High oil prices, growing interest in alternative energy and decades of R&D all mean boom times for the solar industry, right? Not quite. Just when solar-panel sales should be skyrocketing, the industry finds itself grappling with a nagging shortage of polysilicon, the key ingredient in photovoltaic solar cells. Tight supplies are frustrating panel makers and causing investors to balk at backing public companies.
“Right now, I’d say we are in a correction phase for solar stocks,” says J. Peter Lynch, a private investment banker focused on renewable energy for alternative energy companies. “Wall Street said, ‘Jeez, these solar stocks have really run up,’ but then the light suddenly went on about the polysilicon shortage, and the stocks corrected by about 20 to 25 percent. The logic behind it is, ‘Whoops, we went too far’.”
Ironically, polysilicon is made from one of the most common materials on earth: sand. So the problem isn’t so much a lack of raw material as a lack of production capacity for refining sand into polysilicon, the material that enables panels to capture solar photons and turn them into electricity. Burned by past downturns, polysilicon producers have been reluctant to invest in infrastructure that would increase capacity. Last year, though, convinced that long-term polysilicon orders were for real, companies like U.S.-based Hemlock Semiconductor, Norway’s Renewable Energy Corporation, and Germany’s Wacker-Chemie each committed hundreds of millions of dollars for new capacity. But with a lag time of about three to five years between commitment and production, the new polysilicon plants won’t impact the solar industry until 2008 and beyond.
So for now, shortages are still putting the breaks on solar-industry growth and pitting the solar sector in a fight against the massive semiconductor industry, which now uses more than half of the 30,000 metric tons of polysilicon produced each year to make everything from PCs to cell phones to gaming systems. Nevertheless, the solar industry is poised to hit a significant milestone soon: sometime in the next two years, more raw silicon will be going to solar panels than to electronics chips.
Even when new production capacity comes on line in 2008, analysts say polysilicon will remain very much in demand because much of the additional output is already spoken for. Solar cell maker Evergreen Solar (ticker: ESLR) recently signed a supply contract with Renewable Energy Corp. (ticker: REC) through 2014 for polysilicon from its yet-to-be-completed new facility. Other solar companies are expected to forge similar arrangements, according to analysts.
Hence, traditional solar-panel makers, such as Sharp Corporation and BP Solar, are hard at work designing thinner products that use proportionately less polysilicon; a number of smaller companies are also exploring ways to reduce — or even eliminate — the need for polysilicon.
“There is a core group of firms making cells that use a fraction of the silicon needed for conventional solar cells,” says Jesse Pichel, senior technology analyst for investment-banking firm Piper Jaffray. Evergreen Solar, for example, relies on “string rib on” technology, a
manufacturing technique that creates long, 3.2-inch-wide ribbons of silicon that can be cut to shorter lengths for individual applications.
Evergreen claims the process produces more than twice the solar cells per pound of silicon than traditional manufacturing techniques. And Energy Conversion Devices (ticker: ENER) says its thin sheets of solar cells also use less silicon. The manufacturing process deposits the silicon in a gas form onto slender 14-inch-wide stainless-steel sheets, which feed off a roll into the company’s solar-cell manufacturing machine.
Other companies are selling solar products using “thin-film” technologies that eschew silicon altogether. DayStar Technologies (ticker: DSTI) and the private firms Miasolé and HelioVolt Corporation combine the highspeed manufacturing advantages of thin-film techniques with solar cells created from a combination of copper, indium, gallium, and selenium (known as CIGS). Miasolé says only a fraction of this silicon alternative is needed to create the same energy-producing capacity of a conventional solar cell, saving on materials costs.
This all sets the stage for intense competition that’s likely to persist long after the polysilicon shortages subside. Upstarts like Energy Conversion, Evergreen, and the CIGS backers are ramping up their capacity to compete head-to-head against the established solar-cell companies. Hmm…Upstarts challenging the establishment? Sounds like just one more sign that the solar industry is well on its way to moving beyond the growing-pains stage toward becoming a mature sector with a bright future.
A solar game plan
• Consider investing in polysilicon manufacturers: Rather than bolting from solar because of its near-term supply problems, Jesse Pichel, senior technology analyst for investment-banking firm Piper Jaffray, recommends playing the polysilicon shortage directly. He looks for polysilicon manufacturers with attractive price-to-earnings multiples (the stock price divided by the company’s earnings per share, a good metric for looking at an individual stock’s value relative to a large index like the S&P 500.) One such example is MEMC Electronic Materials (ticker: WFR), which has sold at about 12 times its earnings. Investors who balk at supporting manufacturing companies, a segment not typically considered green, may be comforted to know that PowerShares WilderHill Clean Energy Portfolio (ticker: PBW), a diversified exchange-traded fund, includes MEMC within its portfolio of 40 clean-energy stocks.
• Build a diversified portfolio: Rather than gambling entirely on solar stocks, which will likely remain volatile for the foreseeable future, consider a broad mix of environmental securities. A handful of indexes now monitor the financial returns of green investments, including NASDAQ Clean Edge U.S. Index; CleanTech Index; WilderHill Clean Energy Index; and WilderHill Clean Energy Global Innovation Index.
• Wait until profits are on the horizon: Look for companies that show solid financials and a clear path to profitability, says Eric Becker, Green Century Balanced Fund co-manager. “Some companies have strong environmental stories to tell,” he notes, “but the question is, are they going to pan out in one year, three years, or five years?” Becker himself follows a simple rule—he invests in companies that are already profitable or whose earnings trends over a number of years show profitability is imminent. He admits that no pure solar companies meet these criteria yet, so for now his strategy is to limit solar bets to firms included within diversified alternative energy funds, such as the PowerShares ETF.
• Keep an eye on companies that use less — or no — silicon: Energy Conversion Devices (ticker: ENER) and Evergreen Solar (ticker: ESLR) use manufacturing techniques that reduce the amount of silicon needed to produce the equivalent wattages of conventional solar panels. DayStar Technologies (ticker: DSTI) is banking on a chemical-element cocktail, known as CIGS, to produce silicon-free panels. Other CIGS companies include HelioVolt Corp., Miasolé, and Nanosolar, Inc. These are all private companies with significant venture capital backing; investors should watch for future IPOs.
Story by Alan Joch. This article originally appeared in Plenty in October 2006. The story was added to MNN.com in July 2009.