The Shining Prize: Solar Power

It is starting to appear that a Moore’s Law of endlessly doubling technological innovation may be just around the corner for the solar power industry, along with drastically falling prices for photovoltaic cells.

That means that for the first time, a viable alternative is arising to the fossil fuel generation of power. The solar industry has grown so rapidly over the last 18 months, and appears likely to continue to grow, that the full and long-awaited combination of falling unit costs and relentless technological innovation is already underway. China and Taiwan are leading the technology, although the United States, particularly California, is catching up fast.

As a result, fossil fuels will never again be without a viable and vigorous competitor patrolling its pricing. It is a mismatch between two economic models: between a low capital cost - high variable cost model (fossil fuels); and a high capital cost - vanishingly small variable cost model (solar).

Those vanishingly small variable costs mean the entire solar proposition is about cutting capital costs, which is why the now galloping supply-side expansion is so significant. The solar power proposition is extremely simple: solar energy really does have the potential to deliver all the world’s foreseeable electricity demands cleanly and renewably. Calculations and demonstrations of this abound. Here are three:

  • On average each square meter of land is exposed to enough sunlight to receive 1,700kWh of energy every year. That is enough to satisfy global energy demands approximately 10,000 times. Alas, sunlight falls unevenly: in Europe the average yearly received is about 1,000 kWh, in the Middle East and the Sahara it rises to 1,800 kWh. In vast swathes of Central and Western China it rises to more than 2,000 kWh.

  • It has been calculated that 0.71 percent of the European land mass, covered in photovoltaic modules, could supply Europe’s entire electricity demand. The International Energy Agency calculates that installing photovoltaic cells on 4 percent of the world’s dry desert areas would meet the world’s entire energy demand.

  • A 35,000 square-mile chunk of the Sahara Desert — smaller than Portugal and a little over 1 percent of the Sahara’s area — could yield the same amount of electricity as all the world's power plants combined. The problem, however, has historically been one of supply – getting to the point where supply-chains are sufficiently developed that it can become a genuine commercial possibility.

Moore's law was first described by Gordon Moore, the co-founder of Intel, in 1965. It posited that the number of transistors that could be placed on an integrated circuit would double every two years. It has held true for more than 40 years and looks good to last at least another 10. I believe that point is probably arriving right about now for solar energy, and that the combination of continuous technological efficiency gains and extraordinary and sustained supply-side competition will ensure that fossil fuels will from now on always face price competition from the newer, and cleaner, technologies. In other words, the fossil fuel quasi-monopoly on electricity generation is breaking right now.

Solarbuzz, probably the leading solar energy consultancy, found that last year 5,950 MW of solar power was installed – a rise of 110 percent year-on-year. Using data from the European Photovoltaic Industry Association, this suggests that global cumulative installed photovoltaic capacity rose to 15,112 MW.

When compared to global installed thermal electricity capacity of just under 3 million MW, solar is equivalent to just a paltry 0.5 percent of thermal generating capacity. By itself, photovoltaic power is insignificant. However, Solarbuzz also estimates that 2008’s global solar cell production rose to 6.85GW, up by 99 percent. It is absolutely certain that this supply will rise again, and dramatically, this year, if only to reflect completions of projects already under construction.

But if we assume that only the 6.85GW can be sold next year, we reach a global capacity of just under 22GW of installed capacity. If thermal generation growth continues at its five-year growth rate of 3.8 percent, then by the end of this year, solar’s proportion will have risen to 0.7 percent.

solartaylor-graph1

Source: European Photovoltaic Industry Association, Solarbuzz, ColdWater Economics Ltd

In total installed capacity terms, that is still insignificant. But on a marginal basis, the story has changed very dramatically: over the past five years, new solar installations have risen from around 1 percent of annual new thermal installation to probably around 6 percent.

On a marginal basis, solar energy is no longer insignificant – it is a viable alternative. What’s more, if the suddenly significant photovoltaic industry is even just to keep its existing factories running, while adding no more, solar will double its proportion of installed thermal capacity by 2013. But of course, it is nearly certain that photovoltaic production capacity will expand – and probably rapidly. In the 10 years before the big jump of 2008, production had grown by an average 35 percent a year.

{mospagebreak}

But assuming that growth slows to the 6.85GW of last year’s capacity expansion, it still means that marginal installation of solar power will rise to 10 percent of marginal thermal power by 2014. If the average of 35 percent growth is maintained, we’ll get there by 2011.

solartaylor-graph2

Source: European Photovoltaic Industry Association, Solarbuzz ColdWater Economics Ltd

But there is a large consultancy industry already attempting to track the likely expansion of this market, and it is likely that the expansion will be far faster: we can expect solar polysilicon supply to expand from roughly 5GW last year, to around 11GW this year, to around 38 GW by 2012.

Such a massive increase in supply is likely to cut the spot price from a peak of around US$450 per kg last year to probably no more than US$50 by 2012. If that turns out to be right, the marginal supply of solar MW capacity this year will already be equal to roughly 10 percent of marginal thermal capacity added, with the proportions rising to roughly 30 percent by 2012. As these numbers rise, what’s happening is that solar power is moving well beyond the idea of putting solar panels on your roof: what is envisaged, and what is already driving demand, is the development of large-scale solar farms contributing directly to central power grids. The demand, in other words, is increasingly wholesale/industrial, rather than just retail/household.

It is important to realize that this surge in MW capacity doesn’t merely reflect the build-up of industrial capacity for solar silicon per se, but also the acceleration of technological progress, so that for every kilogram of polycrystalline silicon, the MW potential is rising sharply.

