Fueling the Solar Energy Boom

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No question it's a huge potential market: Sales of solar panels are forecast to reach $80 billion to $100 billion by 2010 and could even eclipse the semiconductor industry in the next five to 10 years.

In 2007, Applied's solar equipment sales amounted to only $165 million, or less than 2% of its $9.7 billion in revenues. But the company says it expects the business to generate up to a quarter of sales by 2010, or about $2.5 billion to $3 billion annually. Its ambitious goal: for Applied equipment to be used in the making of nearly three-quarters of all the solar panels forecast to be produced in 2011.

Relying on Government Subsidies

To be sure, Applied isn't the only player in the business. Its main rival is Oerlikon Solar, a unit of Truebbach, Switzerland's Oerlikon (OERL.DE). Oerlikon has chosen to focus solely on equipment for making thin-film solar panels, and sold some $277 million worth of such gear in 2007. Chief Executive Jeannine Sargent figures that should grow to more than $923 million next year.

Sargent argues that thin-film is already far more cost-effective than crystalline silicon, allowing for panels costing $1.20 to $1.50 per watt of power, vs. $4 to $7 per watt for the semiconductor type. With continued technology improvements and higher volumes, she thinks thin-film panels can get below $1 per watt in 2010. Still, that remains seven to 10 times more expensive than conventional sources of electricity, so solar likely will continue to rely on government subsidies to be competitive for the foreseeable future.

To date, generous government programs in countries such as France, Germany, Spain, and Italy have helped close the gap. But there are risks for the industry on the horizon. The Italian and Spanish governments are already moving to cap subsidies. And solar technology may not improve fast enough to make up the difference, cautions Jenny Chase, a solar energy analyst at London consultancy New Energy Finance.

Guaranteeing the Market

There's also a danger of overproduction. Chase says demand for solar panels "could tail off if governments reassess subsidies." If new plants supplied by Applied and Oerlikon Solar help increase world capacity by a factor of five or six times in the next three years, "We are really relying on government to be extremely generous with their subsidies," Chase says.

Applied's CEO is hoping they'll do just that. "Japan and Germany are great examples of where smart government policies have helped create a booming market," says Splinter. "By guaranteeing a market for a period of time, public policy can help accelerate solar quickly to a place where subsidies are no longer needed."

What's more, adds Chase, "In a gold rush, it's the guys who sell the picks and shovels who make the money." One way or another, she figures, Applied and Oerlikon Solar look likely to thrive as the solar boom ramps up.

Schenker is a BusinessWeek correspondent in Paris.