Photovoltaic cell maker SunPower expects to more than double its sales, from last year's $80 million to $200 million-plus in 2006, thanks to booming worldwide solar energy demand. But CEO Tom Werner says an acute shortage of silicon wafers is keeping his company, and the rest of the solar industry, from growing even faster.

"We can easily sell everything we can make," he says. "We're sold out for the next couple of years." SunPower, which is 85 percent owned by Cypress Semiconductor, has more than $600 million in orders for its high-efficiency solar cells, which use circuits printed on silicon wafers to convert sunlight into electricity.

"The demand completely exceeds supply," says Jeffrey Bencik, an analyst with investment bank Jefferies & Co. "These solar companies could produce five times as much if the silicon supply were there."

Semiconductor makers—which rely on many of the same suppliers as the solar industry for silicon wafers to build their chips—have been largely sheltered from the shortage thus far by long-term purchase contracts and their historic status as favored customers.

"In 10 years, suppliers will have other customers that are more important to them in terms of revenue. Chip makers will lose their favored position, and they'll have to pay market price," says Richard Winegarner, president of market research firm Sage Concepts. Contract prices for semiconductor silicon have already jumped from $30 to $60 per kilogram, he says, and solar companies without contracts are paying more than $100 per kilogram on the spot market.

The worldwide market for polysilicon, the gray metallic substance used to make silicon wafers, grew 45 percent during 2005, from $825 million to about $1.2 billion, according to industry group Semiconductor Equipment and Materials International. Actual output increased just 20 percent, however, from about 25,000 to 30,000 metric tons. Leading polysilicon makers have announced plans to collectively increase production by about 25,000 additional metric tons by 2008, which should theoretically alleviate much of the shortage.

Yet polysilicon makers remain cautious about expanding too rapidly. During the late 1990s and early 2000s, they geared up for expected semiconductor booms, only to be left with surplus capacity when demand suddenly collapsed. "They've basically been losing money since 1997," says Winegarner.

These days, the industry is booming again and manufacturers are investing in new manufacturing plants, which take two to three years to complete. Hemlock Semiconductor, the largest polysilicon maker, is spending nearly $500 million to double its output from 7,700 to 14,500 metric tons annually by 2008. Germany's Wacker-Chemie is boosting production from 5,500 to 9,000 tons. MEMC Electronic Materials, which makes polysilicon and silicon wafers, plans to double production from 4,000 to 8,000 tons.

This time, however, silicon makers are adding new capacity only after negotiating long-term purchase deals with solar companies. "We're prepared to expand, but we will not assume all of the risk this time," says Hemlock's Marketing Vice President Gary Homan. Gartner Dataquest estimates that the industry's output will be nearly 20 percent less than actual demand during 2006, a shortfall that could reach 30 percent by 2008.

With government incentives stimulating demand in Europe, Japan and the United States, solar cell producers are going to great lengths to procure more silicon. Norway's Renewable Energy recently bought the polysilicon operations of Japan's Komatsu and is phasing out orders from chip makers. Germany's SolarWorld has agreed to buy Royal Dutch Shell's silicon and wafer business.

Most chip makers seem unconcerned about silicon supplies.

A bigger worry may be that the shortage could weaken wafer makers, which are having trouble passing on polysilicon cost increases to customers. Hemlock's Homan warns that if chip makers don't pay enough to offset rising silicon costs, wafer suppliers may stop reinvesting, which eventually could affect "the health and stability of the entire supply chain."