London, UK -- On the back of last year's record demand, there are growing concerns that photovoltaic (PV) module supply is set to outstrip demand throughout 2011, leading to significant oversupply in the industry. But are these concerns founded? And if they are, what impact might the oversupply have on the global PV industry?
According to analysts at UK-based IMS Research, Photovoltaic (PV) module production capacity increased by nearly 70% over the course of 2010, reaching nearly 30 GW by the end of the year. Looking ahead, IMS anticipates that 35 GW of annual capacity will be reached within the first half of 2011, despite installations in the same period being predicted to reach no more than one fifth of that amount.
“Demand for PV grew quickly throughout the second half of 2009 and 2010, driving installations in 2010 to reach more than double the previous year. Most suppliers implemented aggressive capacity expansion plans throughout the year,” says Sam Wilkinson, Research Analyst at IMS.
“Following some reductions and amendments to incentive schemes in Europe, installations will not continue to grow at this rate and demand will not be sufficient to support all of this new capacity,” he adds.
Although in general agreement about the prospects of an oversupply in 2011, other analysts are more cautious about its likely extent. Adam Krop, Vice President of Equity Research at Ardour Capital Investments believes that the bankable supply of modules will be around 25 GW by the end of 2011 - compared to a conservative estimate of 17–18 GW of demand.
“While this appears to be a significant oversupply, these numbers are not a great ‘apples to apples’ comparison,” says Krop.
“The 25 GW of supply is based on statements of capacity build from individual companies, but keep in mind these are year end goals, so ramp timing plays a big role. While nameplate capacity for the industry could be 25 GW, we should discount that number for an adjusted annual run-rate as the lines ramp,” he adds.
Krop also expects some higher cost capacity to be decommissioned in Europe and says that some Chinese capacity plans could be postponed or scaled-back as well.
“[The] real question is how much a supply-demand imbalance will affect pricing and margin structures. We are incorporating 10-15% price declines for module manufacturers based on a more competitive pricing environment,” he says.
Strong Policy Impact
Although the chances of a global oversupply of PV modules occurring in 2011 will depend on a number of factors, one of the most important is likely to be the ongoing levels of government financial support for the sector in key markets. In particular, policy developments in Germany, Italy, France, Spain and other European countries have the potential to significantly affect overall global demand. Given recent trends in policy, it is a fair bet that, as the cost of solar continues to drop, we can expect some additional Feed-in-Tariff (FIT) reductions.
“If [there is] an oversupply situation in 2011, it will be due to lower demand [as a result of] subsidy cuts in Europe. The supply side is easier to control as it is a matter of cutting capital expenditure. Neither is good for stock prices,” says Krop.
“We also need to take into consideration the anticipated growth in China, the US and other markets,” adds Gil Forer, Global Cleantech Director at Ernst & Young.
“But, the retroactive limiting of the number of hours [for which] PV can receive incentives in Spain [and] the retroactive taxes in the Czech Republic, have damaged investor confidence in those countries and caused banks to become more cautious on the sector overall. This could potentially have long lasting negative effects on financing cost, which is a key input variable for the industry,” he adds.
Forer’s prediction is that, as more supply comes online, it is likely that prices for modules will moderate further, improving the economics in those countries with stable incentive schemes, low cost of capital and/or high insolation, thus increasing uptake.
“So, overall there is not one global answer, [instead it] will vary market by market,” he says.
For Forer, any growth market is likely to experience frequent, and often rapid, supply and demand adjustments. However, what makes PV unique is that it relies heavily on policy support, which can change according to political priorities and ability to absorb costs.
“As more and more segments and geographies enter grid parity, we would expect the market to become less volatile over time. That said, the increase in capacity, especially coming online in Asia is quite large,” he says.
Impact on Industry
So, what impact might the widely predicted oversupply have on the global PV industry? For Forer, whilst any oversupply is likely to be temporary, it will be enough to hurt high cost producers.
“Companies with strong brands and strong customer channels will be less affected. Most at risk are high cost producers that are not operating at scale and with weak brands,” he says.
“As we saw during the financial crisis, which was followed by oversupply, bankability was key and could again become a more differentiating factor,” he adds.
Further up the supply chain, tier 1 suppliers, typically favoured by the market, remained sold-out throughout much of 2010 – meaning that tier 2 suppliers were able to capitalise and grow shipments significantly. As a result, both Tier 1 and Tier 2 suppliers have quickly added new capacity going into 2011. The outlook continues to be good for Tier 1 suppliers, who continue to see high demand for their products in 2011.
“With a greater proportion of demand served by these Tier 1 suppliers in 2011, Tier 2 suppliers are likely to see less demand for their products, this is likely to result in some competitive pricing and lead to price declines across the industry,” says Wilkinson.
For some, it is quite possible that oversupply, and the ensuing drop in prices, will drive out some of the smaller, higher cost players.
“Consolidation and mergers of capacity is not likely in my opinion. Capacity will continue to be built and shifted into China, Malaysia and Taiwan, while technology and branding will be focused in key regions [such as] Europe and the US,” he adds.