For example:

  • The average thickness of polycrystalline silicon wafers used for photovoltaic cells is being cut, shrinking from 0.32mm in 2003 to 0.17mm last year.

  • At the same time, the average efficiency with which these wafers convert sunlight to electricity has risen from 14 percent to 16 percent. Between them, this means that the amount of solar power capable of being generated by a kilogram of polycrystalline silicon rose by 115 percent between 2003 and 2008.

We should expect these sorts of efficiency gains to continue: indeed, I’d be surprised if in the next few years someone doesn’t discover a sort of Moore’s Law for solar power. Already, some companies in the industry feel willing to make extraordinary claims about what these sorts of efficiency gains are doing to the underlying economics of the industry. To choose four, almost at random:

  • In China, Suntech Energy’s founder Shi Zhengrong is claiming a conversion rate of 19 percent and has a standing forecast that solar energy will reach ‘grid parity’ pricing by 2012 (even as he struggles with the consequences of overpaying for silicon last year).

  • In the US, First Solar Inc claims its thin-film technology allowed it to produce photovoltaic cells at US$0.98 per Watt during 4Q – a claim seemingly endorsed by the Institute for the Analysis of Solar Energy at George Washington University.

  • Also in the US, SunPower Inc is producing solar cell prototypes with a conversion rate of 23.4 percent.

  • Again in the US, the National Renewable Energy Laboratory is playing with 'inverted metamorphic multijunction solar cells’ which have a conversion rate of 40.8 percent. These developments are only scratching the surface: the emergence of thin-film solar technologies promises both cheaper and infinitely more flexible ways of collecting solar energy than the traditional PVs.

  • At the small end of the scale, Dow Chemical expects to be offering roof shingles incorporating thin-film solar collection by 2011. And at the other end of the scale, thin-film technology is allowing T-Solar to produce the world's largest photovoltaic cells (5.2 sq meters) which it claims can cut installation for large-scale solar farms by around 20 percent.

And on top of that, and perhaps more easily understood, are the emerging industrial applications of solar concentration technology – essentially using mirrors to focus the sun’s rays on boilers which ultimately drive steam turbines, or on super-high efficiency photovoltaics. A simple idea, already at work in Spain, but with new plants being announced so far this year in: Nevada, California, Beijing and, yes, the Sahara. When an industry is developing at such a pace, it should not be surprising that governments and industrial planners all over the world have their sights set on it.

At the moment, the solar silicon industry is dominated by China and Taiwan, which last year produced 44 percent of the world’s solar cells, according to Solarbuzz, up from 35 percent in 2007, and overtaking Japan (22 -25 percent) and Germany (about 20 percent).

China’s market position will not go unchallenged: even this week, Japan’s Ministry for Economy, Trade and Industry published policies aimed at Japan securing more than a third of the world market in solar cells by 2020. Those proposals included the full press of industrial policy, including the government providing loans to assist firms to buy silicon, and demands that utilities purchase solar energy from households at a rate of about ¥50 per kWh (up from the current ¥24). METI envisages the measures could expand the domestic market for solar power to ¥0 trillion, and boost employment in the industry from the current 12,000 employees to about 110,000.

Less directly, the development of renewable energy resources plays a central role in the US economic stimulus package, with a mixture of tax incentives and loan guarantees which the US solar industry expects will add 67,000 jobs in the sector this year, rising to 119,000 next year.

None of this should disguise the fact that right now, the industry is suffering sharply – and nothing I have written should remotely be taken as a suggestion that you invest in any particular company or sector. The crisis of western financial institutions has hit the solar industry as hard as if not harder than, any other sector (except, perhaps, the auto sector).

In particular the price of solar silicon has collapsed from more than US$400 per kg in September-November, to under US$200. This has particularly left Chinese producers taking huge write-offs against inventory in the fourth quarter of 2008. There’s no particular reason to think that the price is likely to rise anytime soon, since most analysts expects the industry will suffer from huge overcapacity this year.

But ultimately, that’s the salient point: that the short and medium term impact of that overcapacity will be that prices of materials continue to fall, and that therefore the costs of installing solar energy continue to fall. The supply-problem which up to now has been the stumbling block for the economics of the solar energy industry, has switched, for the moment, into a demand problem.

Demand problems will be dealt with in the traditional way – by cutting prices. And that simply accelerates the date at which solar energy reaches grid-parity.

While Chinese, Taiwanese and cutting-edge American compaies are diving into solar research and production, Big Oil is staying firmly on the sidelines. According to an April 8 New York Times article, Royal Dutch Shell said it will freeze research and investment in wind, solar and hydrogen power and focus its efforts on biofuels. BP has pared back its renewables program. Exxzon isn't interested in hanging its future on alternatives.

"The scale of their alternative investments is so mind-numbingly small that it''s hard to find them," the Times quoted Nathaniel Greene, a senior policy analyst at the Natural Resources Defense Council, as saying. "These companies don't feel they have to be on the leading edge of this stuff."

Does that sound like General Motors, Ford and Chrysler?

On every front, I think this is now an unstoppable industrial dynamic. Which means that, for the first time in human history, we have an alternative to relying on fossil fuels. We’ve endured our last Oil Shock.

Michael Taylor is a UK-based economist and head of Coldwater Economics Ltd.. He adds a disclosure note saying he has a consulting contract in China helping to develop and industrial park in Xi’an and "At the very least, this piece reflects some of the accumulated knowledge and database which I’ve assembled, and there is of course the tendency for knowledge to induce advocacy. You should be more worried by this tendency than any suspicion that I’d get paid more if I skew pieces like this. Sadly, I don’t."