We give a summary of what we see as the most important consequences of the coming wave of polysilicon hitting the market, which will reverberate through the whole industry and will greatly help the sector competing with traditional sources of electricity production. We also try to say something about the timing.
We’ve argued earlier that heavy investment in production capacity of polysilicon, a crucial ingredient for the most common types of solar cells will unleash a set of forces, amongst which:
- It will drastically cut the price of polysilicon, at present about $400 per kilo, it could fall well below $100
- This will markedly lower the production cost of the most common types of solar cells, production cost could fall by 30-50%
- These are significant, if one-off price reductions that could bring solar energy within reaching distance of grid parity, that is, producing electricity with solar cells would become cost competitive with traditional sources of electricity generation
- This is likely to open whole new markets, solar cell companies deliver en-mass to utilities, or even become utilities themselves. Demand for solar cell will boost and subsidies could be cut
- Alternative, distributed energy production will also take-off in a serious fashion, companies and even citizens could become energy producers, first for their own use, but excess production could be sold to the grid (although the infrastructure needs to be adapted to enable this opportunity become reality)
- However, it also significantly lowers barriers to entry into producing solar cells. At present, polysilicon is scarce (hence it’s price explosion), existing companies frantically try to secure supplies through long-term contracts, and they have an advantage over would be new players. This advantage will melt away when we move from scarcity to abundance in polysilicon
- So it is by no means guaranteed that the huge demand increase that is likely when solars reach grid parity will translate into much higher earnings. Lower barriers to entry could well partly, or even wholly offset this and it could even lead to a price-war (as newcomers will undercut existing players to gain market share).
- Which force will dominate, increased demand versus (likely) reduced margins is impossible to say at this moment.
- It will also have an impact vis-à-vis solar cell producers that use different technologies, which is not dependent on polysilicon. Their present cost advantage might well be eroded (although some of them enjoy other important advantages in terms of usability).
We will write more about these issues, but at present, we wonder whether it is possible to say a little more about the timing.
First, if you want to know about retail prices, look no further than at Solarbuzz.com. Note however (apart from the fact that prices in Europe are virtually the same in euro as those in the US are in dollars) that these are not ex-factory prices but retail prices.
Sales tax and installation cost are excluded also, and these can double the price. You also see that there has been an upward movement in the price until about a year ago. The reason is entirely in the scarcity, and hence surging price of polysilicon. That is not going to last.
According to Ted Sullivan, an analyst at Lux Research.
While only 15,000 tons of silicon were available for use in solar cells in 2005, by 2010, this number could grow to 123,000 tons, Sullivan says. (MIT Technology Review).
Bradford, an analyst for the Prometheus Institute, argues that
prices for solar panels could drop by as much as 50 percent from 2006 to 2010. In areas that get a lot of sun, that will translate to solar electricity costs of about 10 cents per kilowatt hour, matching the average price of electricity in the United States.
So here we have the first tentative date, 2010. Not everybody agrees with this rather optimistic view though. Even an innovative company that claims to have superior technology claims not to arrive there before 2012. Emanuel Sachs, professor of mechanical engineering at MIT and one of the founders of that innovative company 1366 Technologies argues that:
today, solar cells cost about $2.10 per watt generated. When manufactured at a commercial scale, the first cells incorporating his new technology will cost $1.65 per watt. Planned improvements will bring down this cost to about $1.30 a watt, he says. To compete with coal, the cost will need to come down to about $1 a watt, something that Sachs predicts can be achieved by 2012 with further improvements in antireflection coatings and other anticipated advances.
As a side track, note the difference between the $2.10 figure quoted here and the $4.80 in the Solarbuzz survey, the latter is a retail price, the former out of the factory gate pricing (although we have to say we find the difference rather large).
Producing polysilicon is no sinecure though, mastering it’s production requires time and success is apparently not guaranteed:
Part of the problem is that many new entrants lack the technical know-how. A recent study by THT Research estimates that out of more than 20 Chinese poly projects, no more than eight are expected to succeed long-term.
This is the fundamental reason why it’s so difficult to time this coming supply boom. One trick is to look at share prices of polysilicon producers like WFR. Since markets look ahead by at least half a year, these are handy early indicators.
The coming price war?
Predicting the timing is difficult, the consequences of a supply boom in polysilicon are more a bit more predictable though. We listed a couple at the beginning of this article. Some analyst expect a price war. Stephen O’Rourke, a managing director at Deutsche Bank Securities:
forecast an industry shakeout — starting with crystalline-silicon-based panels and spreading to thin films — that could last two or three years.
According to Travis Bradford, president of the Prometheus Institute and a Greentech Media partner, this coming competitive battle will be fought out on price:
To be safe, crystalline-silicon-based solar-panel manufacturers need to lower costs until they are able to profitably sell panels for $2 per watt. Thin-film manufacturers need to reach profits with $1.50-per-watt prices.
Which is sort of standard fare industrial life cycle stuff. When an industry reaches maturity, competition shifts from product toward process improvement.
However, it’s important to keep in mind that we’re not there yet, and we can see a whole lot of product innovation still, which we’re going to report on quite a bit in the coming weeks.
One variable we haven’t mentioned though, and that is the price of the conventional energy stuff solar is competing against. It just keeps going up. We know that in markets, what goes up can very well come down again, but there are reasons to believe that the demand for oil and natural gas is on a rising trend and supplies have problems keeping up.
However, having said that, in the US and many other countries it’s coal they’re competing against (as it’s mainly coal burning electricity plants.
There are those who say that if you include the externalities (basically, what burning coal does to the environment), deduct the subsidies, and add the cost of central energy production versus distributed energy production which solar energy enables, solar would already be competitive. Alas, we do not live in such a world (yet?)..