The Solar Silicon Shortage and Its Impact on Solar Power Stocks

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By Russell Hasan,
President of Altenews.com

I recently wrote a research report on the solar power industry and solar power investment for Alternative Energy News Source (http://www.altenews.com). In this report I noticed several factors that will cause the solar power industry to extend its five-year trend of 30% annual growth for at least another ten years, and possibly longer. Various factors that will help solar power include government incentives, new solar technologies, the rising demand for electrification in rural areas of the developing world, the growing trend towards “green building” which often puts solar panels into rooftops, and the fears of air pollution in industrializing China and India. Solar power is also helped by the “triple threat” that encourages alternative energy: the growing concern over global warming, the desire for energy independence, and the rising price of oil. There is, however, one aspect of solar power that, according to many experts, threatens the future growth of the solar industry. This danger is the shortage of silicon, which is the main raw material for manufacturing the most popular kinds of solar panels. Investors who understand the dynamics of silicon supply may have an advantage when investing in solar stocks.

Solar power investors should have a basic understanding of solar technology and the economics of silicon. The most prevalent kind of solar technology is photovoltaics, or in other words solar panels, and the vast majority of solar panels are silicon-based solar panels. About 90% of photovoltaic sales are made from silicon-based solar cells. Silicon-based solar panels are made from silicon wafers that have their front and back sides treated with chemicals to make them react with light to produce electricity. The solar panels differ only in whether they are mono-crystalline, which are made from one big silicon crystal, or multi-crystalline, which are made from many tiny silicon crystals. Both mono- and multi-crystalline solar panels are made of silicon.
Silicon is made from sand, a common natural resource. From this it could be assumed that silicon is plentiful. Unfortunately, this is not the case. High-grade processed silicon is in such high demand among computer chip makers and solar panel manufacturers that competition for silicon from the computer chip industry has driven the price of silicon way up. In general, the computer chip industry can pay more for silicon than the solar power industry. This has created a shortage of solar-grade silicon with which to make silicon solar panels. In fact, most of the silicon used by the solar industry comes from reject silicon wafers that were found unsuitable for use by the computer chip industry. The price of silicon has gone up from around $25/kilogram in 2004 to around $200/kilogram in 2006 due to the increased demand for silicon. The massive demand for silicon from both solar makers and computer chip makers has caused a significant shortage of solar-quality silicon, which is having an adverse impact on the solar industry. The high price and tight supply of silicon is forecast to cause serious harm to solar power growth, with some analysts claiming that solar growth, which has recently been 30% per year, may decline by 10% to 20% in the coming years due to the solar silicon shortage.

There are two main effects of the solar silicon shortage. First is that silicon-based solar manufacturing stocks now go up and down wildly based on announcements of the acquisition or loss of stable supplies of silicon. The second effect is the growing popularity of “thin-film” technology. Thin film solar panels either use a very thin coating of silicon, which uses as much as 99% less silicon than a solid silicon cell, or else it uses no silicon whatsoever and relies on other photovoltaic materials such as copper compounds. Thin film technology is a way to get around the silicon shortage. However, thin films are typically much less efficient than silicon, with 7% to 10% efficiency compared to silicon’s average 15% efficiency. Thin films normally take up twice the space of silicon panels with the same wattage. Thin film technology is also less developed and more complicated than silicon technology. Up until the silicon shortage, silicon technology had dominated the industry, but the solar silicon shortage has led to a sharp reversal in which thin film now gets more attention. Investors who are afraid of the silicon shortage are pouring money into thin film at such rates that all of the excitement is focused on thin film, creating a “thin film craze.” Most silicon-based solar manufacturers are now ignored in favor of thin film technology-based companies that employ methods such as copper ink printing, CIGS, CIS, dye PV and organic PV.

Solar power investors are putting money into thin film startups in such a way that they seem to think that the solar silicon shortage will last for decades, and that thin film is going to replace silicon as the standard in solar technology. However, while writing the Altenews research report “Solar Power Investment: The Dawn of Solar Power,” which is available free to the public on http://www.altenews.com, I found that the solar silicon shortage will likely end at some time from 2008 to 2010. One industry forecast places current silicon capacity at 34,000 tons, and estimates capacity to rise to 70,000 tons by 2008. Another source predicts that silicon capacity will grow to 78,000 tons in 2010. Three of the biggest silicon suppliers, Renewable Energy Corp. of Norway, Wacker of Germany, and MEMC of the USA, have all announced plans for large increases in their silicon capacity. REC plans to add 6,500 tons, Wacker will add 3,500 tons by 2008, and MEMC will double its present capacity by 2010. Chinese silicon suppliers plan to expand their capacity by 10,000 tons by 2009. Based on this it is reasonable to suppose that the solar silicon shortage will continue in 2007, but will be greatly reduced in 2008 and will come to an end by 2010.

Investors who understand the solar silicon shortage may be able to see higher than average returns if the predictions turn out to be accurate. It is a fundamental law of economics that when demand goes up and price goes up, supply will rise to meet demand and the price will drop to the point of equilibrium. Contrary to popular belief, it is fair to expect this to happen with silicon. In the research report, I explain the various kinds of thin film technologies and their advantages and disadvantages. I also look at solar markets, and the conclusions differed based on the markets. In industrialized nations with solar incentives, such as the USA, Germany, and Japan, the trend is towards a need for smaller and higher efficiency solar panels, which means that silicon is best suited for this market. In the developing world the need is for cheaper solar panels that may take up more space, so that low cost thin films are best suited for that market. There are many different competing thin film technologies, each of which is designed for a different purpose, but this description of silicon for the First World and thin film for the Third World is a good general account of the best usage of solar technology.

Thus, there are two recommendations for investors. In the short term, in 2007, thin films are a way around the silicon shortage, and so thin films may outperform silicon next year. In the long term, after 2008 or 2010, the solar silicon shortage will be over, and investments in silicon-based solar manufacturing stocks will make sense as a long-term strategy. Secondly, with silicon technology, the demand in wealthy industrialized nations is for higher efficiency, while the demand in impoverished developing countries is for lower cost. Thus, when looking at which companies to invest in, two things that investors should look for are high efficiency silicon tech and low cost thin film tech, and investors should also look at which markets the companies are seeking to sell to. The thin film craze, which is focused on high efficiency high cost thin film tech, may not make much sense in a post-silicon shortage market. However, there are many different thin film technologies, and each one must be evaluated separately, since some thin film technologies are better than others. More detailed information about the silicon shortage, solar technology, solar markets, and the solar industry’s historical growth can be found in the Altenews.com research report “The Dawn of Solar Power.” The most important conclusion is that because the solar silicon shortage will be over soon there are no major obstacles to solar progress, and the solar industry should see high annual growth for many years to come. Solar power is a sector with high growth potential, and every investor interested in alternative energy should look carefully at the solar power industry.
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