Sunday, July 14, 2013

Alfidi Capital Checks Out SEMICON West and Intersolar North America 2013

I spent this past week hanging out at SEMICON West / Intersolar North America 2013 here in San Francisco.  I had a whole bunch of fun at this combined show in 2012 and I couldn't wait to go again.  Engineers and other nerd types probably went all gaga at the acres of gadgetry on display.  I'm a lapsed nerd who never got far enough into tech to make it a career, so I stick to the business-oriented panels and workshops at these types of events.

I only got the free expo pass but that's good enough for my needs.  The technical panels that required paid tickets were for industry practitioners.  I missed the opening day Intersolar welcome addresses from Gov. Jerry Brown and Mayor Ed Lee due to a previous commitment but I did hit up the welcome reception at the InterContinental San Francisco.  Man, that was some juicy turkey they carved up with my free drink.

The opening SEMICON West keynote was all about foundry-driven innovation in the mobility era.  I was impressed that the keynoter polled the audience and updated his poll result slide in real time as people were voting via texts.  I guess if anyone could pull that off, it would be a bunch of tech executives.  It was interesting to learn that the mobile market is driving increases in silicon consumption now that the PC market is flattening.  I attended Mobile Commerce World 2013 a couple of weeks ago.  I think the semiconductor industry will be pleased to know that the entire retail sector is about to make multi-year investments in WiFi, smart sensors, POS terminals, and other things that will inundate every store with silicon.  I also sense that smartphone makers will be challenged by the power consumption requirements that are key to smartphones' data management ability and screen resolution.  I had heard others at this SEMICON mention the likelihood that Moore's Law will slowly lengthen in time as processors reach physical limits.  These folks must know that MIT's Technology Review posited a connection between Moore's Law and Koomey's Law for the amount of electric power that can power devices, subject to the limits of battery chemistry.  The keynoter also noted that semiconductor manufacturing capacity gets strained when a new demand node for semiconductors (i.e., smartphones) debuts.  The number of high-volume semiconductor manufacturers in the world is very small, and I presume they forecast demand fairly accurately.  The keynoter made an interesting point about how the longer life cycle time of more advanced technology drives the complexity and cost of semiconductor products, with risk increasing and product life cycles compressing faster than ever.  I think the solution to this trap lies in the application of less complex technology that scales out in any increment, small or large, mass or custom.  I'm referring specifically to the open-source standard known as Arduino, something I discovered when I visited Maker Faire 2013.  There are product functions where complexity adds diminishing marginal returns past some point and Arduino is ideally suited to fill gaps between simple products and hugely complex systems.  The keynoter's final points about the complexity of the ecosystem supporting foundry labs actually reinforces my own point.  Open-source DIY solutions will fill demand for semiconductor products that cannot be profitably made in complex foundries.

I had every intention of alternating between SEMICON and Intersolar presentations.  I had to check out the SolarTech talk on leveraging DOE's soft-cost reduction programs.  "Soft costs" are anything not attributed to hardware in a solar power system.  Clean Power Research has found that even after large drops in PV panel costs, soft costs are not decreasing.  Lawrence Berkeley National Laboratory's Electricity Markets and Policy Group has studied the impact of soft costs such as city-level permitting costs.  RMI and Georgia Tech are studying the soft cost differential between the US and Germany.  DOE's SunShot program has found that costs decline as the number of installed systems increases, but that decline is probably due to economies of scale in hardware rather than any soft cost improvements.  That's why DOE's Rooftop Solar Challenge is testing methods for reducing soft costs nationwide.  DOE is also backing the Solar Roadmap of local soft cost reduction methods.  The Solar Foundation has counted 119,000 jobs in the solar sector, providing justification for politicians who need "job creator" cover for solar-friendly policies.  The Interstate Renewable Energy Council has developed Model Interconnection Procedures that encourage utilities to standardize their rules for installing solar power connections.

The SolarTech presenter mentioned that long timelines for "permission to operate" (PTO) mean that money committed to a purchasing power agreement (PPA) sits on a rooftop without generating energy.  I did some digging on PTO and found that some jurisdictions require a revised PTO application if the system configuration is changed.  An owner who wants to add panels needs a new application?!  Let's add wasted time to the soft cost of installation.  Third party ownership (TPO, not PTO folks) is changing the finance game by allowing investors to finance new solar systems independent of the properties where the systems reside.  Property owners can relax if another investor is responsible for submitting PTO applications and negotiating PPAs.  TPO isn't the only innovation in solar finance.  NREL's project finance team pushes a host of finance initiatives in credit enhancement and securitization.

