News

March 22, 2006

A Drain On Solar Energy

By: by Spencer Jakab, Barron's Online

Source:

WITH OIL AND GAS PRICES hitting records and governments worldwide pouring subsidies into renewable energy, solar power is enjoying its day in the sun. Unfortunately, the cost of the industry's key raw material -- silicon -- has skyrocketed, casting a shadow on solar's growth potential.

"The demand for silicon right now has just gone absolutely crazy," says Kelly McGrotha, sales manager for Mitsubishi Polysilicon. "It's likely to be that way until 2008."

While silicon itself is vastly abundant -- it's the second most common element in the earth's crust -- there are only a handful of manufacturers in the world able to make ultrapure polycrystalline silicon, known as polysilicon. The main consumer of polysilicon historically has been the semiconductor industry, which requires 99.999999999% purity. When solar-panel makers were smaller, they could satisfy most of their needs from castoffs containing impurities of up to one part per million, or a mere six decimal places. But the $11 billion-a-year industry now consumes about 40% of global polysilicon supply, and is set to rise to half the market by 2010, according to Lisa Frantzis, director for Renewable and Distributed Energy at Navigant Consulting, a management-consulting firm. Frantzis has followed the solar-energy industry for 26 years.

The scramble for polysilicon has pushed its price from about $9 a kilogram early this decade to $75 recently and as high as $100 to $200 on the spot market.

The result has been a dramatic slowdown in the pace of solar-panel installations -- just as national and state governments are lavishing cash on homeowners who adopt the technology. Worldwide installations grew by 55% in 2004, but decelerated to year-over-year 17% growth in '05, despite record-high crude prices and expanded subsidies. Navigant expects 17% to 18% growth this year, to re-accelerate only in 2008, when the polysilicon situation is set to improve.

Global polysilicon production should grow from last year's 31,000 metric tons to 55,000 by 2010. While most new production will be dedicated to solar-panel manufacturers, they have scant hope of outbidding the semiconductor industry for existing output. In fact, Dr. Pradeep Haldar, a nanotechnology expert at the State University of New York at Albany, points out that doubling the price of one square centimeter of silicon used in an Intel microchip costing $100 will have a marginal impact on its cost -- but would raise the cost of photovoltaic panels substantially.

"If demand for Xboxes and all these other things goes up, there's no question it's going to pressure the solar industry," he says.

Five polysilicon producers control nearly 90% of global output. While they've been highly profitable lately, McGrotha says building a new plant to produce 1,000 metric tons would require $250 million and up to three years to complete. Some, like Germany's Wacker Chemie, have commissioned new production lines specifically to meet solar demand, but others have balked at hitching their wagon to an industry so dependent on taxpayer subsidies in key markets like Japan, Germany and California. Barron's has written about No. 4 polysilicon producer, the multinational MEMC (ticker: WFR) -- one of the few publicly traded companies in the business -- several times in the past six months.

"A lot of this growth is still based on rebates," says Haldar. "That's a huge risk for all the guys building these plants." Aside from choking off the growth of solar energy at a time it's garnering unprecedented political support, the tight polysilicon market has reversed a long-running cost decline for the technology. Photovoltaic electricity now costs about one-tenth of what it did in the early 1980s, although it's still two to three times the cost per watt of power from the grid.

Most analysts are confident that solar energy will make greater inroads, but the polysilicon shortage is robbing the industry of a golden opportunity. After decades of growth and subsidies, solar power contributes under 500 megawatts to the U.S.-generation mix, less than a single large coal-fired power plant. Navigant's Frantzis, noting the irony of the solar industry's running into growth constraints when it has a chance to enter the mainstream, says: "It's almost like they're a victim of their own success."