An interesting report from MSN’s money columnist Jim Jubak:
Out of the spotlight, solar will thrive
A US energy policy that largely ignores solar power will, ironically, help the sector by giving it time to catch up with demand. That’s good for investors, too.
(Page 1 of 3)
Government neglect could make 2008 and 2009 the best years ever for solar companies — and for those who invest in them.
That’s right. Long-term prospects for the solar industry are actually brighter because the energy bill that President Bush signed Dec. 19 didn’t launch a crash program to expand solar-energy use or even extend solar tax credits that will expire in October.
The solar industry had a problem in 2007, and it wasn’t a lack of demand. Global solar production, measured by the megawatts of power that solar cells and modules produce once they’re hooked up to the grids, climbed 57% in 2004, according to investment bank Jefferies International. And it increased 30% in 2005, 35% in 2006 and a projected 13% in 2007.
See a problem there? Young growth industries facing a virtually untapped market shouldn’t show slowing growth rates. If solar has the potential its supporters say it does — and I agree it does — the industry’s growth rate should be accelerating, not dropping. (Global solar installations, which always lag equipment production and which are growing from a smaller base because of that lag, climbed a projected 60% in 2007.)
Not enough raw materials
So what happened? Beginning in 2005, demand for silicon from solar-wafer, solar-cell and solar-module makers overwhelmed supply from the companies that provide silicon to the solar and semiconductor industries.
(Solar wafers are processed silicon that’s been cut into pieces, the first stage in producing solar cells. Wafers are doped with materials such as boron and phosphorus to turn them into cells that will generate flows of electrons when exposed to sunlight. When cells are placed in metal frames protected with rubber or plastic and embedded in a protective coating, they become solar modules.)
Companies that turn silicon ingots into solar wafers couldn’t get enough crystalline silicon to meet orders from solar-cell makers. That forced makers of solar cells and modules to idle capacity. Utilization rates, the percentage of production capacity that a company is using, fell among solar-cell makers to 70% in 2005 from 86% in 2004. And the problem kept getting worse in 2006 and 2007. German wafer and cell maker ErSol Solar Energy (ERSLF, news, msgs), for example, cut its forecast for 2007 production to 55 megawatts from 70 megawatts, a 21% drop, because of the wafer shortfall.
That shortfall in supply had a predictable effect on silicon prices: They went up. Way up. Companies able to arrange long-term contracts with suppliers saw the silicon raw material required by wafer and solar-cell manufacturers jump in price to $45 a pound by mid-2007 from $20 in 2003. On the spot market, cell manufacturers who couldn’t sign up a stable, long-term supply were paying $95 a pound.
The logjam won’t last
Those higher prices have had the salutary effect of bringing more companies into the business of making silicon for solar wafers and encouraging existing suppliers to expand. After climbing just 14% in 2007, silicon production is projected by Jefferies International to climb 43% in 2008, 50% in 2009 and another 50% in 2010. The industry bottleneck that restricted production and produced higher prices for raw materials will be broken this year.
And that’s critical because the big barrier to growth in the solar industry isn’t a lack of subsidies from the U.S. government but the cost of electricity produced from solar cells. Right now, it costs about 30 cents to produce a kilowatt-hour of solar electricity versus the 15 to 18 cents retail customers pay for most kilowatt-hours in the United States. So, solar isn’t yet competitive with other technologies for generating electricity.
But solar is gradually closing the gap. Solar-wafer makers are getting more wafers out of a kilogram of silicon by making wafers thinner. The industry is on track to get 35 wafers out of a kilogram of silicon by 2010, up from 29 wafers per kilogram now. That 21% increase is a huge cost savings because silicon accounts for about 30% of the cost of a solar module.
At the same time, solar-cell makers are getting more energy out of their cells. Solar-cell efficiency is projected to go up to 17% from the current 15% by 2010. Combine that with the manufacturing savings and the cost of solar electricity falls almost 30% by 2010, to about 21 cents a kilowatt-hour.
Price parity coming soon
I think you see the punch line coming. As electricity from solar gets cheaper and electricity from conventional sources gets more expensive, at some point the cost of solar-generated electricity reaches parity with the retail cost of electricity.
Hemlock Semiconductor, the world’s largest producer of silicon, projects parity around 2012. (Hemlock is owned by Dow Corning, Mitsubishi Materials (MIMTF, news, msgs) and Shin-Etsu Chemical (SHECF, news, msgs). Jefferies International is a bit more conservative: It sees parity in the sunshine-rich U.S. Southwest in 2013.
Government support in the form of rebates to buyers of solar equipment (the U.S. approach) or in the form of guaranteed above-market prices for the purchase of electricity from solar-power generators (the European approach) is crucial to reaching that point. Without the economies of scale created by the demand growth generated by these subsidies, solar costs won’t fall fast enough to hit parity on that schedule.