trade group.

That's more than 30 times the amount invested 10 years ago and presents more evidence that record-high energy prices have incited a monumental push for cheaper forms of energy.

The NVCA says solar investments for the first three quarters of 2005 represented more than a third of the $194.6 million invested by venture-capital firms in the entire U.S. energy industry.

Two-year turnaround
Just two years ago, solar-power companies — which now lead the renewable energy sector — struggled to turn any profit.

"I have not seen a more beautiful example of rapid expansion of cash flow of any sector I've looked at and it looks like it will continue for the next few years," said Michael Rogol, a solar market analyst for CLSA Asia-Pacific Markets, a brokerage firm of Credit Lyonnais for large institutional investors.

Consumer demand has played a critical role behind the boom. In an effort to combat steep fuel and electricity bills — a result of scorching oil and natural gas prices — an increasing number of homeowners are snapping up solar panels.

"What we have seen globally is that most installations take six months or longer from the time of ordering," Rogol said. "Order books are full, so it isn't hard to evaluate the sector, because everything is sold out."

The CLSA analyst predicts supplies will remain tight until at least 2008.

Demand for solar panels in Europe and Asia has blazed ahead of the United States, with Germany in the lead.

But California has a waiting list and orders have spiked in states such as Arizona, Vermont, Massachusetts, Oregon, Washington and New Jersey.

"There are so many people looking to buy them," said Brigitt Hoey, spokeswoman for solar panel vendor New Jersey Solar Power LLC, in Bayville, N.J. "The industry in New Jersey is growing about 500 percent a year."

The panels cost about $25,000 for a typical family home, but government subsidies can pay for up to 50 percent of that.

Unlike energy-price shocks of past decades that were often driven by transient events — such as the Arab oil embargo and Iranian revolution of the 1970s — the latest round of high prices isn't seen abating anytime soon.

That gives well-heeled investment firms time to develop strategies and cash in.

With oil prices now hovering near $60 and energy giants such as BP PLC, General Electric Co., and Royal Dutch Shell PLC developing their own renewable-energy divisions, private investors are expected to continue writing big checks.

Finding that needle
Despite solar's newfound brawn, the industry isn't for the faint of heart, says Ken Lawler, a partner at Battery Ventures.

He likens the hunt for a good renewable-energy investment to "finding a needle in a haystack."

"It's difficult to find a company with a competitive advantage and with technology that's fairly near to market," he said. "In short, there are a lot of science projects out there."

Advent, founded in 2002, makes photovoltaic solar cells and solar modules that convert sunlight directly into electricity. It has yet to generate revenue and its products won't become commercially available for an estimated 18 months.

This year, solar-energy companies are on track to rake in an estimated $12 billion in revenue worldwide, up 50 percent from 2004, according to Rogol. By 2010, he expects that figure to more than triple to $40 billion.