Trends and Challenges in Energy Sector

1366 Technologies – Harvard Business Review

Case Study

Introduction:

The co-founders of the company, 1366 technologies, Ely Sachs and Frank van Mierlo, were faced with a tough decision to devise the strategy by which company could expand in order to be a leader in the world-wide solar industry.  The cost of solar energy had been declining substantially over the years and continue to decline, yet the cost has been high compared to other conventional energy sources.  Shale gas revolution had led to abundance in availability of the natural gas and this put additional pressure on the renewable energy technologies (including solar technologies).  Solar generated electricity had made great progress towards parity with the electricity generated from traditional sources, yet significant cost reductions were still needed to make the technology competitive. The Photovoltaic (PV) solar energy was expensive compared to energy generated from other renewable energy sources.  The company`s initial roadmap included several innovative technologies that would boost the PV efficiency. The two most promising technologies were wafer texturization and fine-line metallization. The company anticipated to market these technologies by selling the equipment to the cell manufacturers.  The company also had planned on becoming a vertically integrated solar cell manufacturer, which wasn’t successful due to the challenges in raising capital amidst of the 2008 financial crisis. The company then started the focus on becoming equipment supplier of the technologies to the cell manufacturers. In addition to this the company was focusing on exploratory research and development (R&D) projects. As result of work on those R&D projects the engineers of the company developed a new manufacturing process called “Direct Wafer”.  The process developed involved melting the silicon and rolling out flat wafers, much like modern glass manufacturing.  The process was faster and cheaper than current techniques.  It led to zero wastage of silicon and used less energy.  The goal of the company then became to produce wafers that eventually would make solar power as cheap to consume as coal energy.  

Strategic options and achieving grid parity:

The first option that was available to the company was to produce the silicon wafers by itself and it would require the company to raise the needed finance from private or later-stage growth equity investors or Depart of Energy (DOE). The wafers would be manufactured in the United States and exported to Asian cell manufacturers.

The other option for the company was to go for a partnership or licensing agreement with a solar company. The partnership with an Asian company would provide perfect complement to 1366 technologies capabilities.  The company would have access to capital, rapidly gain scaling, allow the Asian partners to lower their production costs and global footprint.  The company and its management aimed at accelerating the growth however, the company could face potential risks if it lost control over its intellectual property (IP) if it had a “wrong” entity as a partner.

We know that the economics of the solar generated electricity will have to be on par with not only with the traditional sources energy but also other renewable source.  The exhibit 5a shows the Levelized cost of energy (LCOE) equation.  The LCOE equation allows alternative technologies to be compared when different scales of operation, investment or operating time periods exist.  It captures capital costs, ongoing system-related costs and fuel costs – along with the amount of electricity produced – and converts them into a common metric: $/kWh. The calculation for the LCOE is the net present value of total life cycle costs of the project divided by the quantity of energy produced over the system.  

If we interpret the Levelized cost of energy (LCOE) comparison and its sensitivity against the fuel prices as provided in the exhibit 5b, then it could be seen that the PV solar is expensive as compared to many other forms of the renewable energy in most parts of the world. It is quite evident from this comparison that the management of 1336 Technologies needs to find a way to build its competitive edge in the market with the established wafer technology to achieve the set targets for grid parity.  

Furthermore, if we look at the exhibit 6a it can be observed that China’s share in the global module production has been rapidly increasing from the year 2005 to 2009.  Its share of global module production increased from 10% to 50% in this period.  The exhibit 6b demonstrates the magnitude of Chinese dominance in the field of solar energy.  The list of top ten solar cell manufacturers in the year 2010 consists of only the Chinese and Taiwanese companies with no representation from the United States.  It would thus make sense for 1366 Technologies to partner with one of the well-connected local partners in order to open a plant in Asia. However, there would also be many risks associated with this option such as protecting the intellectual property in China as mentioned in case exhibit 7.  

The interpretation of exhibit 5a and 5b suggests that the LCOE associated with PV solar would need to decline to achieve grid parity. It is evident that the Direct Wafer technology of 1336 would be highly important for the global silicon solar manufacturing companies as they seek new methods to reduce the production costs. It can clearly be understood that its importance will increase over the upcoming years as the solar companies will focus more on efficiency and in increasing the quality. Some of the forces that will affect this trend  are  a) new innovations like the hydraulic fracturing that lead to abundance of natural gas from shales b) competition from other renewable energy sources c)  Challenges in obtaining the financing d) government policies not only within the United States but also globally.  We can also expect continued dominance in the solar market with additional investments in the American and European markets from the Asian manufacturers who are backed strongly by the local governments.    

It is clearly evident that the Direct Wafer technology of 1336 would be highly important for the global silicon solar manufacturing companies as they seek new methods to reduce the production costs. The importance of this technology will potentially increase over the upcoming years as the solar companies continue their emphasis on increasing efficiency and the quality.  Therefore, this wafer technology could really help 1366 build its competitive advantage in the global silicon cell manufacturing market.

Strategy Evaluation:

As discussed previously, 1366 technologies had two strategic options to market their technology, both the options required building a 20 MW demonstration plant but they varied greatly after that phase.

Option 1) Go-it Alone approach

This approach would require raising the capital from private, later-stage growth equity investors or from Department of Energy (DOE) who would benefit from economic upside of the technology.  The company would manufacture its own wafers and export them to the Asian companies as a commodity.

...