Roof innovation shines with solar cell integration.

EDWARD Stevenson and Bruce Khouri were doing a fine job running a roofing company when they gambled everything they had--$ l 0 million between them--to move into solar and build a factory in downtown Los Angeles.

Two years later, Solar Integrated Technologies has received $80 million in new orders from clients such as Coca-Cola Co. and Frito-Lay Corp. And a unit of General Electric Co. wants to finance year in a London stock offering, but in February the founders stepped aside, bringing in a more seasoned chief executive to prepare the company for its next stage of growth, which could include a U.S. initial public offering.

"We needed skill sets that required professional public-company experience," Khouri said. "We needed to put together an A-list team of talent."

The new chief executive, Jon Slangerup, is trying to get more U.S. companies to consider the product, which incorporates solar modules directly into the roofing so nothing needs to be mounted on top of the building. The technology is primarily used on large buildings, and one-third of the sales are being targeted for Europe, where renewable energy products are accepted more easily.

Besides factories, Solar Integrated is targeting big-box retailers. "Our real mission in life is to seek out those large, flat-roof facilities and up sell them on renewables," Slangerup said.

Stevenson and Khouri tried for years to develop their own solar roofing material before finding a supplier in the late 1990s.

Stevenson secured a patent in 1989 for an idea to integrate solar panels into roofing material, but the pair had trouble making the idea commercially viable. The solar element was so fragile that it had to be mounted on sturdy glass plates, which made it less affordable to install, and more inconvenient. "We spent a good part of the decade banging our heads against the wall," Khouri said.

When they took over Southern California Roofing in 1989, most industrial roofs were constructed with conventional tar. They began using a white, plastic-like membrane called Sarnafil, which is installed in rolls across flat or low-incline roofs, and fused to a foam insulation layer. It is now widely used in commercial roofing.

After that, Khouri and Stevenson discovered a Michigan company called United Solar Ovonies that makes a wafer-thin, flexible solar module that could be laminated to almost anything.

Traditional solar panels needed to be bolted to the top of buildings, requiring holes pierced in the rooftop. That's one of the reasons solar power hasn't caught on with facilities managers in the commercial-industrial sector.

"They take their roofing membrane very seriously," Khouri said, especially when the roof is housing an F-18 assembly line or a food processing plant. "When you start talking about solar, the first question out of their mouths is, 'What are you going to do to my roof?'"

Their idea was to laminate the thin, flexible solar panels, called photovoltaics, onto their popular roofing material. "It's not a great leap to put them both together--if you could incorporate a photovoltaic cell into the membrane, we knew you'd have quite a system."

Manufacturing process

In its 30,000-square-foot factory at the corner of Alameda Street and Martin Luther King Jr. Boulevard, Solar Integrated takes the photovoltaic film, called Uni-Solar, and laminates it to the Sarnafil for a product the company calls SmartRoof. It is just used on Solar Integrated installations.

Solar Integrated's first clients were Coca-Cola Bottling and Frito-Lay, which covered 12 buildings in and around Los Angeles with shiny white membranes dotted with blue-black solar panels. The roofs are not cheap--the material comes in sheets of 40 feet by 10 feet, which can cost between $13,000 and $16,000 apiece.

In its most recent project, a $17 million deal announced last month, GE Energy Financial Services is financing new solar roofs for the San Diego City School District. GE funds the roof, Solar Integrated installs and maintains it, and the School District pays Solar Integrated for the power generated.

"Someone gets a free roof in exchange for agreeing to buy energy for a reasonable price for a long period of time, and that's a very compelling value proposition," said Daniel Gross, senior vice president for renewable energy at GE Commercial Finance.

The roofs are expected to generate about 60 percent of the schools' electricity needs and could save about $7 million over the next 20 years, according to Erika Wilgenburg, facilities communication supervisor for the San Diego City Schools.

The San Diego schools project represents 20 percent of SIT's 2005 revenues, according to Slangemp. Six schools are already completed, and four more are almost done. It can take three to six weeks to install a new roof.

There is a 10 percent federal tax credit for businesses installing solar power--as well as a number of state incentives to encourage solar energy use, including a 7.5 percent state tax credit for renewable energy installations, plus a rebate from the California Energy Commission of around $2 to $4 per watt.

That, coupled with the state's high energy prices "makes California terrific for solar," said Gross. Since GE owns the roofs, it gets the tax benefits.

Currently, 80 percent of the company's projects are in California, 15 percent in Europe and 5 percent from other U.S. states. With its European operations up and running, Slangerup said he expects that by 2006, one-third of the business will be coming from European countries where governments are offering favorable incentives for renewable energy.

That's why the company looked to Europe in raising about $21 million through the Alternative Investment Market of the London stock exchange. Stevenson and Khouri still own 74 percent of the company.

"The European market is far ahead of the U.S. in photovoltaics," said Chief Financial Officer Geza Molnar, who joined the company in 2004.

But Solar Integrated is betting that the U.S. market isn't far behind, especially with California's mandate to get up to 20 percent of its power from renewable energy sources by 2010, as outlined by Gov. Arnold Schwarzenegger. Khouri and Stevenson remain hoard members of Solar Integrated.

"North America is just coming to life right now," Slangemp said. In his last job as chief executive, he shepherded a Canadian alternative energy company through an acquisition. But he insists that being acquired is not a goal, as he would prefer to bring the company public in the U.S.

"There are serious economic costs to being listed on the Nasdaq that we just weren't ready for yet," he said. "But we'll get there."

PROFILE Solar Integrated Technologies Inc.

Year Founded: 2002

Core Business: Manufacturer and installer of integrated solar roofing systems

Revenues in 2003: $8.3 million

Revenues in 2004: $7.8 million (not including $5.2 million from a San Diego school project)

Employees in 2003: 21

Employees in 2004: 36

Goal: To install 10 megawatts of systems in 2005 and 15 megawatts in 2006, and to increase European sales

Driving Force: To convert every commercial and industrial roof into an energy-producing asset

HILARY POTKEWITZ Staff Reporter