My final note on the SolarTech keynote is that their Solar 3.0 program is alive and well but IMHO it won't be enough to push standardization of zoning, permitting, and connection rules.  The renewable energy sector needs to piggyback on the utility sector's smart grid movement if it wants to see standardization.  Smart grid adoption will drive harmonization of data transfer protocols that are crucial to energy metering.  Connectivity standards will follow naturally.  Renewable developers need a seat at the table when utilities make their push for smart grid adoption with municipalities.

I flipped the switch back to the SEMICON side of things and went to the Silicon Innovation Forum, with an awesome keynote from serial entrepreneur and semiconductor luminary Brad Mattson.  I can't find a link to the presentation he used so you'll just have to live with my recap.  Different parts of the silicon market are at different maturity stages.  I'm imagining executives at the silicon product makers plotting their BCG growth-share matrices with "mobile devices" in the Star box.  Innovation is hard in mature markets and a bi-modal corporate culture that splits creativity into a separate part of its structure is best able to handle the challenge.  Brad introduced the concept of a "design CEO" running an intrapreneurial research lab inside a big company, but IMHO startups will recognize it as an adaptation of the "scientific and technical founder" who developed the tech and then steps away from enterprise management.

Brad mentioned the tendency of VC money to travel in packs for economic reasons.  I don't know whether he meant they crowd into the same hot startups at once or just follow the same trends.  My new pet theory is that VCs chase similar deals because they also chase the same institutional pools as clients, and those institutions are themselves susceptible to falling for the same hot trends touted in popular media.  Too much money chasing a trendy but immature idea does not reduce risk, and Brad found that the best time to invest is during a sector's downturn to leverage a long gestation period for new tech.  He also contradicted something I had previously heard about VCs.  I had previously thought that VCs often replace a startup CEO with a COO to institute repeatable processes during a company's maturation.  Brad said VCs don't like to replace CEOs because it makes them look like they made a mistake.  Maybe it comes down to the reputation of some VC firms.  Some may like to bet on the jockey but fire him when the horse outgrows him, while others keep the match together.  Now I understand why startups with hot prospects are advised to "pick their VC" just as carefully as the VC picks them.  Those VCs that offer just the right "Goldilocks" combination of reputational capital and minimally dilutive investment must exist somewhere over the rainbow past Sand Hill Road.

The Silicon Innovation Forum expert panel had even more to say about VCs, from VCs themselves.  They think any potential slowdown in Moore's Law may be complicated by the semiconductor supply chain's inability to adapt and innovate.  Bottlenecks are opportunities to innovate; IMHO this cries out for startups who can carve out a disruptive niche.  VCs stick to their standard metrics of market size and amount of capital needed when they evaluate startups, but they also like a mix of strategic and financial investors who can collaborate to reduce risk.  I might as well introduce my own definitions here.  "Strategic VCs" invest because they want to harvest technology or product innovation; these are typically the venture arms of big corporations.  "Financial VCs" want pure play returns that fit their own expertise and deal history; these are the usual Sand Hill Road denizens.  Strategic VCs (according to the strategic VCs on this panel) tend to put more restrictions on the startup's outside partners to keep their tech away from competitors.

I didn't stick around for all of the startups in the Pitch Zone because I'm not professionally qualified to evaluate their prospects.  I'm a finance guy, not an engineer.  I'm also too cheap to pay for the Showcase and Reception, so if SEMICON wants my perspective in the room they should let me in for free.

Wednesday morning had me in the Business Continuity Planning seminar after a wonderful breakfast at the San Francisco Marriott Marquis.  I gotta tell ya, the Marriott Marquis has some really awesome breakfast sausages.  Anyway, the BCP folks touched on the triple bottom line that I've heard about lately.  IMHO the BCP function is an excellent candidate for a continual improvement process because the supply chain and environmental factors that affect it are dynamic.  Well, it just so happens that Alfidi Capital has a handy-dandy continual improvement process diagram that any C-suite can use for anything.

