Will Silver Curb Growth of Solar Power?

Why predictions of exponential growth in solar power might be stymied by a silver shortage.

Introduction

The Economist was breathlessly promoting solar power in its recent solstice issue, predicting that “exponential growth of solar power will change the world” and that solar power is going to be so huge that solar energy will become “humankind’s largest source of primary energy – not just electricity – by the 2040s.”

Figure 1 - Dawn of the Solar Age The Economist June 22 2024

But the Economist is thought by some to be the ultimate contrarian indicator after it famously called the end of the oil age in 2003. As Figure 2 shows, that prediction has not worked out too well.

Figure 2 - End of the Oil Age and World Oil Consumption 2003-2023 (Source - Our World in Data)

How realistic are the Economist’s latest solar power predictions and what might derail their forecasts?

How Fast is Solar Power Growing?

Figure 3 shows, using data from IRENA, how the installed capacity of solar power has increased since 2000 (solid orange line) and the annual growth rate (blue line). The dotted red line shows how installed capacity will evolve if it grows exponentially at the average growth rate for the past five years of 23% per annum. The plum line shows the annual capacity additions at the same 23% growth rate. The dotted green line shows installed capacity if growth is fixed at last year’s rate of 346GW per year. .

Figure 3 - Solar Power Installed Capacity and New Additions (GW) vs Growth Rate

The wonder of compounding at 23% per year means that by 2032 the annual capacity additions will be larger than the installed capacity in 2023. Let us consider the constraints on that growth.

Cost and Value of Solar Power

The first thing to consider is the value of solar power generation. Another article in the same issue of the Economist claims that Europe is facing a problem of “ultra-cheap energy.” After I got up from the floor after falling off my chair and stopped laughing, I delved a little deeper to understand why the author had come to that conclusion. It looks like the author has confused market value and cost (see Figure 4).

Figure 4 - Negative Day Ahead Electricity Prices in Europe, Zero Market Value (from the Economist)

The Economist’s chart shows that day ahead prices do sometimes go negative on sunny days in Spain and Germany. The market reference price for solar power in the UK also reaches extremely low levels on sunny and windy days.

These apparently low prices reflect the market value of the energy generated, not the price we pay in our bills for that electricity. Surely the Economist realises that any enterprise that has to pay its customers to take away its output is not commercially viable. Solar farms can only operate because they rely on generous subsidies. As we have covered before, the latest Feed-in-Tariff report for 2022-23 which is mostly solar shows the average total payment was ~£193/MWh and CfD funded solar plants currently receive over £110/MWh. We pick up the difference between low or even negative market prices and the subsidised prices through our bills.

Moreover, despite the Economist claiming and models from Government showing the cost of large-scale solar power falling over the coming years, the prices offered in the various allocation rounds have risen sharply since AR4, see Figure 5.

Figure 5 - Evolution of Solar CfD Prices and 2023 Generation Cost Report (£ /MWh)

The gap between the Government model and the strike price they are offering is getting wider and wider. Moreover, recent Government figures show that the installation cost of small-scale solar is rising too and is now above where it was a decade ago in nominal terms, see Figure 6.

Figure 6 - Small Scale Solar Power Installation Costs (£ per kW)

With costs rising and market value falling below zero as the penetration of solar power increases, it cannot be long before the exponential curve starts to slow down, particularly in temperate latitudes like Northern Europe.

Two of the Economist’s solutions to the low value problem involve spending even more money, either by building bigger interconnectors across European states or by installing batteries or other storage. But these “solutions” would only add to the cost of solar power for no increase in output, although the market value might rise a bit.

The Impact of Silver on Solar PV Costs

We also need to look at where solar panel costs might be going, and to do that we need to consider the silver intensity of solar power. The durability and conductivity of silver makes it an essential ingredient in solar panels. Even though the amount of silver required per Watt of capacity has fallen over the years, the increase in solar panel production has led to ever higher overall demand for silver in photovoltaics.

The rapid increase in solar panel production and silver demand is having an impact on the price of silver. The Silver Institute produces a silver supply and demand table, an extract of which has been converted into chart form in Figure 7 below.

