Are solar cells the solution to the energy crisis?

Written by Mr. Christen Krogvig, GLI-member from Norway

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Less than one year ago, newspapers were dominated by reports about severe problems in future energy supply, especially oil-based energy. Oil price peaked at 147 $ pr. barrel. Following the financial crisis the oil price has plummeted, and the papers are dominated by news about over supply of just about everything.

But when the economy eventually returns to normal, I think we will face energy shortage issues again. And if the world decides to reduce carbon emissions as a number of scientists suggest, the world will have to make dramatic cuts in coal based energy production, as coal is the biggest polluter per unit of energy.

There are many types of energy with low carbon emission. But they are either based on already utilized resources (hydro electric power), they have other problems (nuclear) or they are very expensive. Solar power is an example of the latter. Back in old days, this type of energy was only used in extremely distant locations.

But this could be about to change. An article in the German magazine Der Spiegel takes a closer look at the issue.

The price of solar cells is falling. The price per watt in solar panels has fell from 3.5 Euro in the autumn of 2008 to 3 Euro by the end of the same year! At the moment the price is down to 2.6 Euro per watt. And the best negotiators are, according to rumors, even able to push the price further down even for high quality panels. This represents a 35 percent drop in just six months.

There are several reasons for the severe price decline in the German market. The German parliament has lowered the subsidies for solar cells based power. From January 1st the producers get merely 43 Eurocent per kilowatt hour delivered to the grid. This is 8 percent lower than tariffs from 2008. Thus, the producers must lower the prices on solar cell panels to remain competitive.

Solar cells and other types of alternative energy have been popular among investors in recent years. And, as always, it’s the most popular industries that will later get problems due to over investment and over capacity. According to the American consultancy company iSupply the production capacity will be 11.1 gigawatt in 2009. But demand is estimated to 4.2 gigawatt. And the Chinese are hard competitors also in this market. In the Spanish market the problems for the solar cell producers are even more severe as Spanish authorities have abolished the subsidies altogether.

And the producers experience rapid changes. Technical progress makes the production process far more efficient. Investments in large factories have also promoted efficiency. The earlier shortage in the raw material silicon is no longer a problem, and the industry experiences abundant supply of raw materials and falling raw material costs.

This is good news for home owners who wish to invest in solar panels. Subsidies have fallen, but investment costs have fallen even more. The result is improved profitability for investments in solar power. And the price drop is expected to continue. The consultancy firm iSuppli expects the price to be less than 2 Euro per watt within the end of the year. Other analysts expect prices to drop to 2 US$ per watt before long.

Norwegian break trough

In 2010 solar energy could possibly make its final break trough. By then the Norwegian solar cell producer REC (Renewable Energy Company) expects to produce solar cells for one Euro per watt. This represents a 70 percent price drop compared to the prices from the autumn of 2008. In addition to the price of the panel the consumer must also pay for accessories, installation and profit. In total the price is thus expected to be 1.85 Euro per watt.

When examining what this will mean for the production costs for solar power, one comes to a rather sensational result. The cost is expected to fall from 43 to 21 Euro cent per kilowatt hour.
This is equal to the price for electrical power delivered to the consumer in Germany including grid costs and taxes. This is often referred to as grid parity. However these calculations will depend among other things on local electricity prices and the sun radiation level.

Negative impact for the panel producers

Some fear that the low prices will have severe negative consequences for the solar cells industry. One fears that the industry will experience the same scenario as the Internet companies went trough in the beginning of the decade. The stock quotes for the solar cell companies have already dropped significantly. The Norwegian company REC has for instance experienced a 80 percent drop from the top. Compared to the introduction price the stock has fallen by 56 percent. Still the market capitalization of the shares is about 2.5 billion Euro.

Not surprisingly the rapid growth in the sector is expected to continue. A market inquiry made by EuPD Research estimated that new capacity will be 1.5-2.5 GWh in Germany in 2009 against 1 GWh in 2008.

Disadvantage for the power consumers

The high price for solar power delivered to the grid is paid for by other power consumers. The falling solar panel prices gives more solar cell projects. In the short run, this gives more subsidized solar power which the other customers have to pick up the bill for. Falling prices on panels therefore paradoxically results in higher energy bills for the power customers. But in the long run the falling panel prices on the panels will result in reduced subsidies for solar power delivered to the grid and due to this lower cost for all power