The semiconductor companies that earned the San Francisco peninsula its Silicon Valley sobriquet are set to be displaced in their consumption of that core material by a new high-technology industry.

The faster growing solar panel industry is forecast to overtake the chip sector in the next five years in its use of silicon. But it must first overcome an acute shortage of the commodity, which is throttling its expansion.

Raw silicon refined to 99.99999 per cent purity for use by chipmakers such as Intel and AMD - and also by makers of solar panels - is known as polycrystalline-silicon, or polysilicon. While the semiconductor industry has concentrated on miniaturisation - squeezing more and more transistors on to silicon wafers - the solar panel industry creates larger areas of silicon to absorb the sun's rays.

In 2005, the solar panel industry grew by 30 per cent, but analysts at Piper Jaffray expect only 5 per cent growth in 2006 due to the shortage of polysilicon. This has been caused by the industry's rapid expansion - the result of government subsidies and incentives - and its insatiable appetite for the material.

Some 30 per cent of world supplies are expected to be used on solar panels this year. This has caught polysilicon manufacturers by surprise.

Production of about 26,000 metric tonnes in 2005 came from a small number of producers including Hemlock Semiconductor and MEMC of the US, REC and Elkem of Norway, Wacker of Germany and Tokuyama of Japan.

While they recognised last year the need for extra capacity, it takes three years for new plants to come on stream, creating acute shortages until 2008.

The squeeze comes at a time when chipmakers are also expanding their factories, using larger silicon discs. Chipmakers are in a better position than solar panel makers as many have long-term contracts at fixed prices.

The silicon is also a lower part of the overall value of their chips compared with the cost structures of the solar panel makers, meaning they can afford to outbid the newcomers.

Prices have risen from about $30 per kg in 2003 to around $72 now, according to Rich Winegarner, president of market research firm Sage Concepts. With no properly established spot market for the material, though, some buyers are paying more than $300 per kg for a few tonnes of silicon.

"It does show the degree of desperation of buyers," he says.

More than 90 per cent of solar panels being produced today use large amounts of silicon, leading to the development of thin-film solar cells, where a layer of silicon thinner than a human hair is deposited on to glass, plastic or metal.

Applied Materials, the world's biggest maker of tools for the semiconductor industry, has transferred its expertise to the solar industry. This month, it announced its new solar strategy, saying it aimed to reduce the cost of generating a watt of electricity from $3 to $1.

"We see the silicon shortage as a catalyst more than a permanent or critical feature," says Mark Pinto, Applied Material's chief technology officer. "It's obviously choking the industry, a lot of people don't have secure supply and they're having to make the wafers thinner and thinner."

The wafers are now so thin they break easily but Applied's equipment promises more sensitive handling and better yields. Its expertise in making equipment for the flat-panel display industry and its acquisition of Applied Films, which specialises in thin-film deposition of materials, means it can also help achieve finer coatings of silicon on glass-based solar panels.

Winegarner says the solar industry's use of polysilicon in Silicon Valley will match that of the chipmakers when supplies get back to normal in 2008: "Twenty years from now, the primary use of that material will be solar and semiconductors will represent a small niche."