In recent years, the global price of PV modules has undergone a rapid and sustained period of decline. In light of scaled back policy in key markets and recent bankruptcy announcements, the questions remain: How exactly is Chinese PV module pricing affecting the European market? And how best should European governments and solar companies react?
The general consensus amongst many industry observers is that the ongoing decline in global PV module prices is largely driven by a combination of oversupply and growing production overcapacities, coupled with ongoing cost reduction as a result of technological progress and innovation. According to some, there is no question that this trend has emerged as a direct result of the seemingly unstoppable rise of Chinese PV module manufacturers.
"Since the major part of the global production capacity is installed in China it is almost exclusively driven by them," says Günter Weinberger, CEO of German solar company Solar-Fabrik AG.
It is certainly undeniable that, in recent years, the Chinese solar industry has enjoyed some of the highest levels of investment in production capacity. According to Matthias Fawer, Director of Asset Management Sustainability Research at Bank Sarasin, Chinese and Taiwanese solar companies increased production volume by 120 percent over the last four years. In contrast German and Japanese companies grew production by only around 40 percent.
What is less clear is the extent to which this rise is fuelled by Chinese government subsidies. However, in late March, following complaints from U.S. solar companies, the U.S. Department of Commerce announced the results of a preliminary investigation, which found that Chinese solar panel makers had received government subsidies of 2.9 percent to 4.73 percent — and decided to levy an identical amount, in the form of tariffs, on Chinese imports.
European PV manufacturers, developers and installers are watching the case very carefully. With a second anti-dumping tariff ruling expected in May, there has been a great deal of speculation that European manufacturers are waiting for the outcome of the U.S. case before potentially filing a case within the EU — with potentially significant effects for the European market.
Even so, some observers point out that investment into PV capacity has historically been a global phenomenon, with all manufacturers having to follow downward price pressures to maintain market-share, and stress that it is wrong to pin all the responsibility on Chinese manufacturers.
"It is incorrect to assign the pricing decline directly to manufacturers in one specific region, but rather to the global supply-demand balance within the PV industry," says Finlay Colville, Senior Analyst at NPD Solarbuzz.
Effect on European Solar PV Industry
Whatever your view, it is difficult to deny that the continuing price freefall is having a marked impact on the European solar PV industry. For one thing, the unexpected spike in installations as a result of low prices has led several European governments, notably Germany, Italy and the UK, to scale back feed-in tariff support in an effort to moderate growth. Tim Murphy, an analyst at NPD Solarbuzz, highlights the fact that lower prices have helped drive some European national downstream markets “beyond expectation,” prompting some national administrations to react by reducing incentives sharply in order to “effectively moderate market volume and growth.”
So, what are the long-term prospects for the European solar sector if the trend continues? According to Weinberger, the primary financial effect is shrinking margins — which is felt by every company, whether it is Chinese or European. As a consequence, he argues, only “cost leaders” can maintain positive earnings before interest and tax (EBIT).
"Cost leadership can be achieved in many countries around the globe, not just in China. We think that the European market will grow further by volume and that this a sufficient basis for the European industry to be successful," he adds.
Other commentators are less optimistic. Susanne von Aichberger, an analyst at NPD Solarbuzz, predicts that consolidation and shake-out in the European PV manufacturing industry now seems “inevitable,” particularly if European governments continue to “strongly and abruptly reduce funding levels,” further increasing price pressure “without giving the industry enough time to adapt.”
"Price war in the solar module sector ends in a survival of the fittest. Who has the longest breath? The whole process is unhealthy. Euro[pean] solar companies have to focus on niche products and activities. Standard cell [and] module production will be in Asia," predicts Fawer.
For Weinberger, the best strategy for the European PV industry to adopt in reaction to the ongoing decline in PV module prices is the same for everybody — a focus on reaching cost leadership in a “key competence.”
"We don’t believe in fully integrated manufacturing because we consider the challenge to reach and maintain cost leadership in several value steps too extreme," he says. "In fact, we prefer to buy cells from the cost leader in cells, who buys wafers and silicon from cost leaders in their particular field. Anything else won’t work out longer term.”
In the module production segment, von Aichberger also points out that quality is often seen as a means of differentiation from Chinese competitors.
"The European PV industry in general should focus on new high-tech markets where innovation is required, for example in the field of storage [and] smart grid applications," she argues.
Meanwhile, Murphy believes that downstream growth strategies are beginning to revolve around demand being driven by competitive PV electricity price rather than incentives based benefits — a trend which could gain more importance in the European sector in the coming years.
At the macro-level, Murphy also believes that European government policy makers should determine or re-affirm their objectives in the PV sector and 'act accordingly' to either drive the domestic market and maintain and expand market share, or 'let it go to Asian manufacturers like the textile and other sectors.'
For Weinberger, it is clear that European governments should continue to assume the responsibility for establishing an economic environment which spurs further installations at the lowest possible cost for the population, hence “establishing a growing European market as a basis for the industry to operate in.”
However, as a second step, he believes that governments should consider requesting companies to declare individual product and production characteristics, such as the amount of “clean energy” used in module production — similar to the energy efficiency labels already required for electrical household goods or cars, but focusing on “production instead of operation.”
"It is irritating, at least with respect to climate change aspects, to build cheap and dirty coal fired power plants to generate the electricity required for silicon production," he says.
"[Moreover], it is important to continuously monitor the various national regulations and policies like local content and other hidden subsidies. Only fools are left alone on a level playing field," he adds.
In terms of financing and subsidies, von Aichberger also contends that European governments should stop calculating funding levels based on module prices at the “bottom end of the range.” For her, the residential PV roof segment is often less price sensitive compared to other PV segments, and “more open to domestic panel supply.”
"A strong roof segment also strengthens the position of domestic installers. The residential segment should therefore be a major focus of PV funding schemes in Europe," she says.
In the face of relentless capacity expansion and price decline, the European PV sector looks set to undergo several years of upheaval. However, if European companies meet the challenge by adopting smart strategies, perhaps based on differentiation and niche technological development, there is every possibility that the sector can continue to compete at a global level.