Price Decrease and Consolidation: The Solar PV Supply Chain

Considerably lower sales in Germany
The German market will consume considerably fewer modules in 2006 compared to last year. Precise figures are still not available, but everybody within this market is convinced.

The feed-in tariff decreased 5% at the start of this year. At the same time the module shortage was moving toward its peak. Basic financial calculations showed that PV installations and, moreover the larger free-field power plants, were no longer as attractive as they were in 2005.

Simply count the new large projects inaugurated in Germany in 2006: fewer large power plants means significantly fewer megawatts (MW). With Germany being the world's largest market, a drop of 10-15% in module sales means some 100-150 MW of modules can be sold elsewhere, and the predictions that can be heard within this market are: sales of 600 MW or even less in 2006 instead of the 730 or more in 2005.

Continued strong production growth
With the continued strong global growth in production capacity and production of cells and modules, the production of modules has risen compared to 2005. The shortage of silicon did not seem to affect this development too much. New cell manufacturers have started production and seem to be able to obtain wafers. This must be additional quantities, since no breakdown of any cell manufacturer has been reported so far.

It seems the semiconductor industry has found a way to make better profits by moving to solar wafer and cell production. From this perspective it is no coincidence the semiconductor nation of Taiwan already has seven solar cell manufacturers. So, with more cells and modules -- and fewer sales in Germany -- where do all the modules go?

Slow growth of module sales in rest of the world
Based on our contacts and market research, these modules do not all reach Spain and Italy. Although both very promising markets, they are not yet taking up even 100 and certainly not 150 MW of modules this year. The sales in these countries will be less than 50 MW each, due in part to both administrative and bureaucratic issues.

The world's third market, California, is just at the beginning of a new and promising era of market growth and secondly-ranked Japan is going strong but not with any serious market growth. The conclusion is that more modules should be available on the market. And this has of course an influence on the price.

What will happen next year?
New and existing Chinese manufacturers are ramping up cell and module production capacity. More silicon is expected to be produced next year in the world, specifically in China. Which markets will consume these silicon, wafers, cells and finally modules? Not Germany it seems. The feed-in tariff will be decreased another 5% as regulated by law. Furthermore, a revision of the German feed-in tariff is planned in 2007. Therefore, the German market can only become attractive again with much lower module prices.

At least a 10% decrease in price seems necessary to create market opportunities for solar systems and bring an acceptable financial yield for investors. Without a price decrease this market will only shrink once more. Other factors could enhance this development as well.

There are already more than 70 cell manufacturers and more than 230 module manufacturers in the world. The larger and stock-listed producers will have to show their shareholders growing numbers for sales and market shares. And as other markets have shown: if you can't sell more, you either lower prices to increase sales or you buy other companies out of the market. Both of these developments can put a serious pressure on the market prices.

Small companies will have to make serious efforts to keep up with the larger corporations. The question is whether these companies will be able to get their hands on cheap wafers and cells or whether they will have the financial resources to lower their prices and margins to go along with the market.

And there is another visible trend which is putting pressure on the smaller manufacturers. The growing attention for product quality and (financial) reliability and sustainability of photovoltaic (PV) companies. Like the Huerta Solares projects in Spain, more and more large multi-megawatt PV projects are being developed.

In this price-unstable market, the developers purchasing modules not only want to do business with companies offering the lowest prices, they also want to be sure that the seller will still be there in 10 years to fulfill product warranties.

Further price decrease after 2007
Will the smaller cell and module manufacturers be able to survive price decreases after years of heavy investment? Will this be the beginning of a consolidation phase?

The enormous growth rate of the bigger manufacturers will definitely require maximum efforts by the smaller ones to keep up within this unstable market. They could become fodder for the larger companies to strengthen their local market positions or, even worse, break down if prices fall faster and margins melt like snow in the sun. And prices could fall further after 2007.

The new silicon production capacity currently being built could bring considerably more solar-grade silicon on the market after 2007. That means, finally, the enormous surplus of cell and module production capacity can be used. This could lead to further price decreases since it's not unthinkable that global market growth will increase over the next two years.

Modest market grow in 2007
With a revision coming up in 2007, it is uncertain what will happen with the feed-in tariff in Germany. If continued as it is now, the growth will depend very much on the required lower module prices to pump up the market again. Japan is growing modestly and an explosive growth does not seem likely in the coming year.

The world's third market, California, is very promising with its new incentives, but has only just started. Experience in other markets shows that it takes time to educate a market before really big sales numbers can be achieved.

Look for example at Spain and Italy. Already in action with good incentives for over a year, they could start growing seriously, but are currently showing some uncertainties related to revisions of the feed-in tariff. Many other new markets might pop up (France, Canada, Greece), but they will not be able to consume big numbers of MW in their early stages of development. Therefore, for the long term, global market development looks great.

Consolidation seems likely within the coming years
Based on the above scenario, in the short term a consolidation within the supply chain could take place. Would it matter if the "big guys" with access to large amounts of capital take over some "smaller guys"? With continued price decreases achieved by large-scale and optimized production, solar modules will more and more become a commodity product.

In the development of the solar energy market and industry, the current market phase could also be the start of a new era in the development of photovoltaic energy as a major energy source. As foreseen by several industry experts, photovoltaic energy systems could even become a price-competitive energy source within the next decade.

Chinese solar industry dominance?
Within this consolidation phase, the Chinese manufacturers have an interesting advantage. As with other products (toys, computers, cars, etc.), the Chinese manufacturing industry seems to be very competitive compared to industries in western countries. Moreover, western multinationals have build up their manufacturing facilities in China, most often in joint ventures with Chinese companies.

Government incentives, tax advantages, cheaper labor, plenty of capital, enormous numbers of highly educated people, and a culture and spirit to work harder and longer, provide competitive advantages that are hard to beat. Their strongly growing energy consumption and programs to stimulate domestic use of renewable energies will further enhance the Chinese solar industry. All these developments make it worthwhile to keep a close watch on what will happen in the Chinese PV industry over the coming years.

The solar industry seems to be at a turning point in its development. Global production capacity is rapidly growing and shortages in the supply chain are vanishing. Prices are decreasing again, turning the market from a sellers market into a buyers market again. The expected consolidation phase could create a good starting position for a new era heading towards solar energy as a price-competitive renewable energy source.


About the author...
Edwin Koot is the Founder and Chief Executive Officer of SolarPlaza.com, the global solar energy marketplace with more than 4,300 PV companies registered. SolarPlaza is based in The Netherlands, publishes market survey reports, organizes international PV trade missions to countries like Spain, China, Greece and Italy and operates as industry matchmaker. Mr. Koot holds a MS degree in Chemical Engineering from Twente University in The Netherlands and has more than 13 years of experience in the solar energy industry. He is a consultant on global PV market trends and developments for international companies like investment firms.