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2012 PV Forecast: Industry Value Chain Blues

At the turn of the year, photovoltaics manufacturers are faced with difficult choices: continue selling at prices that do not allow for positive margins, or shutter production and wait for the current situation to settle down. With significant inventory on the supply side, and expectations on the demand side for continued low pricing, the correction is likely to be long and painful.

A fire sale is the sale of goods at extremely discounted prices. Today's prices are artificially low, and decreasing almost daily. Confusion over who is buying what technology at what price has made establishing a global average almost impossible. Adding to the confusion are joyful announcements that grid parity has been reached. Right up front, if the price of technology per watt peak is below the cost of producing it and technology manufacturers are failing, true grid parity has not been reached. Currently there is significant tension between technology's manufacturers and its buyers. On the buying side, current low prices are leading to healthy margins, and thus this group does not want to see prices increase. On the selling side, well, margins are negative and the future looks grim.

Along with the failures of third tier technology, manufacturers and module assemblers are failures of industry pioneers. This is not a symptom of healthy correction and consolidation, it is a sign of something gone severely awry in the value chain of the PV industry. Rhetorical question: if all the technology manufacturers go out of business will there be a PV industry?

PV is an industry of optimists. In fact, optimism should be a requirement for entry because before 2004 all, or at least most, of the technology manufacturers lost money. Before a reasonably steady slate of incentives, demand was primarily into the off-grid applications with grid-connected demand hit or miss. Despite all obstacles, and driven by industry participants who truly believed that they had a calling, the industry survived until it could thrive. And thrive it did. From 2005 through to 2011, the PV industry grew by a compound annual rate of 59 percent. In 2010 over 2009, shipments to the first point of sale grew by 120 percent. This extraordinarily strong growth was driven by the generous feed-in tariff (FiT) market in Europe. The strong EU FiTs led to a virtual gold rush in the solar industry, inviting new entrants who, knowing nothing of the industry's history, did not understand the inherent risks of an incentive-driven market.

Current State of the Industry

There is significant tension currently between the demand and supply sides of the PV industry. Supply side participants (not news to readers of public financial statements) are suffering from negative margins, large losses and are shuttering production. High debt in Italy, currently the strongest market, is giving investors pause, and the market is slowing. The German market has slowed and other European markets cannot take up the slack. In 2010, the markets in Europe had an 80 percent share of global demand. In 2011, the markets in Europe will have a ~72 percent share, with Japan, the U.S. and finally China consuming more product. In the case of China, having built the strongest global export market and, with its manufacturers experiencing significant losses, the government can choose to install domestically or allow inventories to increase significantly. China is choosing to install. The government in China has also publically indicated that it will control capacity additions. The country will still have a dominant share of global capacity at an eventual 20 GWp.

In all markets, manufacturers are shuttering production and stepping back from announced capacity plans. Though several polysilicon manufacturers are apparently carrying forward with capacity additions, many are quietly discarding plans for capacity expansions while publicly putting on a brave face. The time for brave faces may be past; in its place is the need for true courage. For an industry that has historically faced significant obstacles and, by and large, surmounted these obstacles and survived, the current state of affairs requires courage indeed. The proof of this is in the manufacturer bankruptcies that have already occurred, and in the bankruptcies still to come.

The current state of the industry includes crashing prices and negative margins for manufacturers, decreasing incentive rates, high levels of debt in markets such as Greece and Italy, high levels of capacity and high levels of inventory. The U.S. is a promising market, but the demand side (installers, system integrators, EPCs, developers) has grown so significantly that it is now overcrowded. Project bids are, in some cases, at the 8.5 cents/Wp level, which does not support quality system installations. The demand side of the PV industry in the U.S. may well suffer the next correction. (Corrections are healthy, though they can also take a long, long time. As an example, consider the still recovering U.S. housing market.)

A caveat to 2011 data, as the final data are not available until the 2012 survey is completed: the 2011 total is an estimate based on quarterly assessments. In fact, pricing data is coming in almost daily. The methodology used is classic market research. This discipline counts things from where they start to where they first stop, begins counting again to the next stop, and so on.

