One of the best articles I’ve seen on the state of the solar PV market appeared in Barron’s today, with mentions of ATS and Carmanah near the end of the story as one analyst’s suggested stock buys.

A couple of interesting points made in the story, based on data from analysts:

* Within 10 years solar PV technology will be in cost parity with retail electricity prices.

* About $100 million (U.S.) has been invested in solar-related ventures in the first half of 2005.

* Shares of publicly traded solar-focused companies have jumped 150 per cent over the past 12 months.

* By 2010 solar power production is expected to quadruple to 6 gigawatts worldwide. During the time, the market will grow from $11 billion (U.S.) this year to $36 billion (U.S.).

“Now that’s nice, Google-style growth,” wrote reporter Eric J. Savitz. It was perhaps his best line in the story.

But as I’ve posted before, this stellar growth — driven largely by incentives in Germany and Japan — has led to a shortage in the polysilicon used in solar cells that could cause problems for a few more years. According to Barron’s:

The result is that by 2006 almost half of the world’s polysilicon supply will be soaked up by the solar-cell makers. Richard Winegarner, proprietor of consulting firm Sage Concepts, says the market is about 10% short this year, with the solar-cell industry, and not chip makers, absorbing most of the resultant pain.

“I can’t find a data point anywhere that shows anything other than a very real shortage of polysilicon that is going to get worse over the next two or three years,” says Paul Leming, an analyst with Princeton Tech Research. “It would take a solar-panel market collapse to bring any slack capacity to the polysilicon business anytime soon.”

Not surprisingly, polysilicon prices have soared: Winegarner says contract pricing has moved from about $32 a kilogram to $45 since 2003. Spot pricing, depending on whom you ask, is running $60-$80 a kilogram, though Winegarner notes that there is “essentially no volume” in the spot market. “The industry has already wrung out every nook and cranny of inventory and scrap,” he says.

The world’s polysilicon makers are working frantically to add capacity, but supply is unlikely to catch up for a while. Optimists think the shortage could be cured by 2007. Neil Gayle, coordinator of the Critical Materials Council of Sematech, a chip-industry consortium, thinks there could be shortages though 2009.

The bottom line is that there won’t be enough solar cells to meet demand for at least the next several years, potentially triggering a supply crisis for some smaller players that lack contractual supply arrangements with polysilicon producers.

Yikes! It’s yet another reason — other than supporting a homegrown company – why I like ATS’ business model. First, let’s consider what it has done with its France-based Photowatt unit. According to ATS CEO Ron Jutras, speaking during the company’s Aug. 12 earnings conference call, silicon management has been a key focus of the company. Though Jutras didn’t sugarcoat the silicon situation:

“A substantial amount of management time at Photowatt is being devoted to sourcing and managing silicon availability and pricing. Today, these efforts have worked well, but we are concerned about silicon availability and the impact it may have late in fiscal 2006 and into 2007. We are investigating different methods of securing longer-term supply, and we believe we have enough to sustain a significant amount of our capacity for fiscal 2006. This is an industrywide problem and a challenge that will likely intensify during 2007. The price of silicon has already risen significantly — substantially, some $50 a kilo compared to about $25 a year ago. But to date these increases have been successfully asborbed by exceptionally strong market demand. It’s difficult to say if this will continue. The bottom line is Photowatt has done very well. But it’s a challenge that may well grow and negatively impact this business down the road. What is frustrating about this is that most experts believe the silicon shortage will disappear within two years as new capacity comes on stream.”

At the same time ATS is managing silicon supply for Photowatt, it also has to think about its new venture Spheral Solar. Important to consider again is that Spheral Solar uses a different approach to manufacturing solar panels, one that uses much less silicon and lower-quality silicon. The end result is that Spheral Solar, when all engines are running, will have a significant competitive advantage against rivals where silicon accounts for 30 per cent of their final product.

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