Solar Photovoltaics: A High-tech Commodity

How likely would you be to consider using global vendors?

Woodlawn Associates asked survey participants from U.S. and European developers, integrators, and finance providers to consider vendors from the People’s Republic of China (PRC), Japan, Europe, and the US, and rank their interest in these vendors. The results suggest that geographical location has no great impact on consideration. Suntech, a Chinese company, ranked highest. Japanese companies score well as a group, with high confidence reported in warranties and a respect for Japan’s long PV history. 

Figure 1. How likely would you be to consider using each of these vendors, with 0 being not at all likely and 10 being extremely likely? Source: Woodlawn Associates.

Interviewees said they prefer domestic modules, but often don’t use them due to price. Companies with products well suited for a niche may have scored better in a narrower survey, though: Uni-Solar does well with installers concerned with weight, but not as well otherwise.

PV Modules Are Viewed as Commodity-like

Developers and integrators see modules as commodities. One utility-scale developer CEO said, "A solar panel is a solar panel is a solar panel. It’s amusing to me when these guys try to tell you how different they are. It is a complete commodity." Others echoed this sentiment. Interviewees typically mention cost as the most important criteria in vendor selection, even when performance, reliability, availability, and company stability are also factors in the selection process. However, bankability and secure warranties are must-haves as well. "Number one is bankability. Second is landed cost," said one procurement manager for a commercial integrator.

Differentiators can include power/price and power/size ratios and local manufacturing bases to customers. Other areas to concentrate on include reducing materials waste, integrating modules with balance of system (BOS) components to streamline supply, and focus on scale (perhaps by manufacturing in low-cost/high-volume geographies). Vertical and horizontal integration are options for module suppliers, which can go upstream into silicon growth, downstream into project financing (discussed later), or into related fields of energy storage and BOS.

Figure 2. Factors that decide solar module selection. Source: Woodlawn Associates.

	Customers of businesses with highly differentiated offerings and high barriers to entry cannot easily switch to competitors. Even average firms can achieve ROIC above the cost of capital.
	Customers in commodity businesses view providers as essentially interchangeable. When capacity is easily and quickly added by providers, it is hard for firms to earn more than the cost of capital. When costs are similar, results will be similar.
	Even in commodity markets, firms that achieve cost advantages can achieve returns above cost of capital. Cloud Peak, Peabody, Consol, and Arch control low-cost coal resources, while International Coal and Massey control high-cost resources. When demand is unpredictable, firms with high costs find cost of capital earning difficult.
Figure 3. Across industries, high returns on capital reward differentiation or low costs. Source: Morningstar.

Figure 4 (right). Comparing solar module producers using the logic of Figure 3. Source: Morningstar

Utility-scale developers and residential/commercial integrators said they would be interested in vendor financing. One reason is speed: in feed-in tariff (FIT) markets, you get the highest tariff if you move the fastest, said one CTO.

Some developers would be willing to pay higher per-watt prices if the project cost were spread over 15 years, for example.

For developers within larger companies financing may be less important than it is to smaller or newer companies.

Supply and performance

Costs and capacity are not transparent enough to developers and integrators, according to the survey respondents. 

Figure 5 (below, right). Supply and demand: Impacts of demand elasticity.

Buyers also want data on how modules perform over time; some suggest that payment financing structures should be tied to modules’ long-term performance. Warranty structures could and should change with this data, say some respondents.

Are module vendors also competitors to utility-scale developers?

Utility-scale developers have a hard time dealing with module vendors that also develop projects. This dissatisfaction with being a customer and a competitor could push some developers to bankable vendors without project development arms, such as GE, Kyocera, Sanyo, and Suntech. First Solar, SunPower, and Sharp (with Recurrent) need to clearly delineate where they will compete for development projects, say survey participants.

The impact does not extend into the commercial and residential spheres, however. One integrator in that market said "Project development by module vendors does not affect us too much because...we mostly do residential and commercial, and they are doing utility-scale projects."

Josh Lutton is a managing partner with Woodlawn Associates Management Consulting and may be contacted at 312-262-1610.