Silicon, Strings, and Solar Cells

The Motley Fool recently interviewed Evergreen Solar (Nasdaq: ESLR  ) CEO Richard Feldt. Read on to see what Feldt had to say about the market for alternative energy and his company's plans to reach positive cash flow.

The Motley Fool: For the uninitiated, can you give our readers an overview of Evergreen Solar's history and business model?

Richard Feldt: At Evergreen, our goal is to use our proprietary, highly efficient manufacturing technology to produce solar panels that produce electricity at costs that are equal to or less than the cost of electricity supplied by the power grid.

The company was founded in 1994 by three former executives at Mobil Solar. They formed Evergreen Solar around a unique technology, called "String Ribbon," which held the promise of producing low-cost solar wafers.

In the String Ribbon process, a set of special, parallel "strings" are pulled through a small molten pool of polysilicon inside a custom furnace. A thin wafer is created between the two strings as the polysilicon cools and recrystallizes. The process is continuous, clean, and efficient. By the end of 2003, the company had developed the technology to the point where low-cost production could be achieved.

In order to quickly scale production and demonstrate the efficacy of this technology, Evergreen entered into a joint venture with Q-Cells, a large German manufacturer of solar cells. The partnership (EverQ) built a 30 MW factory in Thalheim, Germany from mid-2005 to mid-2006 that makes wafers, cells, and panels. Renewable Energy Corporation (REC) from Norway joined the JV [joint venture] more than a year ago as an equal partner with one-third ownership. In return, REC brought a silicon supply contract to enable the JV to grow to 300 MW by 2010.

As of today, in Marlboro, Mass., we have a 15MW Evergreen-only factory producing wafers, cells, and panels. At this commercially modest-sized factory, we also perform a substantial amount of R&D development. The EverQ JV in Thalheim will have about 100MW of production capacity by the end of this year. Evergreen will own one-third. We recently announced the start of our second Evergreen-only factory, a 75MW facility located in Devens, Mass. We plan to grow Evergreen-only production to 500 MW by 2012 and work with our partners to continue expanding the EverQ JV to its planned 300 MW capacity.

We continue to invest in new technology at our Marlboro facilities to reduce production costs and enhance our panels for Evergreen customers. Today, our String Ribbon manufacturing process uses about five grams per watt of polysilicon, which is about 50% of the industry average. We expect our substantial R&D investment to help us lower our usage to about three grams per watt by 2010.

In fact, we recently announced [that] we will be using an innovative four-ribbon wafer furnace in our next factory that we believe will both increase capacity and substantially reduce costs as compared to our current production furnaces, which grow two ribbons simultaneously. We're focused on reducing the costs of manufacturing -- as well as forming the right relationships with companies at the back half of the value chain -- to be one of the first companies to enable solar panels to produce electricity at costs that are equal to or less than the cost of electricity supplied by the power grid.

TMF: How do you plan to grow profits?

Feldt: With manufacturing scale, profits will come. Through our German JV, we have shown that our String Ribbon technology is scalable and profitable. Our first 30MW German plant achieves gross margins approaching 30%. Leveraging our R&D investment, we plan to continue to drive down our total manufacturing costs each year and open new plants that will maintain gross margins of at least 30%.

By 2010, if we achieve our three-grams-per-watt goal, our total costs may be low enough so that we are able to achieve grid parity without subsidy.

TMF: In April, Evergreen signed a multi-year polysilicon supply agreement with DC Chemical. Can you explain the significance of this deal, and to what extent you believe it will benefit Evergreen?

Feldt: It provided the raw material that allowed us to immediately begin construction of our second wholly owned facility and raise significant equity capital. Longer-term, DC Chemical is not only a supplier, but also a major shareholder in Evergreen, with about 15% ownership. So it should be in their interest to provide us an increasing flow of silicon to assist in our plant expansions.

Additionally, with an independent expansion capability, we are now able to interest other silicon manufacturers in Evergreen. In fact, we just signed a 10-year supply agreement with WACKER for polysilicon.

TMF: How reliant is the future of solar power on government subsidies?

Feldt: In the near term, subsidies continue to drive demand for solar panels. The unsubsidized cost of solar electricity is still generally more expensive than electricity supplied from the grid. It is important that governments continue their support, although at decreasing amounts, so that manufacturers will have the incentives and resources to continue making needed investments in solar.

Over the next four to five years, the PV industry must substantially reduce costs so that the price of solar electricity is equal to or less than grid electricity. When parity is achieved, there should be no further need for subsidies.

TMF: As you might expect, Evergreen is a popular company with our readers. For those seeking to hammer out a valuation for your shares, can you give us a feel for when you envision Evergreen Solar becoming free cash flow-positive?

Feldt: As mentioned, we have just begun our second Evergreen-only factory, a 75MW facility we will begin operating later next year. The Evergreen factory planned after this one, which should be similarly sized at 75MW and is currently projected to become operational in late 2009, should enable us to become cash flow-positive. We should remain cash flow-positive even as we open one new plant per year thereafter.

TMF: I think that when most investors come across your company, they assume you are only competing against other pure solar plays such as First Solar (Nasdaq: FSLR  ) or Suntech Power (NYSE: STP  ) . Really, though, some of the biggest players in your space operate under the umbrellas of BP (NYSE: BP  ) and Kyocera (NYSE: KYO  ) . Competitively speaking, which of these groups presents you with the greatest competitive challenges in the short and long run?

Feldt: Those are all good companies, each working at lowering their costs of production. In the short term, with demand for product exceeding supply, most manufacturers can sell all they can produce. Longer term, achieving grid parity is the Holy Grail in the industry. So, in effect, we are all competing with ourselves.

Our String Ribbon technology sets us apart and gives us a competitive advantage. We believe it will enable us to be one of the first solar companies to manufacture solar panels that can produce electricity at a cost competitive with electricity supplied from the grid.

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The Motley Fool's disclosure policy, sir, is like the sun; it shines everywhere.


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