Alternative Energy: Powering Up Solar

Carmanah's Art Aylesworth thinks now is the perfect time to consolidate the solar tech sector.

For many living in central Canada this summer, the heat was intolerable. In Windsor, Ont., the temperature rose higher than 30ûC on 45 occasions over June, July and August. Ontarians cranked up the air conditioners to compensate, and generation stations in the province struggled to keep up. They couldn't, forcing the provincial government to import expensive out-of-province electricity to fill the demand. All this raised a counterintuitive notion in a northern climate: was there too much sun this summer?

For Art Aylesworth, CEO of Carmanah Technologies Corp., a Victoria, B.C.-based company that manufacturers solar-powered devices, the idea there might be too much sun is a dim one. The sun, source of the heat that threatened to cause blackouts this summer, is the thing, in Aylesworth's opinion, that will get us out of this energy mess. “There is actually more than enough energy in this country,” he says, during an interview in Toronto.

Which is an interesting suggestion in a country facing rising energy costs. It's been said so many times since the '70s–solar power is going to be huge–that the chant has become almost meaningless. But the good word about solar is being heard again these days, now that oil is up around US$70 and seems set to trade in a higher permanent price band.

There are a couple of facts those in the solar industry like to quote. According to the Solar Energy Society of Canada, the sun showers the earth every hour with more energy than the world's population consumes in a year. And the Canadian Solar Industries Association says the amount of solar energy across a region of 15 square kilometres is equal to the energy capacity of all the nuclear power plants in Canada. Lack of energy, from this perspective, is the least of our worries. We only need to figure out better ways to collect and distribute it.

Someday, at least. As it is, solar is still generally uncompetitive with grid-provided electricity. One estimate put together by San Francisco-based research consultancy Solarbuzz Inc. put the cost of residential solar in August at 37.57¢US per kilowatt hour. That's much more than the 9.52¢ that Ontario's Independent Electrical System Operator was quoting as the average weighted hourly cost of electricity in August. Aylesworth thinks it will be 10 to 15 years before solar is competitive with fossil fuels, but that could happen faster if the political will to support solar is there.

Keep in mind, Solarbuzz's estimate is the cost of “on-grid” mainstream electricity. There are lots of other niches out there that can benefit from solar, and that's where Carmanah is finding success. The company is a serious global competitor in the provision of solar-powered LED lights for industrial use, lighting bus-stop shelters, street signs and so on. Carmanah recently ranked 36th on Profit magazine's list of Canada's fastest-growing companies, with revenue growth of 1,246% since 1999. Carmanah products are installed everywhere from bus shelters in Seattle to lights on remote airstrips in the Middle East.

The company has benefited mightily from advances in LED technology. LEDs are sources of light that don't require a filament; instead, electrons, activated by computer chips, produce light. Recently, scientists have been able to squeeze higher light output and more colours from LEDs, enabling the low-power light source to be effectively coupled with solar power. Carmanah, which reinvests 7% to 10% of total revenues in R&D, uses this advance to produce products that fill peculiar niches: lights that are not hooked up to the power grid and don't require much maintenance. “We engineer out cost and engineer in quality,” says Aylesworth. He backs up that boast with numbers. Year-to-date net earnings are about $650,000, 6% of sales, for the first six months of the year. That's up from earnings of $213,000 in 2004, when profits were just 3% of sales.

No wonder analysts and investors like Carmanah. The company's stock, listed on the TSX Venture Exchange (TSXV: CMH), recently hit a new high of $3.26 this past July. “They are in a fabulous area of the market,” says Sara Elford, an analyst with Canaccord Capital in Vancouver. “It's always nice to find a [startup] company that's not burning through cash and is in an area of significant growth.”

But the LED-solar combination is just the beginning, according to Aylesworth, who wants to steer Carmanah into the acquisition lane. Oil around US$70 a barrel, he says, means the cost of solar is coming down, relative to traditional energy sources; he wants Carmanah to ride the consequent growth in the sector by consolidating what is currently a highly fragmented, regionalized industry. “The higher the price of oil, the cheaper solar becomes,” points out Aylesworth. “There is an opportunity in being a consolidator of many of these small individually run businesses.” He thinks they could benefit from the economies of scale.

In July of this year, the company acquired Soltek, this country's major supplier of self-contained solar systems for cottages, remote industrial complexes (say, an oil rig) and RVs. The acquisition effectively doubles the company's revenues, which for the first six months of 2005 were $11 million, making Carmanah one of the major players in Canadian solar.

A consolidation play will be tough. Venture capital is newly interested in the sector–blue-chip Silicon Valley heavyweight, Kleiner Perkins Caufield & Byers is one–as have large energy companies, such as BP, through its subsidiary, BP Solar. There are also concerns it may be premature to consolidate. Elford, for one, questions whether solar tech is ready for that. “[Consolidators] usually appear when the market matures; I don't think this industry is there yet,” she says.

Nevertheless, she is impressed by Aylesworth's attitude. “You don't get CEOs putting their neck on the line like that,” says Elford. That's what many like about Carmanah. The company is moving aggressively in an industry where the fundamentals are changing in its favour; it's already calling 2005 a breakout year for its solar-powered bus shelters, which have generated $1.8 million in sales this year alone. Talk about sunny weather.

Here Comes The Sun
Companies worldwide are converting hot sun to cold cash.

Once again solar is on the rise, say sustainable-energy gurus. Ira Ehrenpreis, a partner at Technology Partners, a Palo Alto, Calif., venture capital firm that invests in clean energy technology, confirmed this to the New York Times earlier this summer, stating: “The reason we're allocating dollars to this sector is we think we can deliver attractive returns.” Of course, they've been saying that for years. But with oil around US$70 a barrel, there is good reason to think the clouds may be lifting on this niche industry.

So who are the players? When it comes to solar-equipment manufacturers, the Japanese are the global leaders, responsible for some 50% of the solar cells made around the world. Among the big players: Sharp, which claims to be the largest solar-cell manufacturer in the world; Sanyo; Sekisui Chemical; Mitsubishi Electric; Asahi Glass.

Also dominating the solar industry are the solar divisions of Big Oil giants like BP and Shell. BP Solar employs more than 2,000 workers in the manufacturing, marketing and installation of solar systems, and maintains manufacturing facilities in the U.S., Spain, India and Australia. Shell Solar is headquartered in Amsterdam and has about 1,300 employees. The company recently announced it will build the biggest solar photovoltaic plant in the world near Pocking, Bavaria, to consist of some 62,500 units and provide electricity to almost 3,300 households.

The biggest dedicated solar companies include SolarWorld AG (Frankfurt: SWV). This German manufacturer, which makes solar panels, posted revenues of Û200 million ($294 million) last year. Q-Cells AG, another German company, has started construction on a new manufacturing facility in Thalheim, Germany, in partnership with Evergreen Solar (Nasdaq: ESLR), a Marlborough, Mass.-based company.

In Canada, Vancouver-based Xantrex Technology Inc. (TSX: XTX) makes the power electronics needed to convert energy from such items as solar cells and wind turbines into high-quality power. The company generated US$35 million in revenue last quarter, a 7% increase over the same quarter in 2004. Further down the list are niche product manufacturers, such as EnerWorks Inc. of Dorchester, Ont., a manufacturer of solar hot-water-heating units designed to work in conjunction with a home's existing hot-water system. And ICP Solar Technologies Inc., a Montreal-based provider of consumer solar products, makes the truly cool solar-powered jacket that can charge your PDA.