A scenario we wrote at least half a year ago is actually materializing. Polysilicon prices are plunging, and with that, the price of the solar cells build with this, which is still the large marjority of solar cells, despite all the attention on so called thin-film technologies that don’t use polysilicon.

We used to write about three impeti for getting solar energy prices down:

1. Continuous gradual improvements through learning and scale economies
2. More radical breakthroughs by innovation, like new materials, new production processes, new concepts
3. A fall in input prices.

The first might be relatively small and not very spectacular, but it’s taking cost down and efficiencies up on a gradual, year-to-year basis in the order of 3-5% per year. There are two things one has to realize:

• No traditional energy source can boost this kind of continuous progress. Not to say that oil, gas, and coal winning is not subject to technological progress, but this is (more than) cancelled out because the low-hanging fruit (the cheapest deposits) have largely already been plucked.
• 3-5% progress is not much in a year, but in a decade it starts to make a dramatic impact, especially if the cost curves of the main alternatives (traditional energy) are sloping upwards, rather than downwards.

Most attention is usually going to the more radical breakthroughs provided by new concepts (concentrating light on cells through lenses, for instance), new materials (thin film, nanocells, etc.) and new production processes.

Thin film especially has gotten much attention, and indeed the performance of companies like First Solar are quite spectacular. However, we have always argued that they had a somewhat artificial advantage due to the scarcity, and therefore very high prices of polysilicon, the raw material going into most solar cells.

And that advantage is now rapidly slipping away. Spot prices for polysilicon have now fallen from $450-500 per kilogram in the summer of last year, to $130-150 p/kg now. And, because severe oversupply caused by a fall in demand and a lot of new production capacity coming on-line, these prices are set to fall further, a lot further.

Theoretically, they could fall all the way down to marginal production cost (which is supposed to be something in the order of $30 p/kg), but are expected to fall to the $50-60 range at least.

Now, although polysilicon makes up something in the order of half the cost of solar cells build with them, it doesn’t mean prices of these will fall in line with the price falls of polysilicon because most producers have long-term supply contracts which mitigates these dramatic price falls considerably.

But it does mean a 20% fall in the price of these cells is likely, and that’s a very significant step on top of the other two working forces, and the price pressures solar cells are facing because of the recession and the steep drop in energy prices in general

What this amounts to is that solar energy will slowly emerge as a viable, cost effective way to compete with traditional electricity production (the elusive ‘grid parity’), and this will open whole new markets for solar energy, unleashing yet more economies of learning and scale.

In the meanwhile, the price pressures due to the steep fall of energy prices and the recession have made solar energy a particularly hostile place for investors, but we think this isn’t going to remain forever. Picking shares up now on dips will provide handsome returns for investors with patience (probably the only ones left in the market anyway..).