Industry in upheaval: Plotting the future for PV

Although recent years have been exceptionally dynamic for the sector, challenges for the photovoltaic industry are actually expected to increase in the coming years. This is largely due to the fact that, within the next two years, there is a high probability that after five years of module scarcity the market will develop into a buyers market. For the first time, supply will exceed demand.

Certainly, the PV market has developed significantly in the past eight years. In Germany alone, a hundredfold increase in annual installed capacity — from approximately 10 MW in 1998 to 1100 MW in 2007 — has been observed. By the end of 2007 Germany had over 400,000 solar power installations with a total capacity of 3800 MW and over the year, the industry achieved a turnover of €5.5 billion and provided over 40,000 jobs with a growth rate of 30%. The prospects for the future also appear to be good. Electricity prices are rising and in Germany possible bottlenecks in electricity supply are being discussed. Furthermore, the European Union, as well as the German federal government, has set out ambitious renewables targets. Indeed, a PV growth rate of 25% is anticipated for 2008 in Germany.

In 2007 about 2400 MW of PV capacity was installed globally and with a 46% share German remains the most important marketplace. Spain takes second place with 425 MW, followed by Japan and the USA with 230 MW and 190 MW, respectively. All top 13 countries experienced market growth with the exception of Japan, which saw a decrease of 20%. For 2008, PV world market growth is expected to be about 50% at 3.6 GW, in which Germany's market share will lessen to 37%.

Change of market in sight

Since 2004 the photovoltaic market has been constrained by a severe scarcity of modules, mainly caused by a dramatic increase in demand in Germany, Spain, USA, Italy, South Korea and France. This shortage was also due to delays in increasing silicon production capacity. However, the coming years are expected to see a number of developments which will turn this trend around. The global demand for solar modules is growing continuously, despite uncertainties over future demand in all important markets. New markets are also gaining importance; Germany has a decreasing share of the market; Spain installed over 1GW of capacity in 2008; Italy and France are growing strongly; the USA has the potential to become the biggest PV market in a few years; and other countries will also grow rapidly. Furthermore, in specific regions and for some investors, photovoltaics are becoming an interesting opportunity even without federal support programmes, which will lead to new markets, investments and project types.

In addition, due to the rapid increase in new production capacity for solar silicon and thin-film modules, the availability of solar modules is growing quickly. As soon as the supply exceeds demand, the pressure on market prices will increase, which in turn will fuel demand. The increase in investments in production equipment for thin-film modules will also accelerate competition between crystalline and thin-film technology.

Development of the German PV market

Since 1991, Germany has had a feed-in tariff, which requires utilities to connect solar power installations to the grid and purchase this electricty at a specific price. The 1000 roof programme, which was in place from 1991 to 1995, provided the first experiences with the installation of grid-connected systems in Germany. This was followed, from 1999 to 2003, with the 100,000 roof programme in connection with the Renewable Energy Law (EEG) which made PV investments profitable for the first time. Since 2004, investments in PV installations have been advanced solely through the EEG and market growth in Germany has been restricted by the limited availability of modules. For distributors and installers, this means that sales growth is conditional upon whether modules can be purchased. The same goes for manufacturers purchasing primary resources.

In addition, the reduction in the EEG tariff of 5% per year for rooftop installations should actually lead to a 5% decrease in prices per year. This is because the basic idea of the EEG is to reduce the tariff at the same rate as prices and costs for the technology decrease, so that the return on investment will remain constant over time. The feed-in tariff for a specific system, however, remains unchanged over 20 years, so that long-term credits are covered and a return on the original investment can be achieved. However, despite the decreasing tariff, module prices (which account for 60%-70% of installation costs) have actually increased between 2004 and 2006. The primary reason for this is the increasing price of silicon, but also the rising sales profits and large capital investments in production and sales capacity. Prices could also have increased due to strong demand, but, since 2006 module prices have begun to decline.

The German PV market reacted to rising module prices with price elasticity as installers reduced costs through simplified assembly robotics and quicker assembly methods. They also accepted decreased profit margins. Furthermore, the system yield per installed kilowatt has been increased and the systems were built primarily in regions with a high solar irradiation. Customers also accepted a reduced rate of return.

In 2006, the borders of elasticity were reached and the correcting mechanism of the EEG began to take effect. The manufacturers were responsive to the stagnant sales in the first half of 2006 and from the middle of the year average module prices began to decline again. Thus, BSW-Solar's price index shows that module prices have been decreasing at an average rate of 7% per year since mid-2006.

EEG amendment leads to accelerated depreciation

The German feed-in law is reviewed every four years so that it reflects the actual price, cost, and demand developments. Given that the photovoltaic market is growing considerably quicker than expected and the technological developments are advancing quickly, the German federal government assumes the costs of photovoltaics will decrease more rapidly in the future than they did in the past. It is difficult to predict the cost reduction potential of the industry over the next four years, particularly because there are many different expectations for market development. Accordingly, there are very different estimates and a considerable amount of discussion concerning the optimal degression rate of the feed-in tariff. At the same time, all political parties agree that support for PV by means of the EEG should continue.