Okay, let's continue with the BCP workshop.  The pandemic and disease folks cited recent case studies to note travel restrictions, supply chain disruptions, and protocols for entering buildings that businesses will face.  They mentioned that little things such as handwashing and critical surface cleaning have high ROIs.  The environment, health, and safety (EHS) speaker advocated using a risk matrix to track those materials subject to increased regulation or outright bans.  Enterprises should monitor the EU REACH (Europe) and TSCA SNURS (US EPA) for changes in regulated chemicals.  Small businesses that outsource their supply chains can benefit from subscription services and trade associations to stay informed on what becomes prohibited.  The point is to make the supply chain robust by having a replacement strategy if some materials are unavailable.

The BCP critical materials speakers reinforced what I've been hearing at resource conferences about declining material grade discoveries worldwide; they further noted that exploration spending to offset resource depletion is well above historical averages.  Semiconductor material inputs are to small to bother primary producers; they need specialty firms for processing and quality control.  Recycling finished products is a more cost-effective method of metals extraction than mining.  It all makes me think back to my interview with the Gold Report in 2011 when I made a prediction about China's rare earth export policy that was proven correct in 2012.  I am a genius, but my readers already knew that.  The BCP workshop finished up with some case studies from companies with exemplary BCP programs in place.  I'll run down the good stuff in a checklist . . .

- Pre-designate members of a cross-functional crisis response team and hold rehearsals based on likely disruption scenarios.
- Have backup power and water supplies to keep production running.
- Collect damage and degradation reports from business units and cost centers, so the enterprise can prioritize its response if its resources are constrained.
- Assess the BCP annually in coordination with major suppliers.
- Have business units update their own BCPs that are nested within the enterprise's BCP.
- Have an automated messaging system for mass notification of employees.

This BCP panel wasn't done until we talked through some final hints.  One attendee said DHS has a federal regulation requiring self-identified "high-profile facilities" to have an anti-terrorist plan.  The only public source I could find for such a regulatory requirement is DHS's Chemical Facility Anti-Terrorism Standards (CFATS).  Another sharp player here mentioned the ISO's best practice, which I take to mean ISO 22301 on business continuity.  This stuff was extremely important and more people should have attended.  It was so important that I even learned a bunch of new acronyms . . .

Key enabling technologies (KET):  The EU's definition for really important tech.
Confidential business information (CBI):  The combination of IP and trade secrets that businesses may claim as exempt from reporting under the TSCA regime with EPA approval (not likely to get approval IMHO, but it's there just in case you get lucky).
Substance of very high concern (SVHC):  The EU's term for stuff they want to include in REACH control; i.e., the stuff you should plan to substitute in the BCP risk matrix you show your boss.

I headed back to Intersolar for the Joint Forces for Solar speakers and panels.  The PV energy market update was informative but the market for renewable energy certificates needs to be a lot larger if solar is going to grow. Some states have rolled out solar RECs specific to their RPS standards and DOE's Green Power Network has identified products and tracking systems to make the REC market viable.  SEIA and CALSEIA have plenty of data on how the market for solar is growing.  Take heed, solar installers.  If you want to boost your business, you need to connect to those two industry associations along with Joint Forces for Solar, and you need to review DOE's listing of REC products in your state.  One expert from the panel discussion had another hint for installers:  Hot climates seem to be good markets for parking lot solar panel farms.  I've seen quite a few of those even in the moderate climate of the San Francisco Bay Area.

The Joint Forces for Solar folks had a lot to say about finance, my favorite topic.  The cost of capital has now become the dominant cost of many PV systems because the prices of components have fallen so rapidly.  Private equity firms are now stepping in to fund projects that banks won't fund with loans.  More storage on the grid will mean more load-shifting capability from peak to non-peak hours, but the grid still needs upgrades to make it intelligent enough to handle bi-directional flows.  That means IMHO utilities and transmission line owners will need to spend massive capital just to keep up with growing demand for renewables.  The Edison Electric Institute has researched flaws in the traditional sales models of electric utilities, and private utilities are thus looking more closely into PPAs that get revenue from distributed generation.  The panel was concerned that scaling back "net metering" will threaten the business models of some solar producers.  I asked the panel about the impact of renewable energy MLPs and REITs once legislation makes them available, and the experts were in totally in favor of this development.  They told me MLPs and REITs will allow aggregation of multiple projects into a single portfolio.  The objective of securitization is to lower the cost of capital, which in turn will help enable more distributed generation.  I'd be remiss if I didn't mention a crowdfunding site called Mosaic that enables crowdfunded investments in solar projects.  This stuff is right up my alley.

