Sharp-Enel Alliance Offers New Solar Biz Model

Japan's Sharp plans to build several solar power-generating plants with Italian utility Enel in the hopes of staving off new competition

When global oil prices were closing in on $150 a barrel, it looked like a blessing for renewable energy. Not for solar technology, though. Manufacturers of photovoltaic cells were grappling with shortages of a key substance called crystalline silicon and were having to pay through the nose for it—$400 per kilogram, 10 times what it cost just four years ago.

Now that oil prices have plummeted, solar would seem even less attractive. Tell that to Sharp (6753.T) of Japan. On Nov. 27 the world's second-largest maker of photovoltaic cells unveiled a $1.05 billion plan with Italian utility Enel (ENEI.MI) to build several solar power-generating facilities over the next four years. Sharp will collect royalties from Enel. The two will also partner with another company to split the initial cost of a new factory in Italy that will make so-called thin-film solar cells. Analysts think the technology, which can be made with far less silicon and in a more efficient automated process than existing solar panels, holds promise.

Sharp isn't merely trying to regain the No. 1 position in solar cells, now held by Germany's Q-Cells (QCEG.DE). It's also eager to stave off competition from newcomers in low-cost labor markets such as China, Taiwan, and Korea. Traditional power-generation equipment makers like General Electric (GE) and Alstom (ALSO.PA) adopted a similar strategy for ensuring steady orders for their products and services when they bought small stakes in the utilities years ago, says consultancy Frost & Sullivan's Ravi Krishnaswamy.

From LCD to Solar Panels

The solar industry is tiny enough that no company has a lock on the market's future. Electricity generated by capturing and converting the sun's rays into energy makes up only 0.4% of global electricity output. Sharp is trying to repeat the success of its flat-panel liquid-crystal-display TV business by pouring billions into cutting-edge technologies before rivals do. The competition includes commodity LCD manufacturers such as Taiwan's AU Optronics and Chi Mei Optolectronics, which are retooling old LCD plants to make solar panels.

The problem is, the big payday for solar cell makers isn't expected to come anytime soon. Analysts mostly blame the global financial crisis. With banks struggling to finance their own operations, there's no money for renewable energy projects. That's pushing market prices lower, a trend that could make for a profit-punishing few months. In October, Sharp issued a profit warning for the fiscal year through next March, and last month China's Suntech Power Holdings (STP), the No. 3 solar cell maker, lowered its sales forecast.

But there is a silver lining: As prices drop and manufacturers scramble to make their operations more efficient, the changes help make the cost per watt of solar-generated power more competitive with that of traditional coal-fired electricity plants. This "grid parity" could happen in some markets as soon as 2010, Sharp's solar chief, Executive Vice-President Toshishige Hamano, told reporters.

The prospects are best in sunny areas with generous solar-energy subsidies, such as Italy, Japan, and California. "We are a lot closer than we thought, thanks to the credit crisis," says CLSA's Charles Yonts, who is based in Hong Kong.

A Silicon Glut in the Making

The dynamics of the solar market are in flux. There might not be enough crystalline silicon to go around now, but dozens of new plants are scheduled to open in the coming months. Analysts say the current silicon shortage could quickly give way to a glut. By 2010, CLSA predicts the number of silicon producers could reach 175, from just five in 2004.

An abundance of silicon should drive prices lower. Since silicon accounts for two-thirds of the cost of making a solar panel, Sharp and other manufacturers would normally benefit from higher profits. But cash-strapped utilities and renewable energy facilities are all now shopping around for cheaper panels. Panel makers may have to lower their prices between 10% and 30% in 2009, analysts say. (Many companies in China have delayed their plans. Korea's LG Electronics pulled out of an agreement to buy a majority stake in Congery's solar panel-making plant in Frankfurt.)

Sharp knows it can't compete with Chinese and Taiwanese companies if prices collapse. That's why it's aggressively investing in its thin-film technology, which only a handful of companies have the knowhow to mass-produce. Sharp officials say thin-film solar panels can be made five times faster and with 100 times less silicon than the standard crystalline silicon type and are better suited for large-scale industrial applications such as power plants. Sharp has a small-scale production line at a facility in the western city of Nara. By 2010, Sharp plans to open a $760 million state-of-the-art thin-film panel plant in neighboring Osaka. The Italy plant it's building with Enel and others will be modeled on the Osaka plant. At the press announcement last week, Sharp's Hamano wouldn't say when the company expects to recoup its investments.

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