In early June, 2008, the German parliament determined the changes to the EEG which will take effect on 1 January, 2009. As a result of this, the tariff will decrease yearly between 8% and 10%, as Table 1, left, shows.

Since the cost reduction also depends on the market volume, a provision was established for the tariff which reacts to the development of the market. Therefore, in the years 2010, 2011 and 2012 the tariff will adjust respectively either 1% higher or lower when the market size for the previous year is larger or smaller, according to the ‘market growth corridor'. For example should the market be smaller than 1 GW, 1.2 GW and 1.3 MW for the years 2009-2011 respectively, the tariff will increase by 1%.

Expected demand development in Germany

The reduction of the tariff for PV systems as of 2009 has led to an increase in demand in 2008, as many investors expect that the returns from PV systems will decrease. It is therefore certain that the demand for modules in Germany will only increase in 2009 if PV system prices decrease more rapidly than the feed-in tariff. Consequently, German wholesalers and installers fear a strong PV market retrogression, since module manufacturers have not yet announced any comprehensive price cuts.

In previous years, installers made a large contribution to price reduction and accepted sinking profit margins. Consequently most are not in a position to reduce prices further. It is therefore evident that module prices must fall to maintain demand. Since PV modules constitute 60%-70% of the costs for a PV system, an 8% cut in system price will see require modules to become 11% cheaper. It is very unlikely that module manufacturers are able to realize this level of reduction given the one-digit profits margins which stock market listed companies show.

Hence, it is primarily the silicon, wafer, and cell manufacturers which must reduce prices, since they show the highest profit margins. However, solar cells would have to become 16% cheaper in order to achieve the total system reduction cost of 8%. So far, module manufacturers have regarded such price reductions as unfeasible due to long-standing solar cell supply contracts.

Market prognoses for 2010 vary greatly

The significant differences in the prognoses for the world market in 2010 show how difficult it is to make accurate forecasts. Despite the short timeframe, the opinions of experts diverge in very different directions. Photon Consult presents the most optimistic prognosis, since they predict a world market size of 26 GW in 2010. With a given market volume of approximately 3.6 GW in 2008 this would mean a yearly growth rate of 170% and is hence hard to believe. The solar experts of the banks Sarasin and LBBW came to a much lower forecast: they believe a market size of 8 GW is possible, which corresponds with a yearly growth rate of 50%. The European Photovoltaic Industry Association (EPIA) and the German Solar Industry Association (BSW) expect at least 4.7 GW and a maximum of 7 GW in 2010.

The main reason for the strong deviation in the prediction of Photon Consult is the assumption that the world market will grow as quickly as global module production. In 2010, according to data from Photon Consult, silicon for 24 GW of crystalline silicon modules will be produced, which assumes that adequate wafer, cell, and module manufacturing capacities to assemble the modules will also exist. An additional assumed 2 GW of thin-film modules gives the 26 GW Photon Consult figure.

However, EPIA and BSW-Solar assume that the demand and the receptiveness of the worldwide PV market have limits. Thus, it is most likely that as of 2009 demand will be the limiting factor rather than production. Overall, this is because of factors and uncertainties which are slowing growth in the seven established leading PV markets. All other PV markets require several years to establish appropriate legal conditions and to build up sufficient financing, project planning, and installation capacities required which will allow for more than a 100 MW per year of new installations.

Nevertheless, EPIA and BSW-Solar are optimistic, believing an average growth rate of 40% a year is possible to 2010. A precondition for this prognosis is a positive development in terms of political framework conditions in the respective countries, without which the market in 2010 could be less than 5 GW. Indeed, it could also be foreseen that under optimal framework conditions, the market could be at 10 GW or larger if the prices decrease significantly quicker than expected and important political framework conditions become strongly advantageous for photovoltaics. This could include rapidly increasing energy prices or electricity shortages during daytime in the summer. However, the probability of this occurring is relatively small.

Silicon production hampers PV market development

Since 2004 there has been a bottleneck effect on worldwide PV production due to the production constraints of solar silicon. Previously, there were five companies worldwide which were able to produce solar silicon in large amounts: Hemlock (USA), Wacker (Germany), REC (Norway), Tokuyama (Japan) und MEMC (USA). In 2007, these five companies raised their production levels around 8%, even though they had been investing for many years in the development of production capacities. This proves that even experienced firms require long lead times before production can begin. However, according to EUPD Research the production is anticipated to increase 27% by 2008, 33% by 2009, and again in 2010 by 41%. Additionally, a large number of new companies are entering the market, which are currently attempting to produce solar silicon. Including this, according to EuPD Research, the solar silicon supply chain will allow for the production of 14 GWp of photovoltaic modules in 2010.