I stayed with Intersolar events on the final day because I wanted as much perspective on the sector as possible.  NABCEP held a certification workshop on the credentials they offer to solar installers.  It's important to note that their certifications represent mastery of best practices; they are not licenses to conduct trades.  Those licenses are granted by state and local governments.  Just for kicks, I did a Web search for "renewable energy finance certification" and nothing came up except links to RECs.  Finance experts like Yours Truly thus have no credential to hold out to the world as proof of expertise in green finance.  That cries out for remedy, given the proliferation of financial tools such as feed-in tariffs, RECs, and tax equity that are made just for the green sector.  Okay, back to the NABCEP workshop.  I asked the presenter why NABCEP offered a Small Wind Installer certification and he said it had been suspended for lack of demand.  They will continue to offer small wind subjects as an entry-level exam.  That is IMHO a good move.  Even the American Wind Energy Association recognizes that small wind turbines are best suited for rural sites.   I learned from personal involvement with a small wind company that wind turbines don't work in urban areas.

The next workshop was on product differentiation in a commodified market, presented by Albie Fong, co-editor of Project Development in the Solar Industry.  He cited Greentech Media's ranking of top solar panel producers by revenue, which is good to know for any company supplying components to this market. NREL has found that solar system prices and gross margins are dropping.   I was surprised to learn that reliability has overtaken price as a product choice criteria.  I guess all of the news on China taking solar market leadership as a low-cost producer doesn't tell the whole story.  Buyers now want modules that are compatible with other parts of their installations and are resilient in local environmental conditions.  Product differentiation by geographic environment has emerged as a value-adding strategy.  One example Albie cited was that customers near transportation nodes and routes want PV panels with anti-glare glass.  I can see how reflective glass could be a navigation hazard near an airport.  I came away from this presentation convinced that Customer Development matters in solar!  It's not just for tech startups anymore.  It's for solar manufacturers and installers too.

The one thing I got out of the panel on maximizing system output via inverters was the importance of bankability.  A manufacturer's warranty on inverters and modules does not translate into a financially viable PV system.  Only performance data verifying the viability of solar PV installation defines bankability.  This is especially relevant for large-scale solar project developers.  Third-party testing consultants can analyze components for short and long term light availability, exposure degradation, irradiance and temperature coefficients, microclimate effects, and much, much more.

I kept thinking about bankability through the next panel from SolarGIS touting their databases and online assessment tools.  Developers should verify the bankability of specific sites just as manufacturers seek to prove the bankability of their components.  Measuring a site's irradiance data helps project developers assess its viability.  Global horizontal irradiance (GHI) is influenced by altitude and latitude.  SolarGIS has free downloadable maps plotting GHI all over the world.  Wow, that's almost like hitting the "easy button" for assessing a site's bankability.  That's just the beginning.  NREL maintains a National Solar Radiation Data Base (NSRDB) showing changes in solar data.  The National Weather Service's GIS Data Portal has downloadable meteorological data that developers can overlay onto GHI coverage maps.  Mastering GIS means taking the guesswork out of solar site selection.

The final workshop I attended on successful solar business was presented by a guy from Quick Mount PV who also has a leading role in NABCEP.  You can get the workshop's awesome slides yourself from Quick Mount PV's download page.  LLNL has cool-looking flowcharts on US energy use that show room for growth in solar.  The solar market is segmented into residential, commercial, and utilities.  Once a servicer has picked a segment they must get the proper licenses, and IREC maps out the training they need.  I noticed the solar sector has become so specialized that solar brokerage businesses now offer third-party consulting to property owners looking to install solar systems.  The solar broker performs all non-installation services in TPO-leased systems.

