Saudi Arabia to Supply SunPower with Silicon

By Josie Garthwaite

SAN JOSE, Calif., Feb. 14 — The solar electricity systems manufacturer SunPower Corp. (SPWR) announced a pair of long-term supply agreements last month that could support up to six times its 2007 solar cell production within two years.

The first is with the world’s largest polysilicon manufacturer, NorSun AS of Norway. The second is with a joint venture NorSun formed with the Saudi Arabian investment companies Swicorp Joussour Co. and Chemical Development Co. The group will build and operate a new polysilicon plant in Jubail, Saudi Arabia.

Under the terms of the deal, San Jose, Calif.-based SunPower has agreed to fund NorSun’s share (50 percent) to build the plant in exchange for advance payments for a nine-year supply of polysilicon beginning in 2010. Polysilicon is a key component needed to make high-efficiency solar cells.

The move could simultaneously strengthen SunPower’s ability to compete with conventional electricity providers by lowering silicon costs—and weaken a key argument for U.S. tax credits on which the alternative energy industry has banked near-term growth.

Government subsidies established as part of the Energy Policy Act of 2005 offer businesses and homeowners rebates of up to 30 percent of the cost of in solar power systems and installations. But those subsidies are set to expire at the end of this year. Solar industry groups have spent millions lobbying to delay the expiration, pushing most recently for a provision in the economic stimulus package.

More often than not, political arguments for solar subsidies have hinged on a claim that solar power reduces dependence on oil-rich nations like Saudi Arabia. But according to Julie Blunden, vice president of external affairs for SunPower, the country offers a natural choice for the company’s new venture.

“Saudi Arabia has the existing infrastructure for very heavy industry, a good supply of raw feedstock material, which is essentially sand, and a port,” she said. SunPower partner NorSun AS reported additional incentives. Among them, low energy prices, since polysilicon production requires large amounts of electricity to melt and purify raw materials. Saudi regulations encouraged local companies to partner on the project, since the government requires certain national firms to invest in energy-intensive industries.

In 2006, more than half of the world’s polysilicon production occurred in the United States, according to a report from the Prometheus Institute for Sustainable Development, a nonprofit research firm in Cambridge, Mass. Prometheus has predicted that the United States will remain the top producer through 2010, even as capacity expands in China, Spain, and Korea—all countries where SunPower has achieved a foothold.

Coming online that same year, the Jubail plant would contribute to a jump in polysilicon production worldwide. The Solar Energy Industries Association, a trade group, expects the supply more than double. Limited silicon supply over the last two to three years has constrained solar industry growth.

Analysts predict that demand will continue to outpace supply through the end of this year. At that point, analysts say, silicon suppliers that have historically responded to the cyclical demand of the semiconductor industry will have had enough time to ramp up production for the emerging solar sector.

Depending on how quickly silicon prices fall in the open market, SunPower’s contract with NorSun could prove less than competitive. SunPower also has long-term supply agreements with the polysilicon manufacturer Hemlock Semiconductor Corp. worth more than $100 million. Like the NorSun contract, the Hemlock agreements bind SunPower to a set amount of polysilicon components at fixed prices through 2019. That could hurt the company’s bottom line if demand for SunPower’s products dries up.

Energy sector analyst Kelly Dougherty of Calyon Securities in New York added that SunPower’s existing relationship with NorSun and the Norwegian company’s experience with getting a polysilicon plant off the ground gives Wall Street “more comfort” with this foray into a new country. “If it’s not the first and only silicon facility in Saudi Arabia,” she said, “it’s at least one of a few.”

The fact that NorSun was willing to commit to a supply agreement through 2019 also buoys her confidence in SunPower. “Some suppliers,” Dougherty said, “might be loathe to enter a contract with a company if they’re not sure they’ll be around 12 years from now.”

Calyon analyst George Kotzias noted that SunPower has begun setting up shop globally—not only in the Middle East. “It’s just more supply,” he said. “If you can build in China, if you can build in Germany, then you can build it in Saudi Arabia.”