Silver and gold are compared to each other as both metals are viewed by investors as inflation hedges and safe haven investments. However, in addition to its characteristic as a safe haven investment, silver is widely used in industrial applications. It is used in the manufacture of semiconductors, solar photovoltaic cells and batteries, in the fabrication of jewelry, in photography and has a variety of applications in nanotechnology. With the rapid adoption of solar energy across the world, the demand for silver from the solar photovoltaic industry is expected to rise rapidly. In this article, we will take a closer look at the trends in the demand for silver by the solar PV industry.

How is Silver Used in Solar PV Cells

Silver has the highest electrical and thermal conductivity of all metals. This property of silver makes it an important constituent of solar cells. It is used in the form of silver paste, which is used to conduct electricity out of solar cells. Approximately 20 grams of silver are used in each crystalline silicon solar panel, which accounts for around 85% of the total market. Roughly 80 metric tons of silver or approximately 2.8 million ounces of silver are needed to generate approximately 1 Gigawatt of solar power.

Growth in Installed Solar PV Capacity

Globally, installed solar capacity stood at 139 GW at the end of 2013. Installed solar capacity has risen exponentially from a paltry 1.3 GW in 2000. Most of this growth in installed capacity in the past has come from Europe, particularly Germany, with favorable government policies facilitating the incorporation of a greater share of renewable energy into the country’s energy mix. Europe accounted for around 75% of global installed solar PV capacity in 2010. However, the pace of new installed capacity in Europe is expected slow down due to a reduction in incentives for PV installations in some major markets, such as Germany.

In recent years, China has made a push for greater PV installation. Chinese installed solar capacity has increased from 0.8 GW in 2010 to around 18.6GW in 2013. China leads the way in terms of additions to installed PV capacity in 2013, with the installation of 11.3 GW of grid-connected solar PV capacity. This was followed by Japan, the U.S. and Germany with 6.9 GW, 4.75 GW and 3.3 GW in additions to their installed solar capacity, respectively. Installed solar capacity is expected to grow by 20% this year or around 44.5 GW. China, Japan and the U.S. will be lead the way in terms of newly installed solar capacity, with around 12GW, 10.5 GW and 6 GW of additions to installed solar capacity, respectively.

The growth in installed solar PV capacity will be driven by China in the years to come. China is making a concerted effort to reduce its dependence on coal as a source of energy. The country is targeting 70 GW in installed solar capacity by 2017, as compared to 18.6 GW in 2013. Thus, China’s thrust on solar energy will provide the impetus for growth in solar PV capacity additions.

As per European Photovoltaic Industry Association estimates, by 2018, cumulative installed PV capacity will grow to 430 GW in an optimistic scenario and 321 GW in a pessimistic scenario. The incremental PV capacity addition in 2018 is expected to be 69 GW in the optimistic scenario and 39 GW in the pessimistic scenario. The risks to growth in installed PV capacity that will determine which scenario materializes are discussed later in the article. If we consider an intermediate scenario where installed capacity grows to about 375 GW by 2018, it represents a compounded annual growth rate of about 22% from the 139 GW in installed solar capacity in 2013. This will correspond to roughly 54 GW in incremental solar PV capacity addition in 2018.

Silver Demand from PV industry

The sharp growth forecast for installed PV capacity bodes well for silver demand by the PV industry. If we assume that over the next five years, crystalline solar silicon panels will continue to account for roughly 85% of the market, then these will account for approximately 38 GW in installed capacity in 2014 and around 46 GW in installed capacity in 2018.

We will estimate the demand for silver from the PV industry under the simplifying assumption that solar panels for incremental solar PV capacity additions are manufactured in the same year in which they are installed. Taking into account that roughly 2.8 million ounces of silver are required to generate 1 GW of solar power, the demand for silver translates into roughly 106 million ounces and 151 million ounces in 2014 and 2018 respectively. To put this into perspective, global silver mine production is expected to be roughly 800 million ounces and 750 million ounces in 2014 and 2018 respectively. Mine production accounted for roughly 75% of silver supply in 2012. If we assume that this ratio holds till 2018, overall silver supply will stand at roughly 1.07 billion ounces and 1 billion ounces in 2014 and 2018 respectively. Assuming a balanced market in which supply matches demand, the demand for silver from the solar PV industry will rise from 10% of the total demand for silver in 2014 to around 15% in 2018.

Risks and Opportunities

The pace of adoption of solar energy and consequently demand for silver from the PV industry, is contingent upon a number of factors. These include policy support for solar energy, competitiveness of solar power versus conventional sources of electricity generation and the price of silver itself.

Price decreases through technological advancement and rising costs of electricity in Europe have made solar power more competitive than before vis-a-vis conventional sources of electricity. However, this is contingent upon policy support for solar power. For example, in Germany, which accounted for the largest share of global installed solar capacity in 2013 at 26%, the cost of generating solar power stood at 0.078-0.142 Euros per Kilowatt hour (kWh). This compares favorably with the average end-customer price in Germany, which stood at Euro 0.289/kWh in 2013. However, due to lowering of policy support with the imposition of a tax on clean energy plants, incremental addition to installed capacity is expected to fall to 3.3 GW in 2014 from roughly 7.4-7.6 GW in each of the previous three years. Lowering of policy support in Germany made solar power less attractive as compared to conventional sources of energy. Thus, favorable government policy is a must in order to accelerate the adoption of solar power at a global level.

The cost of silver itself is another major factor that will determine the cost of generating solar power. Silver is currently trading at levels of around $18 per ounce. A significant increase in the price of the metal may raise the costs of producing solar panels and solar power, thereby retarding the pace of the adoption of solar power. In addition, any technological changes that reduce the amount of silver used in producing a unit of solar power, may also reduce the demand for silver by the PV industry. These variables would determine the pace of growth in installed solar capacity between the optimistic and pessimistic scenarios discussed previously, and consequently, the demand for silver by the solar PV industry.