There are a couple of very interesting recent solar developments that have substantial economic implications. First, the blue sky stuff: courtesy of Slashdot, a team of researchers in the Netherlands have demonstrated avalanche effects in semiconductors that can be used in solar cells (here’s the original article). Avalanche effects mean that instead of having a 1:1 relationship between a photon and an electron, in which 1 photon releases 1 electron, it’s physically possible in these nano-scale semiconducting materials to have 2:1 or even 3:1 — 2 or 3 electrons released per photon in the material. This means twofold or threefold increase in the possible energy intensity of the solar cell material. These nanocrystals are even inexpensive to manufacture. How cool is that?
What are the economic implications of this new material and new knowledge? The low energy intensity of solar cells has been a factor in making solar a less cost-effective means of generating electricity than fossil fuels, which are extremely energy intensive. This avalanche effect can mean smaller, more energy intensive solar cells, which changes the cost structure for solar. I think it will certainly shift the long-run average cost curve downward, which creates an opportunity for solar retailers to reduce prices. A lower solar retail price shifts the price ratio between solar power and all other electricity power sources. For example, the price ratio between solar-generated and coal-generated electricity would shift such that at the margin, consumers would substitute out of coal-powered electricity and into solar-powered electricity. If I were better at generating the isoquant and indifference curve graphs electronically, I’d show it here graphically … but the logic is straightforward.
In brief, innovations like this one increase the margin on which solar can compete with fossil fuels.
Another solar development that’s amenable to economic analysis is described in this Financial Times article from Monday.
The solar power business is bracing itself for a collapse in prices that could lead to a shake-out in one of the most promising areas of the renewable energy sector.
However, a price slump could hasten the take-up of the technology which would help boost the overall volume of future activity, even as margins fall, industry analysts and officials add.
Expectations of falling prices have been partly sparked by a surge in the level of manufacturing capacity for solar panels. This is likely to lead to demand outstripping supply for the first time in years.
Another factor driving prices is uncertainty over the degree of government subsidies in some key markets for the technology.
Interesting, interesting, interesting. Over the past decade the demand for solar cells has shifted out, leading to increased prices and to supply pressure on inputs like silicon (which is also an input into a lot of other products, so it’s a very competitive global market). Now we are starting to see the supply response, with more solar manufacturing capacity coming online and the use of other materials, as entrepreneurs wanting to enter the market innovate around input supply constraints and costs. This market entry is shifting out the supply curve, and from the sounds of the FT article, the magnitude of the supply shift is large relative to current demand. Consequently, they anticipate a fall in solar cell prices due to the large supply shift. Even if the demand curve stays the same, this supply shift means that retail prices of solar cells would fall, leading to increased adoption of solar technology. More realistically, demand is likely to continue shifting out, which may mitigate some of the price reduction.
Another interesting fact in this article: where is a lot of this new manufacturing capacity coming online? China.
Think about the economics of the interaction of these two developments. Taken together, they imply a potentially dramatic decrease in solar power manufacturing costs and retail prices. It will be fascinating to see how this market continues to develop.