(Bloomberg News)  Polysilicon may be headed for a surprise recovery by 2015 that could push up the prices of solar panels, said Solairedirect SA, France's second-biggest sun-powered generator.

Suppliers of the commodity used in solar panels and microchips have been shutting down capacity or delaying new plants, which can take at least three years to build, said Thierry Lepercq, chairman of the Paris-based utility backed by Schneider Electric SA's venture capital arm.

That could coincide with a surge in demand for solar panels as the price of sun-based electricity converges with fossil fuel-based power in many markets by 2015, he said.

"We have to be wary about it," Lepercq, referring to an unexpected rise that could cause a surge in equipment and project costs, said in an interview in Mumbai. "Even if it doubles, it changes the picture."

Polysilicon prices have plunged 94 percent in three years as the top five producers, led by Hemlock Semiconductor Corp. and Wacker Chemie AG, more than doubled output, according to Bloomberg New Energy Finance data. Prices may be stuck near the cost of production for years, Paul Leming, director of research at Ticonderoga Securities in New York, said in November.

Global polysilicon production capacity is likely to settle at about 300,000 metric tons, Lepercq said this week. Wacker of Munich, OCI Co. of South Korea, GCL-Poly Energy Holdings Ltd. of China and Renewable Energy Corp. ASA of Norway had the capacity to make 131,000 tons of polysilicon last year, up from 50,000 tons in 2008, Bloomberg data shows.

'It Happened Once'

Polysilicon suppliers that survive the supply glut will likely become profitable businesses again unlike equipment makers using the material such as China's Suntech Power Holdings Co. and JA Solar Holdings Co., the largest solar cell maker, Lepercq said.

"Cells and modules are the absolute commodity," he said. "People in that business who earned money have to put that in their memories, say it happened once and honestly it won't happen again."

The shares of the five-biggest panel makers are down 69 percent this year, according to data compiled by Bloomberg, as overcapacity slashes margins and shrinking clean-energy subsidies in Europe deflate demand in their biggest market.
"You can increase cell and module capacity at the snap of a finger, unlike polysilicon," Lepercq said.

Some of the biggest Chinese manufacturers of silicon-based panels such as Suntech and Trina Solar Ltd. bought equipment and signed long-term supply contracts preventing them from taking advantage of falling costs, he said. Their prices can be 20 percent higher than nimbler Chinese rivals, Lepercq said.

Source Material Cheaply?

Solairedirect and co-bidder Jupiter Solar Power Ltd. won an auction on Dec. 2 to sell photovoltaic power to India at 7,490 rupees ($138) a megawatt-hour, about 30 percent cheaper than the world average. It's also in talks about a 10-megawatt site in Chile to supply electricity at $92 a megawatt-hour, avoiding the need for the buyer to subsidize generation, Lepercq said.

An ability to source materials cheaply is behind such record-low bids, Lepercq said. Solairedirect plans to help Kolkata-based Jupiter buy wafers at "extremely competitive" prices, he said. It's also a long-time buyer of equipment from India's Websol Energy System Ltd, he said.

"If you take the best-in-class wafer prices and process in India, you're more or less matching Chinese costs," he said.

The decision to buy Indian panels bucks a trend among local developers of using imports to cut costs and gain financing from foreign state-backed banks eager to boost global sales. Reliance Power Ltd. in August received an $84 million loan from the U.S.
Export-Import Bank to buy First Solar modules. The lender's interest rate then was 3.96 percent.

'Artificial Help'

"We're not playing with American or French or any other finance to give us artificial help," said Lepercq of subsidized, below-market loans. Solairedirect's average cost of capital is 6 percent, he said. "We want solar to be taken seriously, not like some child that's receiving subsidies."

The company seeks low-risk commercial paper to fund operations and will finance the project entirely with equity if needed to avoid Indian lending rates of 13 percent, he said.
Solairedirect, which since its founding in 2006 has raised 500 million euros ($650 million), keeps its financing costs low by managing investors' expectations of returns, Lepercq said.

"People want to maximize their internal rates of return but we try to minimize them," he said. Indian borrowing costs and inflation will decline and "the right level of financial return to expect is maybe a range of 12 to 15 percent."

'Convince' Investors

"If you can convince your investors and lenders that it's low risk, you can do that," Lepercq said.

The company, unlike most, sets aside a provision to replace panels midway through a project's lifetime rather than assuming they'll last for 20 to 30 years because it expects improved technology to double panel power output in 15 years.

"That means a 5-megawatt plant today will become a 7.5- megawatt plant," Lepercq said. Extra output may be sold in the market as the cost of solar converges with conventional generation, he said.