By Chris Berry (@cberry1)
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The growth in the adoption and deployment of solar power since silicon solar cells were first discovered by Bell Labs in 1954 has been nothing short of staggering. The globally installed PV market stands at 140GW and added over 38GW in 2013 alone. In the United States in the first half of 2014, 53% of all new electric capacity came from solar, according to the Solar Energy Industries Association. While still small relative to the overall global energy mix, the rate of solar growth is what to focus on and it is indeed taking off.
As to the question of whether that growth can be sustained, the politically sensitive issue of subsidies seems to get all of the press. To me, there are other, larger, and perhaps more immediate issues regarding PV growth.
One concerns reliable access to the raw materials necessary to build and supply global PV supply chains. Specifically, I’m referring to the copper, silver, silicon, indium, etc. vital to produce existing and future solar technologies. How much do you as an investor, industry watcher, or company representative really know about the origins and supply reliability of the metals and minerals used in PV manufacture? Another issue to be watched is the changes in PV technologies and also the rate at which the technology is adopted. This also has implications for global supply chains.
The success of PV is no secret to anyone at this point. After several tough years when Chinese solar panel manufacturers overproduced and flooded the market, it appears that this excess is quickly diminishing.
As an example, China and Japan have publicly stated aggressive PV deployment goals in the coming years. China reportedly has 20GW of solar capacity installed with a goal to move to 35GW by the end of 2015. Japan is forecast by Bloomberg New Energy Finance to end 2014 in the 9 to 11GW range, exhibiting double-digit growth over the previous year and likely to install more than China, though some are predicting an end-of-year spurt by China could settle the matter.
With nuclear power an unpalatable choice and natural gas imports an expensive one, renewables must play a more prominent role in Japan. On the production side, our research indicates that there are still approximately 400 solar panel manufacturers in China alone. To ensure that these companies and the hundreds more like them throughout the world have staying power, access to ample raw materials is arguably as important as access to customers. It seems clear that the demand is present regardless of where you look.
As the saying goes, “nothing cures high prices like high prices”. This phrase was evidenced during what I view as the ‘first leg’ of the commodity super-cycle from 2002 to 2011. Prices for all sorts of metals rose, and some, such as rare earth metals, skyrocketed. As an example, dysprosium, used in magnets, soared to over US$2,000 per kg in 2011. The price for the metal now rests at approximately US$475 per kg, closer to its long-run historical average. There were multiple reasons for this to be sure, but end users of various metals all began to focus on one issue: substitution.
The PV industry isn’t immune from this phenomenon either. With silver such a critical component of PV manufacturing, copper has emerged as a lower-cost substitute, though hasn’t displaced silver entirely.
In May 2011, the price of silver spiked to US$49 per ounce, far above its historical average. Though the PV industry was suffering from overcapacity and failed promises at the time, any PV manufacturer with a long term view of the market dynamics was seeing what was happening to the prices of raw materials such as silver and trying, however possible, to engineer high cost raw materials out of their value chains.
All things being equal, copper is lower cost than silver (it hit a high of US$4.53 per pound in 2011) and though the two metals have somewhat different strengths and weaknesses, if you’re a purchasing manager for a PV manufacturer, finding the delicate balance between optimal efficiency, lowest cost and reliability will continue to prove to be a major challenge. You cannot allow your competitors to gain an efficiency or cost advantage through substitution.
R&D: A Blessing and a Curse
One of the great promises of renewable technologies such as solar revolves around R&D. Many assume that a large amount of R&D dollars arguably ensures technological breakthroughs giving solar power the chance to become truly ubiquitous in the future as costs continue to fall. That said, just because a certain type of PV production technology is optimal today, doesn’t necessarily mean that it will remain that way in the future.
As research scientists aim to increase the overall efficiency of a solar cell and achieve economies of scale, this has led to the birth of other types of solar technologies such as thin film. With their enhanced efficiencies relative to silicon-based technology, thin-film technologies have attracted much deserved attention and R&D resources. The spotlight has been shone on such obscure metals as tellurium and indium, and the although the global market for each of these metals is small (according to the USGS, usage data on Tellurium is too spotty to report reliably and refinery production of Indium was 770 tons in 2013), should thin-film technology win out and truly become ubiquitous, one can see how increased demand could lead to higher prices, effectively acting as a ceiling on access to the metals and hampering thin film PV adoption.
China Still Matters
No discussion of commodities would be complete without a mention of China – clearly the 800 pound gorilla in the room. Despite the slowdown in the rate of economic growth to just over 7% in 2014 from over 10% per year in recent years, the country is still growing and doing so from a much larger base than before (the World Bank estimates that China’s GDP is US$9.24 trillion).
Effectively, the country is still both the primary producer and consumer of dozens of metals and minerals and is growing more slowly in percentage terms, but still producing and consuming similar amounts of raw materials as she builds out high-tech supply chains and caters to the growing middle class there. This phenomenon must be worrisome to those involved in PV production outside of China as it implies higher raw materials prices in the future (and lower margins) absent technological breakthroughs.
Peak ‘Cheap’ Metals
In the end, with PV as with almost any other business, price matters. A reliable and low-cost supply of raw materials ensures that solar will continue to become an increasingly attractive source of electricity to the masses, regardless of where in the world you’re located. Talk of peak oil or peak copper has become de rigeur and there is validity depending upon the commodity you are examining. I prefer to call it peak “cheap” copper, as that is almost certainly the case.
Perhaps a saviour, the R&D in the PV industry is an exciting area to pay close attention to and will no doubt have implications going forward for lower solar cell prices. Advances using perovskite or nanoscale research to increase panel efficiency are examples. However, in the meantime, a clear understanding of the raw materials used in various PV technologies, their sources, and forecasts for both supply and demand outside of PV usage offers the optimal way forward for investors and PV company insiders as we collectively chart a path forward for increased PV adoption.
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