Figure 1 (below) presents 2011 as the global PV industry moves into 2012. The figure includes bars for inventory, installations, shipments to the first buyer, production, capacity and announcements. The announcements are included to make the point that announced plans are not data. The first buyer in the market can be a module assembler, an installer, system integrator, EPC, distributor, retailer, and even another manufacturer. Outsourcing and rebranding has always been common in the PV industry. With current low prices, it is simply the way business is being done.

Note that in Figure 1 a high level of demand-side inventory (~4 GWp) remains at the end of 2011. High levels of demand-side and supply-side inventory, high levels of capacity, decreasing incentive rates and current unease among investors about the markets in Europe (given anxiety over the Euro and high debt levels) are holding technology prices down.

In 2011, manufacturers from China and Taiwan accounted for 56 percent of total technology shipped to the first buyer. Technology shipped to the first buyer includes cells and modules from the original technology manufacturer. Technology is frequently reshipped several times, particularly in the current market situation.

It Ain't Grid Parity if Everyone Goes Bust 

The demand side of the PV industry, particularly some very vocal participants in the U.S., argues that if prices increase, it will not be able to do business. But if prices do not increase it will not be able to do business, as the majority of manufacturers will cease manufacturing for a time, or disappear altogether. This would leave a vastly decreased field and prices would rise. No matter what, prices will rise, though with current high inventory levels and gray market selling it will take some time. Prices may not rise to a healthy level until the end of 2012. These increases will be fought and resented, but manufacturers cannot continue selling at the current levels.

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At the end of 2011, the average price for all technologies to the first buyer is expected to be US $1.25. Within this average are prices as low as $0.50/Wp to >$3.00/Wp. Prices to the second buyer are currently averaging $1.10; this range begins at $0.50/Wp to $1.25/Wp. Reselling of inventory continues and should not be averaged as it clouds the pricing picture. Currently there is significant gossip in the PV industry regarding pricing. The announcement of ever lower price levels, in most cases based on very little data, sends a signal to the market to wait for lower prices and is a self-fulfilling prophecy.

From 2001 through 2003, average global prices were close to production costs, with aggressive pricing at below production costs common. From 2004 through 2008, the EU FiTs stimulated significant demand and, though this acceleration coincided with a polysilicon shortage, technology manufacturers took margin during this period, most (or all) for the first time. In 2009, manufacturers from China and Taiwan, particularly China, began pricing aggressively for share. They increased capacity and market share rapidly while continuing aggressive pricing strategies. In 2011, manufacturers no longer control the pricing function.

In an incentive-driven industry where governments legislate incentive availability, pushing prices to unsustainably low levels is not only unsustainable, it is risky. Table 1 (below) shows regional shipment (supply) shares over time, appropriately depicting the rapid rise of manufacturers in China and Taiwan.

PV Will Go On, But Struggles To Come

The necessary and long-expected correction has finally come. It is uglier than anticipated. Consolidation, bankruptcy and, sadly, slowing of innovation is the short-term reality while manufacturers hunker down to survive. The correction will involve both supply and demand sides of the industry and will be unpleasant. Figure 2 (below) offers a forecast for three scenarios through 2015. The conservative forecast is expected for 2012; however, the reduced incentive forecast is a distinct possibility.

The reality of slower demand at lower prices is lower revenues. With prices held down artificially, sales (shipments) will need to increase significantly (accelerated forecast) for there to be revenue growth. Given current soft demand and low prices, the correction in PV, which is beginning in earnest in 2012, will stay on the conservative track, and this is an optimistic view.

Consider this a cautionary tale similar to that for all commodity industries (and electricity is a commodity industry).

The current pricing situation is also pressuring CSP and CPV manufacturers, which must compete with artificially low prices. Thin-film manufacturers have perhaps the most difficult time as, over time and due to the area penalty, these manufacturers need to price product ~12 percent lower than higher efficiency crystalline product.

Table 2 (below) offers a technology forecast to 2015 for the conservative and accelerated forecasts with a breakout for thin film categories.

At the start of 2012, manufacturers are faced with difficult choices: continue selling at prices that do not allow for positive margins, or shutter production and wait for the current situation to settle down. With significant inventory on the demand side, and expectations for continued low pricing, the correction is likely to be long and painful.

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