Contradictions in the Solar Market

by: Robert Castellano

The solar industry is faced with a huge oversupply of solar panels planned for production in 2008, but no one seems to notice… or care. Shares in many solar companies such as Evergreen Solar (ESLR), First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), and Suntech Power (NYSE:STP) have surged with the booming solar market .

In the past few years, we have witnessed a stampede of startups entering the solar cell market using thin film technology because of a shortage of polysilicon material used to make crystalline cells. At the same time, existing thin film solar suppliers have announced large expansions as a means of reducing production costs and gain a competitive edge. This has resulted in thin film solar panels reaching 9.4% of the 3.8 gigawatts [GW] of power generated worldwide in 2007, up from 7.6% of 2.5 GW produced in 2006. In 2008, worldwide solar power generation will grow 50% to 5.6 GW, but thin films as a percentage of panels will grow to 14.4%

At the same time, polysilicon suppliers have also initiated competitive capacity expansion plans. 2008 will be the turning point when polysilicon capacity actually exceeds demand by a mere 4,700 metric tons using a calculation that thin film panels at 14.4% of the market. If thin film solar continues at its same growth rate, in 2009 thin film will make up 17.8% of all solar power generation. That would leave a capacity of polysilicon exceeding demand by 17,000 metric tons, based on capacity expansions announced by the polysilicon manufacturers.

There are a great deal of contradictions in the solar marketplace based on these scenarios. The first contradiction is a result of the huge expansion in the industry. Total capacity announced for nearly 100 panel manufacturers (thin film, monocrystalline, and polycrystalline), comes to 10.7 GW for 2008, while solar production is forecast to reach only 5.6 GW. That equates to a capacity utilization of only 52%. By way of comparison, capacity utilization in the semiconductor industry was 90% at the end of 2007.

The low capacity utilization in the solar industry will only slightly improve in 2009 and 2010, growing to 0.57 and 0.63, respectively.

Traditional monocrystalline and polycrystalline silicon solar panels with efficiencies between 15% and 22% compare to thin film amorphous silicon of 6% to 7%, which will possibility increase to 10% efficiencies in 2009 using bilayer micromorph structures. CdTe (cadmium telluride) technology, led by First Solar, is already achieving 10% efficiency. Thus, amorphous silicon is two years behind CdTe.

The second contradiction is that if thin film solar continues at its same growth rate, in 2009 thin film will make up 17.8% of all solar power generation. That would leave a capacity of polysilicon exceeding demand by 17,000 metric tons, based on capacity expansions announced by the polysilicon manufacturers. With all that polysilicon capacity on hand, and thin film solar panels having such low efficiencies, why should thin film continue to increase? If thin film solar stayed at 14.4% of the market in 2008 as it was in 2007, that would still give an excess of nearly 15,000 metric tons of polysilicon. Even if 100% of solar panels made in 2008 were non-thin film, there would still remain an excess of 5,000 metric tons of polysilicon. So that’s the third contradiction: why such an increase in capacity by polysilicon manufacturers when it’s not needed?

The fourth contradiction is why is there a thin film market in the first place? If efficiencies are so low, particularly in the amorphous thin film sector, why do we need them in the future? They served a purpose in the past few years because there wasn’t enough polysilicon around. But why in 2008 and beyond? Clearly an efficiency 1/3 that of crystalline solar means that 3 times more amorphous silicon panels need to be used to generate the same amount of solar power. That’s a lot of residential rooftop area. Solar farms have a lot of real estate to generate electricity, but you need to install 3 times the panels there too. And that’s a lot of copper cable connections and mounts, each connection costing money for materials and labor. Is there a price benefit of thin film panels one may ask? Monocrystalline and polycrystalline panels are priced within a few cents of each other, whereas thin film panels are about $1 cheaper.

However, the mono and poly panels supply 200 W of power each, while the thin film is 60 W. Again, one needs 3 times more thin film panels for the same wattage. But the lower panel price is quickly eroded by hookup costs. Thus, the cost per watt of power generated is about the same, whether it is a thin film or non-thin film panel. And so these technologies will continue to co-exist until the shortage of polysilicon works itself out. That would be 2009 at the latest.

The fifth contradiction is the high equipment costs to make an amorphous silicon thin film panel. Up the food chain, solar thin film equipment suppliers such as Applied Materials (NASDAQ:AMAT) of the U.S. and Oerlikon of Switzerland are selling amorphous silicon technology. Equipment costs in the neighborhood of $200 million to make 60 MW of panels. Add to that the costs of consumables. Cost to manufacture panels of amorphous silicon is about $1.70 per watt, depending of the size of the factory (First Solar, which uses cadmium telluride, has reduced its cost to $1.20 per watt). The profit for a panel selling for $2.50 per watt would be $0.80 per watt or $50 million per year. But with the equipment costing $200 million, it would in reality take 4 years just to recoup the equipment costs. And as more capacity is added, competitive pressures will drop the selling price further, not to mention Chinese manufacturers selling their product at under $2 per watt.

The overcapacity should impact equipment and materials sales in the amorphous silicon thin film area. As the shortage of polysilicon dissipates, due to ramped production and a semiconductor slowdown, prices of mono and polycrystalline silicon solar panels will drop and become even more economically competitive with thin film technology, further exasperating thin film equipment sales and the thin film solar market. With the industry having twice the capacity as it needs, expect some rethinking on the part of investors.

Disclosure: none