There has also been a significant increase in the supply of thin-film modules. In Germany alone, there are more than ten production lines under construction currently, with which capacity will increase from 75 MWp in 2007 to 860 MWp in 2010. Worldwide thin-film production growth is predicted to rise from 560 MWp in 2007 to 4400 MWp in 2010.

PV production volumes will increase from 2.4 GWp in 2007 to approximately 18 GWp in 2010, EUPD Research concludes. Furthermore, even according to this conservative prognosis, production will be substantially higher than the demand.

Development of worldwide PV demand

Development of global demand is considerably more difficult to estimate than the development of supply and only in a few countries — where concrete PV targets and support policies for the coming years are in place — is it foreseeable. Despite this, a number of broad assessments can be made of the major markets.

In Germany the support conditions were established by the amended EEG in June 2008 for the next four years, for example. Should PV module prices decrease less than 10% per year as of 2009, this will lead to a declining German market. If prices decrease significantly more than 10% a year, however, then the German market will continue to grow. There is no cap foreseen by the EEG, though the decrease in the tariff will be adapted should the market grow quicker than anticipated. Should the market become as large as Photon Consult assumes (6.5 MW), it must be assumed that the framework conditions will be changed in the short-term.

In Spain the actual feed-in law is running out in September 2008. In July, the government presented a new legislative proposal for a reduced tariff from 29 euro cents/kWh to 33 euro cents /kWh, which provides for two thirds of systems on rooftops and a market cap of 300 MW per year. Currently, changes to this proposal are being discussed. However, it is assumed that a cap will be established which is significantly lower than the market volume this year, which is estimated to be about 1000 MW.

Within the space of a few years, the Japanese market fell from first place back to third and is currently stagnant, since a PV support programme ran out in 2005. However, it is expected that the Japanese PV companies which are currently making large investments in building up production capacities will serve their home market in the future when a sufficient amount of modules become available. New support programmes are also under discussion. Japan did not officially give up on its goal of 4.8 GW of installed PV capacity by 2010, even though it is now hardly reachable. Nonetheless, due to the available market structure and experience, the Japanese market has the potential to grow very quickly.

Strong market growth can be assumed for the USA in the coming years. Many American PV firms have had a considerable amount of experience in the PV market, the solar irradiation is very good in much of the country, and in a few states there is a bottleneck in summer electricity supply along with high costs. Solar energy is now becoming cost-effective in some regions. Certainly. So far there has only been a large support programme in place in California, for over 3 GW by 2017. Despite many efforts, the 30% federal solar tax credit which expires at the end of 2008 has yet to be extended. Due to the upcoming Presidential election, the US commitment to photovoltaics will not be revealed until the beginning of 2009.

The Italian feed-in law has already been established for a few years and offers very attractive conditions for investors. The target of installing 3 GW of PV proves the seriousness of the politicians. There are issues associated with the law; however, and currently it is difficult to estimate to what extent administrative barriers at local and regional levels will limit market growth. It is uncertain whether the new government under President Berlusconi will lend further support for photovoltaics and allow the ‘Conto Energia' law to remain.

The feed-in law in central France has only been attractive for building-integrated PV systems, with the tariff for rooftop and ground-mounted systems only adequate for triggering investments in Corsica and the overseas territories. Despite this, a doubling of the PV market to approximately 100 MW could occur. Discussion is taking place regarding increasing the existing target of 700 MW of PV systems and improving the tariff for rooftop systems.

Besides Japan, South Korea is the only state in Asia with a noteworthy PV market. With the feed-in tariff system South Korea has an established support system, and it has a clear goal of 1.3 GW of PV systems by 2012. The market and the industry are being systematically built up.

Overall it can be assumed that these seven leading markets will very possibly continue to grow as a whole. However, it seems unlikely that this growth will be greater than the 40% annually envisaged by EPIA and BSW-Solar within the next 3 years. All other markets with a size of 20 MW and smaller collectively constituted a world market share of 13% in 2007. A few have the potential to grow quickly in the short-term. Nonetheless, a PV market can only grow by 100% or more for several years under exceptional circumstances. Therefore, in the short-term these markets are only able to slightly increase their world market share.

The fundamental factors for the development of photovoltaic markets in many states are for the most part positive, considering the increasing dependence on energy imports, increasing energy costs, and climate change. At the same time, in the coming years photovoltaics will become economically atrtactive in more and more regions of the world without support programmes, particularly in those locations where high levels of solar radiation and high energy costs come together. Therefore, in the mid-term an increased demand for photovoltaics is to be expected, especially when prices decrease significantly. Nevertheless, until 2012 the worldwide production of photovoltaic modules will increase to significantly more than demand and thus it is very likely that by 2009 or 2010 at the latest there will be an oversupply in the photovoltaic world market.

Gerhard Stryi-Hipp is the managing director of German solar industry association BSW-Solar
e-mail: stryi-hipp@bsw-solar.de