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A Sunny Silver Forecast: Low Price Today Means High Price Tomorrow

  • Written by Syndicated Publisher No Comments Comments
    November 5, 2014

    Solar power has been the next big thing in energy for as long as most people have been alive. But it was always too expensive to be anything more than a niche technology, attractive more for its coolness than its efficiency. That has changed, in a big way.

    According to a report by Deutsche Bank, generating electricity from sunlight is now as cheap as getting it from coal in most US states when current subsidies are included. Extrapolate the inexorably-falling cost of solar just a few more years, and the subsidies won’t be necessary.

    At that point the floodgates will open, with every homeowner in the US sunbelt and pretty much every other warm part of the world slapping solar panels on their rooftops and happily watching their meters run backwards. According to a new report by the International Energy Agency, between now and 2050 solar’s share of global electricity production will rise from the current 1% to 27%, making it humanity’s single largest power source.

    That’s great news for climate change, air quality and West Virginia (where they won’t have to blow the tops off of so many mountains to get coal). But the point for silver? Well, every traditional silicon solar panel uses a bit of silver paste to conduct electricity out of its constituent solar cells. And among the other cost cutting measures solar panel makers have been pursuing lately is a reduction in the amount of silver they use. Some alternatives have been found, but none are worth the trouble at current low silver prices. And presumably further research has become less urgent relative to immediate challenges like raising efficiency and lowering installation costs.

    So silver is unlikely to be supplanted in this generation of solar panels, which means demand from the solar industry is going to soar along with panel installations. Here’s how a recent Forbes Magazine article does the math:

    Trends In Silver Demand By The Solar Photovoltaic Industry

    Approximately 20 grams of silver are used in each crystalline silicon solar panel, which accounts for around 85% of the total market. Roughly 80 metric tons of silver or approximately 2.8 million ounces of silver are needed to generate approximately 1 Gigawatt of solar power.

    Growth in Installed Solar PV Capacity
    Globally, installed solar capacity stood at 139 GW at the end of 2013. Installed solar capacity has risen exponentially from a paltry 1.3 GW in 2000. Most of this growth in installed capacity in the past has come from Europe, particularly Germany, with favorable government policies facilitating the incorporation of a greater share of renewable energy into the country’s energy mix. Europe accounted for around 75% of global installed solar PV capacity in 2010. However, the pace of new installed capacity in Europe is expected slow down due to a reduction in incentives for PV installations in some major markets, such as Germany.

    The growth in installed solar PV capacity will be driven by China in the years to come. China is making a concerted effort to reduce its dependence on coal as a source of energy. The country is targeting 70 GW in installed solar capacity by 2017, as compared to 18.6 GW in 2013. Thus, China’s thrust on solar energy will provide the impetus for growth in solar PV capacity additions.

    As per European Photovoltaic Industry Association estimates, by 2018, cumulative installed PV capacity will grow to 430 GW in an optimistic scenario and 321 GW in a pessimistic scenario. The incremental PV capacity addition in 2018 is expected to be 69 GW in the optimistic scenario and 39 GW in the pessimistic scenario. If we consider an intermediate scenario where installed capacity grows to about 375 GW by 2018, it represents a compounded annual growth rate of about 22% from the 139 GW in installed solar capacity in 2013. This will correspond to roughly 54 GW in incremental solar PV capacity addition in 2018.

    Silver Demand from PV industry
    If we assume that over the next five years, crystalline solar silicon panels will continue to account for roughly 85% of the market, then these will account for approximately 38 GW in installed capacity in 2014 and around 46 GW in installed capacity in 2018.

    Taking into account that roughly 2.8 million ounces of silver are required to generate 1 GW of solar power, the demand for silver translates into roughly 106 million ounces and 151 million ounces in 2014 and 2018 respectively. To put this into perspective, global silver mine production is expected to be roughly 800 million ounces and 750 million ounces in 2014 and 2018 respectively. Mine production accounted for roughly 75% of silver supply in 2012. If we assume that this ratio holds till 2018, overall silver supply will stand at roughly 1.07 billion ounces and 1 billion ounces in 2014 and 2018 respectively. Assuming a balanced market in which supply matches demand, the demand for silver from the solar PV industry will rise from 10% of the total demand for silver in 2014 to around 15% in 2018.

    And even this might understate the case. The above formula assumes declining mine supply, but — another effect of the recent silver price smash to below current mining costs — the falloff might actually be far steeper. From mining analyst Andy Hoffman:

    Kamikaze Attack and the End of Mining

    And now, for the main event – and perhaps, the denouement of the most vicious paper precious metals raids since 2008. Gold and silver prices are now so far below their actual costs of production, both cash and sustaining, that my recent estimate of a 25%+ drop in global PM production is likely far more imminent than inevitable.

    Combine soaring solar demand with falling mine output and it’s possible that solar panels will consume 20% of available silver in 2018 (again, up from virtually zero a decade ago) and that this trend won’t begin to flatten until a much higher silver price boosts production and scales back solar demand.

    Images: Flickr (licence attribution)

    About The Author

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    DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

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