Solar Grade: A Silicon Revolution

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Includes: CSIQ, CSUN, DWDP, ESLRQ, HQCL, JASO, KWT, ROH, SOL, SPWR, STP, TAN, TSL, YGE
by: Edgar M. van-Wingerden

Authors will do just about anything to catch your attention here. We're talking money. I suggest you get yourself a nice soda can of something and read this. But before you trash it, ever wondered what your empty can was worth like a 160 years ago? And what on earth has that got to do with solar energy stocks you might ask?

For those of you not too familiar with the technicals of the silicon solar Photovoltaic industry, I would like to bring to your attention several developments that in my view represent a paradigm change, will reduce the enormous volatility, present a view of the sector that could alter what I consider to be a false perception in the retail investment community about solar energy stocks in general and the silicon PV sector in particular, and hopefully contribute to some wealth creation -cq. to prevent losses- in a series of articles.

Rising energy costs and stretched power grids as well as a desire for energy independence and environmental/health concerns have sparked a surge in the use of solar panels to make electricity. Solar power (including hot water systems) is doubling now every two years. Doubling every two years means multiplying by 1000 in 20 years. That is the nature of exponential growth. Solar PV technology is an information technology and therefore subject to Moore's law which measures doublings in price performance. Solar PV technology has such doublings every six years. So why are we solar investors not all rich yet, boating around the Bikini Islands?

Because, for various reasons, there is a shortage of silicon refining capacity (but, unlike non-renewables: not of the raw materials that are used in the refining process) causing a statistical deviation of the main laws. Over 90% of solar panels in the market today use refined, purified silicon as raw material. In the 1970's, also a time of energy supply uncertainties, the solar panel market was created using scrap metal silicon from the growing semiconductor industry which uses ultra pure 99.999999% (8 9's or 8N) or even more pure 9N silicon. The scrap metal was pure enough: about 99.9999% (6N), less pure varieties were blended to maintain quality standards. Most solar cell production lines today need 6N: Solar Grade or SoG.

Then there is Metallurgical Grade [MG] used by the steel and metals industry as an alloying material. MG (98-99% pure) is made from relatively crude materials (silica or sand, coal or cokes) by heating in a furnace. The better MG is then the starting material of all refineries to produce ultra-pure 8N silicon in a gasification reaction called the Siemens process. Problem is these plants are very capital intensive, take a very long time to build and are very expensive to run. Then the end product is really too pure. Of course it can be blended, but all this remelting, heating and cooling causes futher inefficiencies, away from an optimized silica-to-solar-cells-process. All this caused governments around the world to subsidize the sector.

Spot prices for ultra pure silicon have reached $500/kg this summer. Contract prices (which are lower) are like discounted futures on the underlying commodity. So it usually leads the trend. Right now contract prices are decreasing slowly as more supply finds its way to the marketplace, while the spot has peaked. Of course future trends can also reverse themselves and maybe contract prices for 2010 and 2011 will start going up again, while the spot price is bottoming. The latter would be double bad news for the existing silicon solar PV sector as high spot has kept newcomers from entering the marketplace while even higher contract prices is a tough sell and could hurt margins.

High spot prices have also caused a large increase in R&D spending for alternatives to the Siemens process. REC of Norway [OSL:REC] is playing with a technology called fluidized bed reactors, which offer a power advantage, altough the process is not quite well understood, somewhat unstable and uses more expensive catalysts. Globe Specialty Metals [LSE:GLBM], Advanced Metallurgical Group [AMS:AMG] through subsidiary [TSX:TIM] have all reported succes upgrading metallurgical grade using pyrometallurgical processes, which are not as capital intensive. These stocks have sky-rocketed as they are building plants and/or ramping up production, even as it is still somewhat unclear what grade, when and how much. Dow Chemical (DOW) is also using such methods. Dealing with molten silicon remains difficult, especially the removal of Boron and Phosphorus, which are very detrimental to the functioning of solar cells in concentrations higher than about one in a million (6N)

But as every good cook knows, it is best to sieve the flour before baking the cake. Silicon can also be found as silica dissolved in water, in a cheap material called waterglass. It has been known since the 1990's that you can easily filter out many impurities (excluding boron, phosphorus) with reagents. But the real breakthrough came this century as Rohm and Haas (ROH) had developed some chelating (ion exchange) resins with usefull functional groups for the mining industry. But it took the genius of Steve Amendola to put it all together in a world-wide patent and start Reaction Science inc. www.rsi-silicon.com Production costs are three times less compared to a typical Siemens plant. Additionally the capital costs for building a chemical silicon purification plant is 1/10 the cost of a comparable Siemens process plant with a much shorter completion time. The fast plant fabrication time and easy scalability is another factor contributing to the low price of refining, along with the high yield. The ROI time on such plants is projected to be less than two years. The RSI proprietary process has been demonstrated on a small scale and vetted by leading Princeton and M.I.T. scientists. The process and cost estimates in the plan were validated by Black and Veach, a leading engineering firm. www.bv.com RSI already has orders exceeding .5 $ billion, customers include BP-solar. As a result the price of silicon PV solar products will be able to drop significantly. Plants such as these in Alabama, Europe and China will obviously benefit the entire silicon solar PV sector. The RSI method will also be used for forming mono-crystalline silicon.

Based on similar disruptive metals processes in the past, I am confident with a probability model, predicting a 95% reduction in the cost of refined (6N) SoG-silicon in 15 years from today's spot price.

Using Suntech (NYSE:STP) as an example: silicon costs per watt were between $2 and $2.20, nonsilicon costs are about $70 cents or $80 cents/watt. In the next five years RSI will reduce silicon costs to $25 cents/watt and Suntech's non-silicon costs should fall to between $50-60 cents. Futher developments such as a household switch to DC, reducing installation costs (a union stronghold) and innovations/mergers could easily reduce costs even futher e.g. by energy savings.

Of course these positive developments are very bullish for the silicon solar PV stocks.

Some further thoughts:

Avoid ETFs in solar energy stocks such as TAN or KWT as they include some questionable equities with relatively very high market capatilizations. Solar energy investors should now choose sides after having weighted the facts, tracking the SPI and an ETF doesn't do that for you. I will discuss First Solar Inc. (NASDAQ:FSLR) and other thin film stocks in another post.

In general it is cheaper to protect yourself from bear markets by buying puts in the general economy, rather then the continuously volatile silicon solar PV stocks, altough increased silicon price visibility should reduce volatility.

Well by now you should have finished your soda pop, the empty can was worth about $830 back then. A bar of aluminum was exhibited as a precious metal alongside the Crown Jewels at the Paris Exhibition of 1855.