The Shifting Landscape for PV Projects in 2011

Competition is stiff in the solar manufacturing industry, with companies like Evergreen announcing its departure from the United States to China in order to reduce costs. Enormous global module supply has come online in the last two years to help fuel the rapid build-out in Europe, China and elsewhere, resulting in dramatic declines in solar module pricing. Some investment firms, like Gleacher and Company, are modeling module prices at around $1.30/watt right now. Others are actually predicting wholesale module costs at $1.10 in the next few weeks.

The result is a strange dichotomy of a manufacturing industry undergoing rapid growth and simultaneously dealing with a stressful reallocation of resources and a fairly pessimistic outlook on Wall Street. The WilderHill Clean Energy Index, which includes solar and other alternative-energy stocks, fell 5.3 percent last year, compared with a 12.8 percent rise in the Standard & Poor's 500 index. Companies like SunPower, Yingli, JA Solar, Trina, Canadian Solar, MEMC, Suntech and others all produced significant negative returns, some more than 20 percent down.

This fall in module prices, and the corresponding difficulties for module manufacturers, will likely continue through 2011 as the world's top solar market, Germany, further cuts its solar subsidies and a growing supply of PV modules outstrips demand, putting pressure on prices and producers' profits. As others have noted, a weak euro will compound the problem for Chinese and U.S. manufacturers. Last year, Germany, Spain, France, Italy and Czech Republic all cut back their solar subsidies. Further cuts are expected in Germany and France in the first half of 2011 and in Italy in the second half. Those three markets account for around 70 percent of the global market, according to Bank of America Merrill Lynch. Next year may be the first year in which more solar is built in the United States than in Germany.

For the solar installer and developer community, falling module prices is presumably welcome news (ignoring the risks, of course, that similar reductions in incentives may take place here). As solar module costs decline, so do total system costs since modules compose a significant portion of the overall costs of a solar system.

However, cost reductions do not uniformly impact the solar community. Because of economies of scale, module costs account for a much larger portion of commercial-sized solar system’s costs than they do for residential installations. The impact is even more powerful with regard to utility-sized projects. As a result, falling module costs disproportionately benefit larger systems, as illustrated the figure below (courtesy of SEIA).

Not only are commercial and utility costs already significantly lower than residential costs, they are also falling more rapidly. Indeed, utility projects are falling in price at three times the rate that residential projects are. This is an interesting window into the solar industry in the United States, which is showing us that solar systems will undoubtedly get BIGGER in the future.

To compound this trend, as states drastically reduce or altogether cut their rebate and grant programs for residential and small commercial systems, the economics that once favored smaller projects are starting to disappear. States like New Jersey, California, Maryland, Pennsylvania, Ohio and many others have gutted their tax-funded rebate or grant programs. American Recovery and Reinvestment monies that flowed through the states in much of 2009 and 2010 are nearly gone.

Although module costs are falling significantly, they are not falling (nor could they) by two to three dollars a watt, which was often the size of grant and rebate monies. The result is, again a further shift upward in PV project size. In Massachusetts, for example, given the emphasis on a solar renewable energy credit (SREC) market, many developers are starting to focus exclusively on commercial and utility-scale projects.

For residential focused installers and developers, this trend can be viewed as an opportunity or a challenge. Presumably, those firms that can secure large economies of scale in purchasing power will better weather these changes than those that cannot. Additionally, because size matters, the industry may see consolidation. Hopefully, it will also see aggregation or collaborative models, where residential and small commercial installers work together to secure better financing opportunities and engineer more sophisticated acquisition models. This, of course, is a primary focus of financing firms like Sol Systems. Additionally, power purchase agreements and lease agreements may gain prominence if effective costs rise for residential customers in the absence of rebates.

For commercial and utility developers, a move upward in size means a necessary move towards more onerous permitting and complex financing instruments. Large ground-mount projects in the 5-10 MW size range are likely to increase, while environmental regulations and permitting requirements may inhibit growth in the 10MW+ size.   Additionally, it is near impossible to make a pure equity play on a multimegawatt project — a blended debt/tax equity/first loss equity product is typically required to reduce risks and bring down the costs of capital. To see this approach succeed, the capital markets will have to open further to solar projects. A lack of access to debt markets and tax equity was a big part of what slowed the growth in wind and large-scale solar in the last few years. So this may be a challenge. On the other hand, Chinese banks continue to push into the US market to offer debt financing for multi-megawatt portfolios, so it may not only be Chinese modules the US industry is using, it may also be Chinese money.

In sum, as the industry grows, there will be a continued movement towards larger projects. To succeed, players will have to become more sophisticated. This will favor players in the residential space who are able to collaboratively or individually leverage economies of scale and acquisition models, and players in the commercial and utility space who are able to better secure complex financing instruments.