Silicon supply could limit solar energy boom
NEW YORK (MarketWatch) -- It seems as if now would be the time to shine for solar panel makers, but a lack of a key raw material will cloud the picture for many over the next couple of years.
With concerns about high fossil fuel prices and greenhouse emissions driving demand for renewable, cleaner energy sources, solar stocks have been, well, hot. But while solar companies are sold out of current capacity, efforts to try to expand to meet rising demand are being thwarted by a shortage of silicon.
"The polysilicon supply to solar (photovoltaic) manufacturers has been tight for the better part of two years and is anticipated to be a growing issue as the PV industry pushes forward on its aggressive expansion plans," Merriman Curhan Ford & Co. analyst Brion Tanous said. Supply constraints have limited production by some manufacturers, and high prices are hurting profit margins.
Solar manufacturers must compete with computer-chip companies for highly pure silicon, which sells for $42 to $60 per kilogram via long-term contracts and which a tight supply has driven up to more than $150 per kg on short-term contracts.
Solar PV Market Growth Slows
The potential winners in this scenario, according to industry experts: the silicon producers themselves, such as MEMC Electronic Materials Inc. (WFR), and solar-panel companies that use less silicon in their manufacturing, such as Evergreen Solar Inc. (ESLR) and Energy Conversion Devices Inc. (ENER), Piper Jaffray analyst Jesse Pichel said.
The solar PV market is expected to grow from $11.2 billion in 2005 to around $50 billion by 2015, but Pichel anticipates the industry will grow only about 10% in 2006 and 20% in 2007 because of tight silicon supply. That may seem like a solid rate, but solar panel production in 2005 jumped 44% to about 1.7 gigawatts and has grown at more than 30% a year for five years.
Most solar growth until 2008 - when the silicon supply issue is expected to abate - will come from thin-film and thin-ribbon technologies that lessen or eliminate the need for polysilicon, Pichel said.
Evergreen Solar's manufacturing process uses a thin ribbon of laser cut material, so it wastes less silicon than the wire-sawing method used to create silicon wafers, Chief Executive Richard Feldt said at a conference earlier this month. Currently, Evergreen uses about 6 grams of silicon per watt when producing panels, versus the average of about 10g/watt for the industry. The company plans to get its number down to 5g/watt by the end of the year, Feldt said.
Meanwhile, Energy Conversion's panel-manufacturing process uses a silane gas to deposit a thin film of silicon on a metal substrate. The process uses 500 times less silicon than typical solar cell manufacturing, and the panels produce more electricity on cloudy days, said Subhendu Guha, president of the company's United Solar Ovonic unit.
However, though thin-film technologies don't use as much silicon, they have their own issues. It is still "what I'd call an emerging technology," Thomas Weisel Partners analyst Kevin Monroe said. The efficiency of the thin cells - how much sunlight they convert to electricity - is less than the 15% efficiency of PV cells using silicon, he said. Usually, the efficiency is around 7% to 10%.
Shares of Evergreen, which has about 45MW/year of solar panel capacity in the U.S. and Germany, are trading around $11, off from the $17.50 high they reached in March. The 52-week low, reached June 1, 2005, is $5.03. Shares of Energy Conversion, which makes other alternative energy products, trade around $41. That's down from their year high in January of $57.84, but up sharply from around $20 this time a year ago.
Energy Conversion has about 25MW/year of solar panel capacity but is expanding to 100MW. By comparison, Japan's Sharp (6753.TO) and Germany's Q-Cells AG (QCE.XE) are the world's two largest solar manufacturers with 428MW and 160MW, respectively.
New Polysilicon Plants Not On Line Until 2008
The dearth of sufficiently pure silicon isn't helped by the fact polysilicon manufacturers are reluctant to boost their production after being burned in the past when the semiconductor market went sour. By 2010, polysilicon production is expected to reach 76,000 metric tons, but currently it is less than 34,000, according to analyst reports.
Even though solar is poised to overtake semiconductors as the largest user of purified silicon, there has been concern about adding capacity to support an industry dependent on government subsidies. But long-term approval of some state solar subsidy pacts in the U.S. and continued subsidies in Japan and Germany have assuaged those fears, and several silicon suppliers are now boosting capacity, Solar Energy Industries Association spokesman Noah Kaye said.
Added supply is still about two years away, though, and the bottleneck already manifested itself in March, when Evergreen shares tumbled after MEMC said it wouldn't supply 52 metric tons of granular silicon as expected.
"We believe 2007 is shaping up to be a potentially disruptive year, as many companies have not secured enough silicon supply to meet 2007 capacity expansion plans," Thomas Weisel's Monroe said.
The result could be a return to solar's academic roots.
"The way to make new money in this business is to find new technology that won't use silicon," things that are still in development, said George S. Reichenbach, managing director of venture capital firm Braemer Energy Ventures. Despite solar's recent run, Reichenbach's firm has no investments in the sector. He's considered investing in some thin-film PV makers but said the ones he's seen so far were too pricey.
Another answer to the silicon issue could be vertical integration, Pichel said. Norway's Renewable Energy Co. (REC.OS) is the closest thing to a fully integrated player right now, making polysilicon and wafers as well as some panels. Renewable Energy listed on the Oslo Stock Exchange earlier this month.
(Piper Jaffray has done investment banking for Energy Conversion and MEMC. Thomas Weisel makes a market in Evergreen Solar shares.)
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