The EIA Annual Energy Review shows the most viable geographic markets for solar and wind systems.  It's buried in there among pricing and consumption data but solar installers need to know how to pick the most viable markets.  The guru recommended small wind as a backup supply for a solar system; my readers know how I feel about small wind but it's okay in rural areas with good data on wind speed.  I will always remember that the height of the tower and the size of the fan's swept area are the two most important factors in a wind turbine's energy capability.  I had to learn that the hard way so my readers can avoid pain.  I got to ask this speaker about the viability of small-scale geothermal systems as complements to a solar-wind combination.  He said geothermal systems in the form of heat pumps can be very cost-effective but dry climates pose a challenge with long payback periods, and they work well where water is close to the surface.

The speaker noted that Solar Energy International has online training consistent with NABCEP standards.  I discovered that SEI has a free online course as an introduction to renewable energy.  He touched on system viability just enough to mention the enormous degradation that even a small amount of shade will have on a solar installation.  I'll refer my readers to what I said about bankability above when evaluating a site.  Solar businesses have plenty of tools to help assemble proposals.  Find Solar will calculate system size and financial incentives, and the California Solar Initiative Incentive Calculator provides additional estimates.  Go Solar California lists components approved for incentive programs.  NREL's PVWatts calculator helps estimate solar energy production for hypothetical installations.  Once the solar installer has data in hand, they use OnGrid Solar and Clean Power Finance to generate proposals showing customers how solar incentives reduce their costs.

Financing a project is crucial to the solar system sales cycle.  Property Assessed Clean Energy (PACE) bonds use property tax assessments to fund loans for energy retrofits.  DSIRE's Quantitative RPS Data Project maps out details on state-by-state standards.  This is all a ton of stuff for a solar entrepreneur to master.  The one final thing installers need to consider is the coming shakeout in the industry.  Some components makers are going to disappear, so buyers who watch warranties should stick with PV system makers who will be around another 25 years.  I would add that the solar sector has seen some very large component makers go bankrupt in recent years, so market share is not at all an indication of longevity for a company that is artificially sustained by subsidized loans.  This is where I come in as an analyst.  I need to take a serious look at the financial viability of leading solar manufacturers.  You'll see my commentary here on this blog as the solar industry evolves.

I didn't spend all of my time listening to expert panels and workshops.  I got out on the trade show floors to see vendors.  I spoke with some of the minor components manufacturers about their impressions of 3D printing.  Just as I suspected, many of them are complacent about the threat to their product lines from DIY parts makers.  I believe the first vendors to fall to 3D printed objects will be vendors of testing and diagnostic devices.  Those are not subject to the pressure and temperature stresses that delaminate printed objects and their performance parameters are well known in open sources.  Once the 3D sector solves that delamination problem, ceramic molded components will be the next subsector to fall.  I truly hope the SEMICON West organizers put some 3D printing demonstrations on their extreme tech stage in 2014.

I'm also endlessly fascinated by the small number of third-party service providers that always pop up.  There were no finance providers this year.  The leading inventory managers and asset liquidators were in their usual places.  I liken asset liquidators to the insects and microorganisms in an ecosystem that break down decaying plant and animal structures into soil nutrients.  They are absolutely vital to capitalism.  It's also vital to have competition in permit review, so along comes the Institute for Building Technology and Safety to fill the gap.  Those folks are going to get really busy if more developers go with building integrated PV (BIPV) materials. The one vendor that impressed me the most this year was the IEEE Xplore Digital Library, with a searchable database of technical articles.  The search function revealed long histories of published research, and I'm convinced this tool offers hi-tech entrepreneurs access to knowledge of manufacturing and quality control processes that will save them time and money.

My final impressions of this joint conference include surprise that some of the seminars and panels I attended were not at full capacity.  I suspect many attendees are purchasing managers looking for product or engineers looking for innovations, so they would gravitate to the tech demonstration stages.  The panels I found most useful addressed enterprise-wide factors that a solar business must manage.

I cam away from SEMICON West and Intersolar North America with even more market intelligence than I collected last year.  I also collected memories of which exhibitors had the most attractive women staffing their booths.  I would have no objection to exhibitors using attractive men to draw female visitors, but that begs the question of how to get more women interested in solar and semiconductor careers in the first place.  That's a question for trade show organizers to ponder.  My focus is to keep hitting up those booths offering booze, food, and babes in between free workshops.  Check me out next year as I prowl for more knowledge.