Photovoltaics: Grid Competitive in Five Years

Alexander E. Braun, Senior Editor -- Semiconductor International, 1/29/2008 6:40:00 AM

The solar photovoltaic industry will achieve grid parity — standalone economic viability without incentives — in under five years. This prediction was made by Stephen O’Rourke, senior analyst covering semiconductor capital equipment and materials for Deutsche Bank Securities (New York City), at the recent Industry Strategy Symposium (ISS 2008), presented by SEMI and held in Half Moon Bay, Calif.

“This time, the solar PV industry won’t fall back into obscurity as in the past,” O’Rourke observed. “The technologies that exist today to generate electricity from photovoltaics are several: crystalline silicon and several thin-film approaches.” The graph around which the presentation was built displayed curves representing the different technologies available to generate electricity using solar power. The curves started in 2006 and were extrapolated to 2020. “The defining metric of what’s competitive in this industry is the declining cost per kW/h,” O’Rourke said. “It’s all about selling energy; not about cells or modules or systems.”

O’Rourke looked at the average cost of grid electricity for 2006 — 8.6¢/kWh, a blended average in the United States — considering an aggregate growth rate of ~4.5% over the past seven years. He then extrapolated those growth rates into the future. “This provides us with a time frame for convergence — when solar becomes competitive with grid-supplied electricity. This happens when it gets below the average retail cost of grid electricity,” he said, adding that these were conservative numbers.

According to O’Rourke, supply and demand is the linchpin of the solar photovoltaic industry. “Considerable capacity is being built, because there’s a supply constraint due to an inadequate supply of refined silicon. Currently, because there is an undercapacity, things look very good, margins are great, and companies are profitable. However, that will soon lead to an oversupply situation, probably beginning in 2009, when there will be a more than adequate supply of polysilicon.” O’Rourke said that this will not be what he defines as a “persistent” oversupply, but one governed by demand elasticity. “It’s akin to the memory industry — prices fall, margins compress, stocks come down, balance sheets are challenged, and there is a shakeout in the industry,” he said. “I estimate this will last for a couple of years.”

O’Rourke stressed that he was being conservative in his predictions, particularly because it is impossible to factor the appearance of a new technology. “When new technologies step into an industry, they can alter the entire dynamic, change the cost-reduction curve,” he said. “I don’t anticipate this within the next five years. But if we have such a shakeout, all the cost curves can get shifted down and bring convergence much sooner.” However, O’Rourke was careful to point out that when photovoltaics reach grid parity, the technology will still be used as a peak power supplement, not a base load supplement. “But photovoltaics are a real industry now, and one that will have explosive growth once it reaches that convergence point.” The analyst described photovoltaics as the oldest new industry because it has been around for half a century. “It is now in an initial growth phase. We’ve seen enormous funding of new capacity growth, new companies and new issues coming to market. I think we’re on the downswing of this as we start to anticipate an oversupply situation. This has happened both for crystalline silicon and thin-film technologies,” he said.

When this occurs, stocks will drop, consolidation will take place, corporate finances will be reduced, and the whole industry will regear for what will eventually be a rapid growth phase. “This is where it all begins,” O’Rourke said. “Subsequently, you’ll have an industry that resembles the semiconductor industry, with cyclicality over time.”

Synopsis of the solar photovoltaic industry over the next 10 years. (Source: Deutsche Bank Securities)

O’Rourke examined the capital required and the significance for equipment companies that may be trying to address this expected growth. “If we look at a fairly standard profile of growth and capacity in this industry, up to about a terawatt worth of installed capacity within 20 years — ~4% of electricity generation with present growth rates in the global electricity market — what we have is a capacity build. Now we must build out the capex per watt. In 2006, it cost between $1.25 and $1.50 per watt to put a factory in place. Over time, that will come down. Within 20 years, it may cost well under $0.50 per watt to put in capacity.”

This comes to a capex profile that can kick out ~$10-$11 B per year; the equipment profile is ~80% of that. “So you have roughly a $10B equipment market that is nowhere near to the $30-$40B equipment market for the wafer fab equipment industry,” O’Rourke said. “Based upon the profile of a commodity industry [which is what this is] and the value that the equipment provides in this industry, there is a lower margin profile.”

However, he added, everything points up from there.