November 12, 2007 (Credit Suisse Equity Research) – In less than two hours, enough solar energy reaches the surface of the earth to satisfy the entire energy needs of the world’s population for a full year. At least, that’s the theory. In practice, solar cells generate not even 0.1 percent of the electricity produced around the globe. The potential is therefore huge, and the political will to promote environmentally friendly power generation is growing steadily.
Lucrative Incentives for Solar Power
In Europe, it is mainly southern countries such as Spain, Portugal, Italy and Greece that are following the German example in passing legislation that will subsidize each kilowatt-hour (kWh) of electricity that is fed into the national grid from solar installations by up to 0.50 euros for the next 20 years or more. These are considerable incentives that promise operators annual returns of over 10 percent on their solar installations, depending on location, weather conditions and panel type. These promotional programs are gaining additional momentum thanks to the European Union (EU) Energy Commission’s ambitious target of satisfying 21 percent of EU-wide energy consumption from renewable sources by 2010.
The US is also getting serious about the sun. At the state level, California leads the pack, having just made 3 billion US dollars available to support solar installations. The most progressive nation in Asia is South Korea, which promotes the construction of solar energy plants with low-interest loans and guarantees a payment of 0.58 euros per kWh for 15 years.
Meanwhile in Japan, which currently accounts for 17 percent of solar energy installations worldwide, solar power hardly attracts further subsidies. Against a backdrop of generally high electricity prices, however, demand remains steady, especially as solar plants can be integrated cost-effectively into new-build homes.
A Blossoming Industry
The industry has responded to the enormous surge in demand with a huge expansion in capacity. At the present time, the global output of solar cells is growing at some 40 percent every year. There are almost weekly reports of companies building new production lines for solar modules or increasing their output of crystalline silicon. As the main raw material for the solar industry, supplies of the latter are becoming tight, and market prices have thus more than doubled within the last two years. As a result, some manufacturers of solar silicon and silicon discs are generating returns of which other companies can only dream.
In the medium to long term, however, the aim of politics and industry alike is to make solar power a competitive form of electricity. In some countries, this should take as little as five years, but should be a reality worldwide within no more than 10. Achieving this target demands an annual reduction of at least 7 percent in the price of solar panels – a rate of reduction that is also a condition of state subsidies.
Players in the solar business are responding to this pressure on prices with technological innovation and by improving operating efficiency. The basic construction of most types of solar cells is simple, so there is no reason they should not become a cheap, mass-market good in the long term. We may well see a drop in prices such as that experienced by the computer chip industry. While the outlook for the sector is rosy, with broad-based consolidation ahead, it is also hard to overestimate the benefits that solar technology provides to society.