Hazy Skies Forecast for Cypress' SunPower

Cypress Semiconductor(CY Quote) has prepared its SunPower unit for an initial public offering, but tough times are ahead for the silicon solar company as it tries to secure the basic building materials for its products.

SunPower, which makes silicon solar cells that convert sunlight into electricity, wants to raise $100 million in a stock sale in order to fund a capacity expansion in the red-hot silicon solar market. But that expansion could be in jeopardy -- regardless of how much money is raised -- because of shortages of polysilicon, the raw material used to make silicon wafers that in turn are used to make semiconductors.

The polysilicon supply-and-demand situation has played itself out in the form of higher wafer prices during the past year. Polysilicon contract prices are up to $45 a kilogram from the mid-$30s one year ago, with bidding expected to reach $60 a kilogram next year as shortages become more dire. While the entire semiconductor industry is affected, silicon solar companies are especially vulnerable because of the specialized poly they require.

Indeed, it's the silicon solar market that has helped create the current shortage.

Demand for solar power is booming thanks to higher energy prices, government subsidies to promote solar power, and improved solar-power efficiencies. The amount of silicon devoted to solar power, in terms of wafer area, outstripped that of silicon for traditional semiconductors last year. Further, the demand surge has caught poly producers short, and capacity additions likely won't catch up to supply for at least 18 months.

"The solar market has grown to the point where it is consuming all of what was excess silicon supply," said Richard Winegarner, a principal with Sage Concepts who has been researching the silicon market for 20 years. "For the next three years at least, there will be a shortage of capacity to supply both the semiconductor market and the solar market."