Silicon Valley's next big thing: 'clean tech'

Microchips? Been there. Software? Done that. Dotcoms? Soooo 20th century. Now, Silicon Valley is looking to become clean and green – and it could turn into the region's next big high-tech push.

Its new focus: so-called "clean technology" – technology that uses natural resources more efficiently or not at all, thereby reducing the environmental impact of products and cutting costs.

Most of Silicon Valley's current emphasis is on clean energy. Entrepreneurs here are aiming to transform solar, fuel-cell, and biofuel projects into viable industries with huge potential. Already, the market amounts to $55 billion – more than the entire Internet advertising market dominated by the high-tech region's current darling, Google. In 10 years, the clean-energy market by one estimate could quadruple. In the past year, for the first time, more silicon in the US has gone toward making solar panels than computer chips. More important, venture capitalists are pouring money into clean technology, thanks to a confluence of events.

"We have an energy crisis, there's a national security crisis, and there's a climate-change crisis. And as a famous economist once said, 'A crisis is a terrible thing to waste,' " says Vinod Khosla, a top venture capitalist.

Twenty-five years ago, he cofounded Sun Microsystems. Now, he is funding dozens of clean-tech companies, everything from Altra, a biofuels firm, to LivingHomes, a home-building company that uses eco-friendly materials and the efficiency of prefabricated construction.

"Clearly this is a very important area, and a much larger market than the Valley has traditionally dealt with," he says.

One factor driving clean energy's expansion are laws in nearly two dozen states that mandate that a portion of electricity come from renewable sources. California has gone further with the passage last year of a law that caps greenhouse gas emissions. Experts see similar federal regulation around the corner, creating an enormous demand for clean energy.

Another factor: rising hopes that clean energy can one day compete with fossil fuels. Already, the cost gap is narrowing. If entrepreneurs can close it, then they will be competing in an enormous market.

"The industries they are attacking are so immense. We import tens of billions of dollars of gasoline each year," says Ron Pernick, coauthor of the forthcoming book, "The Clean Tech Revolution." [Editor's note: The original version had the incorrect dollar amount of gasoline imports.]

That huge market potential is luring big players such as General Electric and Sharp into the sector. Citigroup announced this week a $50 billion investment in clean tech. British Petroleum is investing $400 million in biofuel research at the University of California at Berkeley.

Startups are cropping up as well. Mr. Pernick's market research firm, Clean Edge, now tracks 45 clean-energy companies listed on US stock exchanges. The index is up 12 percent since February. Just three years ago, Pernick says, it would have been impossible to find enough companies to track.

Silicon Valley is buzzing with optimism. Venture capital funding jumped sixfold to $300 million from the first to the third quarter last year. But some analysts see limits to clean tech's potential.

"While clean technology [companies] will grow, and they become very important, especially here in California, they're not going to replace the fossil-fuel based system," says Anne Wenzel, principal economist at Econosystems, a market research firm in the Bay Area.

Fossil fuels are so efficient, and the existing infrastructure to deliver them so vast, that clean energies will remain a small percent of the overall market, she says. Nor does she expect clean tech to surpass the current titans of the Valley. "As far as overtaking software or biotechnology or web and search engines: no," she adds. "But it's a very viable business."

Historically, alternative energy has flourished during energy crises, only to sharply contract when fossil-fuel prices drop and stabilize.

Many in the clean-tech community argue that the days of cheap fossil fuels are over, due to their scarcity, the rapid economic rise of India and China, and the effects of global warming beginning to be felt by businesses.

Some clean-tech startups will fail, admits Mr. Khosla. But he and others argue this boom is built on sterner stuff than the dotcom boom. For one thing, it's built on extremely diverse technologies, insulating the industry if one technology stumbles. For another, it has a relatively high barrier to entry. It takes expensive equipment, research space, and staff to get a clean-tech startup off the ground.

"You can't just create a company in a bedroom and a weekend like people were doing in the '90s," says Seth Fearey, chief operating officer of Joint Venture: Silicon Valley Network, a market research and advocacy group in San Jose.

Clean technology "is coming out of a solid foundation – the semiconductor industry," he adds. "This new industry is based on an existing workforce, existing talent, existing research programs."

This is particularly true of solar power, around which much of Silicon Valley's clean tech is clustered.

SunPower, one of the region's top solar companies, turned to T.J. Rodgers, founder of Cypress Semiconductor, to help apply the lessons of mass producing semiconductors to the mass production of solar panels. Applied Materials, a major semiconductor equipment firm, is now moving into solar-panel manufacturing, too.

The adoption of mass-production efficiencies have already pushed prices down for solar panels. The price for a watt of solar power, adjusted for inflation, went from $21.83 in 1980 to $2.70 in 2005, according to Applied Materials.

Within five years, a SunPower spokesperson predicts, the price of solar power will rival – without any subsidies – the price of conventional power.

Installers of solar panels, like SolarCity in Foster City, Calif., are also hammering out inefficiencies. The company offers savings of 15 to 30 percent to neighborhoods that band together to purchase panels.

This process is a Silicon Valley hallmark, says John McClure, vice president of corporate strategy at Applied Materials. "It takes science experiments and makes them into mass-produced products."