To truly understand the supply demand mismatch in the solar pv industry, I recommend you read this free report entitled "Polysilicon: Supply, Demand,& Implications for the PV Industry" , published by the Prometheus Institute for Sustainable Development.

As the report makes lucidly clear, see pages 13-14, in 2000, silicon production capacity produced 24,000 metric tons. In 2005, this had grown to just 31,280 metric tons. The central reason why polysilicon capacity was so slow to grow was because it was living off the silicon glut in the wake of the dot com bust of 2000. Meanwhile, solar pv started to boom - quadrupling from just under 400 MW in 2001 to 1727 MW in 2005. No wonder solar prices have not fallen, because silcon feedstock production (60 - 70% of final cost to the consumer) has not kept pace with demand.

The projection from this report though is that production will reach 72,000 mt in 2010.

So to see how this pans out keep any eye on the listed polycrystalline producers; REC and MEMC and pay attention to the silicon recyclers; Renesola and SolarWorld.

Germany's Solarworld AG plans to double annual solar wafer output from 250 MW to 500 MW over the next 28 months. Of particular interest is that " . . . 50 per cent of the increased volume had already been sold until 2018 by way of long-term supply contracts with the international solar cell industry."

This would suggest that for those of us worrying about a slowdown in the German solar market our fears may be overdone. It's quite an achievement for any manufacturing firm to have orders in place that far into the future.

On the negative side, that Solarworld can sell that far forward on existing prices (silicon now sometimes touching $200 a kilo, average now $74 v. $15 in 2000), suggests to me that the longed-for around the corner drop in prices to $1-$2 a watt is anything but around the corner. The market - in terms of wafer buyers - is not anticipating greatly falling prices even out until 2018.

It's a curious twist of fate that many of Japan's largest companies - the Keiretsu - have become major players in a relatively tiny power industry - solar. As I wrote here a few years ago, the Keiretsu were responsible for 45% of global production. Since then, matters have changed and Germany is driving the demand for the global solar market.

So news that Sanyo, which competes with Sharp and Germany's Q-Cells will spend about 9 billion yen in the business year starting next April and 10 billion yen in the following year to boost its annual capacity to 350 megawatts from the current 165 megawatts could be seen as a solar fightback by the Japanese.

Looked at in very crude terms; Germany, China and Japan - these 3 countries are the current and future driving forces behind solar production. Germany is where the demand is, Japan is where a large part of the silicon will come from and China will eventually become the production hub for the world. In a few short years, the solar industry has changed completely. I expect this to happen again over the next few years too.

SunTechnics, the solar engineering and engineering subsidiary of Conergy AG has just announced a tie-up in India. The deal is with Cauvery Kalpatharu Grameena Bank (CKGB), for retail funding of environmental friendly energy solutions. CKGB is a regional rural bank, with over 200 branches spread across the six districts of Mysore, Chamarajnagar, Hassan, Tumkur, Bangalore urban and Bangalore rural.

A lot of people have ignored India and concentrated on China when looking at the future impact of alternative energy. This is a huge mistake. India is growing almost as fast as China at around 9% p.a. rather than the Chinese 10% and the demographics suggest that India will be bigger than China in the not too distant future.

Conergy AG meanwhile appears to have had a positive response to its plans to enter the wafer module and cells production in the near future. Many think that the associated costs of solar power are so high, only vertical integration of production through to retail to installation can make it a truly viable business. Let's see . . .

As I've alluded to here before - see not yet archived blog from 4th Dec - Two views on forward solar prices - boom or bust? - I have long suspected that the good news story about thin-film solar is at least a little overdone.

So I was intrigued to read this piece on Red Herring which echoed my prejudices at much higher volume !

To quote;

". . . researchers have been working on thin films for years. Thin-film solar has a long history of disappointments, due to manufacturing difficulties and reliability problems, among other things."

It seems that the source of this renewed interest in thin-film solar was nanosolar - a newish thin film company getting extensive pr at least partly because Sergey Brin and Larry Page of google invest in it.

Anyway, the thin-film sceptical article continues . . .

"Nanosolar is one of a number of thin-film startups that claim new materials and manufacturing technologies could solve the problems. The facilities are a chance for Nanosolar to prove itself, and the viability of thin films. So far only a few thin-film companies have begun manufacturing, including First Solar, Energy Conversion Devices’ Uni-Solar, and Global Solar Energy, and they are still at low levels."

