| Industry Overview |
Solar TechnologyThere are many solar technologies in use today with similar characteristics. Solar energy technology is:
Main Types of Solar Energy SystemsOff Grid PV systems generate Direct Current (DC) electricity and usually store the electricity in batteries. Some systems use an inverter to convert DC into Alternating Current (AC) so conventional appliances can be used. Grid-tied PV systems convert the electricity generated by the solar panels (DC) into AC and combine the solar electricity with the electrical grid. Many jurisdictions have "net metering" rules that allow the electrical meter to run backwards when the building is harvesting more electricity than it uses. These systems are also called Utility Interconnected Solar Systems. Solar Thermal (ST) systems harvest solar energy to heat liquid or air to provide part or all of the energy for space heating, domestic hot water, swimming pool heating, agricultural heat and industrial heat applications. Building Integrated Solar techniques build PV and/or ST modules into the building envelope. Passive Solar techniques use solar energy to light, heat and cool buildings and conserve energy. Solar Energy Industry UpdateSolar energy is booming. Significant worldwide investment, development and implementation of solar energy is happening now. Manufacturers are adding capacity as quickly as they can. For the first time in the history of ARISE, we are concerned about lead times for getting PV modules and have experienced significant delays in getting modules over the last year. Some manufacturers are sold out 6 to 18 months. World production of PV modules grew at a rate of 67% in 2004. This is being driven by the high growth in the grid-connected markets in Japan, Germany and in the US. The following chart shows the high growth in 2004, which surpassed most industry forecasts and surprised most industry participants. To quote from a recent equity research report by Credit Lyonnais ["Solar Power", CLSA Asia-Pacific Markets, July 2004]: "Solar power is hot. This year the sector will grow >40% with customer demand so high that many vendors are already "sold out" until early 2006 and >30% growth is expected through at least 2010. More importantly, many companies in the sector are achieving profits for the first time this year and margins will continue expanding through 2007 driven by >5% annual cost reductions. The result is that the solar power market has a realistic potential to expand from US$7bn in 2004 to US$30bn in 2010, with the industry's profit pool expanding from US$0.8bn to US$3.0bn." Energy has become a huge issue throughout the world over the last several years. Issues like climate change, high oil and gas prices, shortage of electrical generation, blackouts, reliability of electrical supply, air pollution, nuclear waste, nuclear cost overruns, Middle East political issues, war in Iraq, declining of oil and gas reserves, air pollution and smog are constantly in the media. On the positive side, conservation, hybrid cars, wind, biomass and solar energy are demonstrating more and more that there are practical, cost effective solutions to these problems. Solar energy has more potential than all other forms of energy combined. It is proven, very reliable and easy to deploy anywhere on the planet. The fuel is free and solar is the fastest growing form of energy today. The industry has had supply issues but no other form of energy could grow 67% in one year. Major companies are making large investments in solar energy. The key to taking solar mainstream and eventually becoming the dominant energy source for the planet is cost reduction of installed systems. The following chart shows the experience curve for PV production. In normal markets, the cost reduction will follow the straight line on the chart. Over the last year, due to demand significantly exceeding supply, prices have gone up. Production costs have continued to go down resulting in significant improvement of the profits of the PV manufacturers. We are now starting to see solar energy replace conventional energy production in some regional markets, because it is now less expensive than conventional energy options for those market segments. This has resulted in almost infinite demand due to the difference in market size. The difference between the price curve and the straight line is abnormal profits that we expect will last for the balance of the decade.
All of the major manufacturers continued to expand in 2004 except Shell. The following chart shows the top manufacturers. ARISE has purchased Sharp, Kyocera, BP Solar, Sanyo, RWE, Photowatt, Astropower, Unisolar and Evergreen PV modules. There are close to 100 manufacturers worldwide.
The largest constraint in the PV supply chain is that it takes several years to add capacity for the production of high purity silicon required for over 90% of the PV modules produced. Historically, the PV industry has used the off-spec silicon from the electronics industry but in 2004 only about 25% of the silicon comes from that source. About 70% comes from four companies (Hemlock, SGS, Wacker and Tokuyama), which now produce solar grade spec silicon. They are all running at full capacity and expanding as quickly as possible. We believe that PV grade silicon is the most profitable step in the value chain. We believe that Canada is an ideal location for a solar grade silicon production plant due to low cost electricity in some locations, strong infrastructure and the potential of significant government funding. Our approach is to be a catalyst to build and to eventually have a minority interest in a Canadian facility. ARISE is in discussions with several companies and the government to create a partnership to build such a facility in Canada. |