Figure 7 - Silver Demand from Photovoltaics and Market Balance (m toz) vs Price ($/toz)

The blue bars show the relentless increase in photovoltaic demand for silver, especially since 2019. Photovoltaics consumed over 19% of all silver supply in 2023. The orange bars show the total market balance and demonstrate the overall silver market has been in deficit since 2019. In 2023, the deficit was about 14% of total supply and the annual deficit is forecast to widen in 2024. This has led to silver prices almost doubling from $16/troy ounce (toz) in 2019 to around $30/toz today. The Silver Institute also shows that overall supply from mines and recycling has remained stable at around 1bn oz per year while demand is forecast at over 1.2bn oz this year.

According to the VDMA (the German Engineering Foundation), in their Photovoltaic Technology Roadmap (p21) a typical PERC type solar panel contains about 9.6mg of silver per Watt of capacity. A typical 400W panel therefore contains about 3.8g of silver or 0.12 toz. In 2023, with silver costing just over $23/toz, this silver would have cost about $2.89 per panel or about 5% of total panel costs assuming $0.15/W of capacity.

However, the solar panel market is moving towards TOPCon technology which uses about 15mg of silver per Watt, so a typical 400W TOPCon panel uses 6g of silver and at today’s price of around $30/toz this works out at $5.80 per panel or about 10% of panel costs.

Future Demand for Silver from Solar Power

The same VDMA report shows on p21 that they expect the amount of silver required per Watt of capacity will fall over the next 10 years for each of the main technology types. However, on p38 they also show how the market share of the different technologies will change and there is a marked shift towards TOPCon and SHJ technologies which both use more silver than existing PERC technology.

By combining the data from both VDMA tables, we can calculate the weighted average silver intensity by year. This rises a little in 2024 to 12.3 mg Ag/W before falling gently to 8.5 mg Ag/W by 2034. We can use these silver intensity figures to calculate the impact on silver demand for different growth rates of solar power. The result is shown in Figure 8.

Figure 8 - Solar PV demand for Silver at Zero and 23 per cent Growth (m toz)

The blue line shows that if the rate of new installations remains flat at around 346GW per annum, then annual demand for silver will fall over time. This reflects an overall decline in silver intensity as technology improvements outweigh the change in panel type mix. However, this rate of new additions would still lead to an ongoing silver supply deficit which is bound to lead to a price response at some point. We must remember though that the Economist’s prediction was for solar power to increase exponentially. The green line shows silver demand from solar power from 2019 and how demand will increase from 2023 if solar PV expands at 23% per annum. As we can see, silver demand grows from 194m toz in 2023 to 1,050m toz in 2034. This is more than 100% of 2023 silver supply from mines and recycling. Think about that for a moment, if silver maintains its average growth rate of 23% per annum, then by 2034 it will be consuming all of the global silver supply.

The price of silver is notoriously volatile, for instance it rose more than 5-fold from a trough around $9 in 2008 to a peak of nearly $50 in 2011. Moreover, when the Hunt Brothers tried to corner the silver market, the price rose 10-fold from ~$5 in early 1978 to $50 in January 1980.

We can only speculate on what might happen to the silver price if demand from solar PV rises from 193m toz in 2023 to 274m toz in 2026 or over 1bn toz in 2034 with the market already in structural deficit. However, the price will likely rise to many times higher than the current ~$30/toz. This could mean that just a few grams of silver per panel could push up the cost of solar panels considerably, thus curbing demand for solar panels.

Conclusions

Making predictions of continued exponential growth are always fraught with danger. Once numbers get to a certain size, the compounding effects of growth rapidly become very large indeed.

The impact of producing more and more electricity of zero value will mean that solar power destroys its own economics, particularly in temperate zones like Europe. The only thing that could save it is continuing generous subsidies awarded by virtue signalling politicians. Remember, the new Labour Government’s plan is to triple solar by 2030, creating more occasions when its output has no value. However, supply-side constraints in the silver market will likely push up the cost of solar panels making them much less attractive, even in the tropics. The odds are that the Economist is still an excellent contrarian indicator, and their exponential growth predictions will likely come unstuck in a few years.

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