I don't think there's much doubt that thin film is no magic bullet. It is as yet only 5 - 10% of the global solar pv market and there are two main reasons for that;

i) the trade off in reduced costs from a reduced input of silcon is offset by lower efficiencies - perhaps 6 - 9% v. 15% for hard solar panels and customers like power.
ii) demand still isn't great enough for a continuous manufacturing run of thin film.

Canadian Solar - a company incorporated in Canada which does all of its manufacturing in China - has not been having a great time since going public a month ago and it has been noticed. It has basically fallen ever since - even 5.76% today.

Nevertheless, today they predicted for Q4 revenues of $24.5 million to $26 million.

There appears to be some concern about the slowing demand for solar in Germany - the world's largest market. Of AEI's 41 listed solar stocks, a full 17 of them are in Germany. So a downward shift in demand in Germany is a very, very big deal.

Here's a first - a leading political columnist, Thomas L. Friedman of the NY Times, appears to have inadvertently lifted the price of Suntech stock by praising Suntech's CEO as China's leading green entrepreneur.

If you want more information about Suntech Power now - see our AEI page here.

I've got a lot of time for Friedman, having much enjoyed his book "The World is Flat" and like very much his "First Law of Petropolitics". It's absolutely right to be upbeat about what is happening in China and Suntech will certainly not be the last big chinese alternative energy company to succeed. Yet even if Suntech can uniquely get the price of solar down to $2 per watt in the next few years, would they want to sell it at that price?

Probably not if they want to be more profitable and one must always be cautious of the solar dawn story which I can now tell you has been around for 100 years. Today I received photocopies from a book called The Romance of Modern Invention published in 1907 with detailed images and descriptions of working concentrated solar power plants in California. It was amazing to see how much was known then about this technology.

A very interesting interview here with Stanford Ovshinsky, co-founder of Energy Conversion Devices although the comparison of him with Thomas Edison is a little over the top. But he is nonetheless clearly ambitious - when asked if he saw ECD as the GE of the 21st century, he replied ;

“Oh, ECD will be much more than that . . .Energy and information are the twin pillars of the global economy, after all.”

Talk about confidence. The man is 84 years old and he exudes life. Someone once said to me that there are 2 types of people - those who inject life into other people and those who suck it out of those around them. No doubt then about which category Ovshinsky is in.

Renesola closed up today by 106 pence to 394 - a massive jump. This comes on top of a jump from 229 p on the 30th November. So can it be justified?

The 2007 capacity expansion is not to be underrated - from an original target of 125 megawatts it has more than doubled to an anticipated 265 megawatts helped by purchases of additional mono and polycrystalline furnaces and wire saws. Doubling the turnover in one year is growth far in excess of the industry itself - see my previous blog where some optimistic forecasts see a doubling of global polysilicon capacity by 2008 earliest.

It all depend on what you think of polycrystalline silcon - will supply catch up with demand and when?

I'm a great advocate of balance. It's always worth looking at both sides of the argument, particularly if you are an investor when getting swept up with all the hype is the easiest path of all. So do look at this piece published a couple of weeks ago in the FT on solar prices.

The pessimistic scenario

It is easily the most pessimistic I have seen. To quote one analyst - Jeff Osbourne at CIBC - “Expectations that the polysilicon supply shortage will ease in 2008 are overly optimistic and we do not expect supply/demand equilibrium until after 2010”. Prices for silicon, now at up to $200 a kilo may go up another 30% over each of the next 3 years.

The optimistic scenario

Is outlined in this 26 page report here, which is full of very good information but misleadingly confuses solar thermal (flat plate collectors for the generation of hot water) with concentrated solar power (angled mirrors and turbines) and I would suggest a bit too optimistic about thin-film solar's chances. After all, if all thin film solar needed to succeed was higher silicon prices, then why have companies like Solar Integrated done so badly?

My conclusion

The vital statistic to watch is the global annual production of polysilicon in tons. In 2006, it is estimated to be around 35,000 tons. In 2008 it could be as much as 76,000. Straight mathematics suggests that for the solar industry to keep growing at a 30% clip over the next 5 years, 2010 will have to see a production of about 100,000 tons - a tripling of capacity which right now looks more unlikely than not. Forecasting any further out than the next year's production of polysilicon still looks a bit like guesswork. So on the balance of evidence, I'd suggest the growth of solar power over the next 5 years will not be a rerun of the last 5. Supply is not going to catch up with demand any time soon and demand growth will suffer. Without a major technological breakthrough which precludes the use of silicon, the next 5 years might see a growth rate therefore closer to 15% rather than 30%.