Why Solar Energy Is Such A Threat To Other Energy Sources

|
Includes: FSLR, GCPEF, JKS, RNWEF, SEDG, SPWR, SUNEQ, TSL
by: Sneha Shah

Summary

Solar energy is booming, with IEA predicting 16% of global electricity to come from solar energy by 2050 from less than 1% now.

Solar Panel prices should fall by another 40% in the next 10 years based on the current technology roadmap.

Energy Industry will see a massive paradigm change, investors need to position themselves accordingly.

Solar Energy is growing at a tremendous pace globally, with the demand growth surprising even the most optimistic analyst. The biggest reason behind the growth has been the sharp reduction in costs and prices (75% in the 5 years). This has made solar energy become cost competitive with other energy sources in many parts of the world. Solar energy is already competitive with gas and coal in many regions. What will be even more concerning for coal and gas power plant owners, is that solar energy costs will continue to decline at a rapid pace over the coming years. It is pretty much certain that solar energy costs will become cheaper than coal and gas in the coming 10-15 years. Solar energy will also threaten the oil industry as solar energy starts penetrating the transport sector (through electric vehicles). Even other renewable energy sources such as wind and nuclear energy will face the heat from solar energy.

Sharp growth in Solar Demand is expected to continue

As per SEIA, USA will have more than 40 GW of cumulative solar installations in 2016 registering a growth of 25-50%. China increased its installation target by 30% for 2015. India has become the fastest growing major solar market since it announced a target of 100 GW by 2022 (current capacity is less than 5 GW). This is happening because solar power has been outgunning other forms of energy in cost reduction, as well as its green credentials. The industry has witnessed massive cost cutting across major components such as panel and inverters, and also achieved higher cell efficiency levels. However there is still a scope of further cost reductions as explained in the ITRPV report making solar energy a huge threat to other forms of energy.

Main Drivers for Cost Reduction in Solar PV Prices

It is anticipated that these costs will decline further due to both technological improvements and decreasing material costs. The solar prices will continue to decline with increasing scale. This will also lead to weeding out of weaker players and the industry will consolidate around the stronger ones.

1) Fall in polysilicon prices - Polysilicon is the most critical raw material that is used in the production of silicon wafer panels. Costs have already reduced in the past few years from ~$60/kg, to less than $15/kg now. This is expected to continue with increasing scale and technology improvements. The FBR technology will bring about further cost improvements and more players will move away from the mainstream. REC Silicon (OTCPK:RNWEF) and SunEdison (NYSE:SUNE) are already deploying the FBR technology to reduce costs.

The graph below shows the price trends of polysilicon, wafers, cells and modules over a span of five years from 2010-2015. The inset shows the proportion of the price attributable to different module cost elements.

Click to enlarge

Source: ITRPV

2) More efficient usage of silicon - Silicon wafers are used as the main raw material for cell production and accounts for ~60% of the overall solar cell costs. Reducing the thickness of wafers would lead to more efficient use of silicon. It is expected that thickness of multicrystalline wafers will achieve a minimum value of 150μm within the next seven years, while monocrystalline wafer thickness will reach a minimum thickness of 120μm by 2025. 180μm is the preferred thickness of wafers used on cell and module production lines currently. In addition, diamond wire sawing technology is also expected to lead to wafer process cost reductions.

3) Reduction in non-silicon costs

i) Reduction in metallization paste costs - Silver and aluminum used in metallization pastes are the other most expensive non-silicon material used in silicon cell production. Consumption per cell is expected to further decrease, from about 100mg currently down to 40mg per cell by 2025. Silver will also be replaced by less expansive copper. Pastes containing lead can also be used as a substitute.

ii) Encapsulants and Connections - It is proposed that lead-free solder technologies will be prevalent for connecting solar cells. As for the encapsulants, EVA will continue to dominate with 60% of total market share till 2025. It is the most common encapsulant used today. Polyolefin will be the second best option and it is expected that by 2025 end, it will capture 30% of total market share. Glass and APA are expected to emerge as stronger alternative materials for TPA backsheet used today.

4) Improvement in cell-to-module power Ratio - This ratio measures the power derived from cells to modules. Currently it is 99.5% for multicrystalline technology and 98% for monocrystalline technology. It is expected to be more than 100% in the future, meaning that the power of finished module will exceed the power of the cells used in the module. The efficiency of N-type cells will increase over time, when compared to p-type cells. Higher efficiency cells will further drive higher power. Usage of bifacial cells that will be light-sensitive on both sides, will also increase.

5) Improvement in Cell Efficiency levels - The efficiency of solar cells have and will play a major role in bringing down the overall cost of solar panels. There has been an improvement of ~0.5% in cell efficiency levels in the last few years. The efficiency of silicon solar panels (single junction) is expected to be 29% in future. Efficiency is further expected to reach ~30-50% for multi junction solar cells.

Click to enlarge

Source - Current and Future Cost of Photovoltaics - Agora Energiewende

Solar Panel Prices will reduce by ~40% over next 10 years

As per ITRPV, solar panel costs will decrease to 33 cents/watt by 2024 down, from around 55 cents/watt now. Solar inverter costs are also expected to decline at the same rate.

Source: ITRPV

Solar Electricity Prices to range from 3 cents/kWh to 10 cents/kWh by 2025

Conclusion

According to IEA, solar will generate ~16% of global electricity by 2050, from less than 1% now. I think this figure may still be an underestimation, given the sharp decline in prices. If policy makers support solar energy in terms of reducing the cost of capital and enabling grid integration, solar energy could increase to 40% of electricity production by 2050 (as per Fraunhofer Institute). By 2050, 1780 GW of annual solar capacity additions might be possible with 36000 GW of cumulative capacity. The Street has still not factored in the sharp decline in solar technology going forward. Solar plus storage is expected to be a huge threat to the utility industry, as energy storage costs are also expected to see >50% cost reduction in the next 5-10 years. By 2020, solar plus storage costs are expected to reach parity with retail electricity prices in a number of places. Solar energy is all set to bring about a paradigm change in the global energy industry. While the current changes have been quite dramatic, the future will see even more drastic changes. Energy companies which are not reacting proactively will see a huge drop in their stock prices. Something similar to what European utilities have already seen with a massive 50% drop in stock prices over the last 5 years. Investors need to be on their toes and reach rapidly to these changes. Some of my favorite solar stocks are Trina Solar (NYSE:TSL), JinkoSolar (NYSE:JKS), First Solar (NASDAQ:FSLR), GCL Poly (OTCPK:GCPEF), SunPower (NASDAQ:SPWR) and SolarEdge (NASDAQ:SEDG).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.