A Solar Stock for Silicon Skeptics

The supply of polysilicon is a perennially hot topic in the solar space. While First Solar (NYSE: FSLR) and other thin-film aspirants avoid the stuff altogether, polysilicon is the building block of most solar modules in the marketplace today. Soaring solar demand in Europe, the United States, and Asia has birthed a serious bottleneck in polysilicon production.

Trina Solar (NYSE: TSL) caused a stir at the beginning of the week by canceling plans to build in-house poly capacity. This gave some investors hope that the tightness had topped out. Yesterday, however, SunPower (Nasdaq: SPWR) said that supply may remain tight into 2009, while Evergreen Solar (Nasdaq: ESLR) noted predictions that the squeeze may stretch on for several years.

Part of the problem is that many new entrants lack the technical know-how. A recent study by THT Research estimates that out of more than 20 Chinese poly projects, no more than eight are expected to succeed long-term.

No matter what happens, Evergreen Solar is in an enviable position as it moves from development mode into commercial-scale production at its new Massachusetts facility. For starters, the firm's unique String Ribbon technology already uses less than five grams per watt, and it's on a path to cut that industry-leading consumption in half. Just as critically, Evergreen has secured 100% of its expected silicon supply through 2012.

Evergreen actually made money this quarter selling silicon scrap to other poor sods. Another of the firm's key raw materials, the string used to form Evergreen's silicon ribbons, is actually declining in cost as the firm increases purchase volume. The only issue there is that the unique string comes from a sole supplier. Evergreen had sought to develop in-house capacity in Devens, Mass., but additional chemical handling issues were slowing down permitting for the rest of the facility. The CEO noted that local residents don't want the chemical business nearby because they "raise vegetables and have bunnies." Evergreen is now looking elsewhere.

The bigger issue with Evergreen is financing risk, because the company needs more capital to hit its capital expenditure requirements. An equity raise earlier this year was cut short because of a sagging share price, so Evergreen is leaning toward the debt markets for its next fundraiser. Still, I think the story here is pretty strong, and, at current prices, Evergreen is one of the more sensibly priced solar plays.