London, UK What if PV's recent surge is not so much a launchpad as a liability? In fact, for Paula Mints, principal author of a new report into the sector, the industry is about to pay for its over-exuberance with a severe hangover.
‘Along with this growth have come low margins, losses and failures,’ she says. ‘We’ve been waiting for a correction for a while – and we now face a two-year correction at least.’
A Challenge Ahead
Mints gives a quote from the economist Kenneth Boulding to sum up the challenge: ‘Anyone who thinks that exponential growth can go on forever in a finite world is either a madman or an economist’.
The seventh annual report from Navigant, entitled Photovoltaic Manufacturer Shipments, Capacity & Competitive Analysis 2011/2012, provides an analysis of the PV industry’s current situation along with a five-year forecast of technology shipments to 2016.
Compared with other recent analyses for the PV sector, Mints’ view could appear overly conservative. Her work is based on ‘classic market research principles’ and focuses on analysing PV technology whether shipped as a module or a cell from the manufacturer to the first point of sale in the market.
2011 supply and demand share
Mints notes that there is significant outsourcing in the PV industry, and that this leads to overstating shipments by counting the same capacity twice: once as a sale by a branded supplier and secondly as a sale by the OEM supplier to which the branded supplier has outsourced production.
‘Even Chinese companies outsource 5%–25% of what they report,’ she says. ‘Many times companies include outsourced production as their own, which makes the industry look much more successful than it is.’
Among the unfortunate outcomes of such over-reporting is that governments have based their policies on a misleadingly rosy scenario of low prices and high shipments, she adds.
In her forecast for the sector, she also highlights a flaw in widespread assumptions of a steady increase in the cost of conventional energy. The emergence of shale gas scuppers the expectation that fossil fuel costs will steadily climb while solar power costs fall.
‘The biggest problem is the low price of gas – the best attribute of solar is that it provides a hedge against the volatility of fossil fuels,’ she says. ‘Isn’t high quality and clean energy better than being the cheapest game in town?’
Solar in 2011
In the meantime, though, the sector already has enough challenges to overcome. Among the most disturbing is that around the globe – but especially in solar’s heartland in Europe – incentives are now on the slide.
‘The current correction might have been avoided had manufacturers, demand-side participants and investors paid attention to the one salient fact about incentives: incentives are designed to decrease over time as demand is stimulated,’ says Mints.
A ‘rush to the bottom’ in bidding on power purchase agreements (PPAs) adds to the industry’s headache. In Mints’ view, prices bid for PV systems in markets such as India are impractical.
‘Bidding on power purchase agreements and tenders is too low and many projects are likely to be renegotiated,’ she says. ‘The alternative to renegotiation may be bankrupt systems or systems that will not be built.’
At the same time, PV technology is also being held at artificially low prices by high levels of inventory, high levels of manufacturing capacity, rumours of low prices and, again, lowering of incentive rates. ‘Prices are too low – they’re being held down by 4-5 GW of inventory,’ says Mints. Reselling this inventory not only deflates prices but fuels expectations of further drops in price. Over 2011, while shipments of technology to the first buyer surged 35%, revenue only nudged up 4%.
Three scenarios for total shipments from 2012
Solar industrial capacity has also shadowed the trend in incentives and prices by slipping by 10 percentage points to 67% in 2011, according to Navigant’s figures. This skid is forecast to continue in 2012, with capacity edging back further to 66%.
Over 2011, Navigant’s analysis puts global shipments at 23.6 GW. For this year, Navigant provides three guide figures. Under a ‘reduced incentives’ scenarios, shipments plunge to 13.7 GW. The ‘conservative’ forecast is for 19.2 GW. An ‘accelerated’ outlook gives a total of 25.9 GW.
But as companies are now losing money on every megawatt, the lower figures are the ones Mints hopes for. ‘Even under the conservative forecast, companies are still mostly losing money,’ she says. ‘I fear we may hit my accelerated forecast of 25.9 GW in 2012, which would mean that we’ve probably got a three-year correction.’
Navigant plots the average selling price for solar modules as continuing to edge down to US$1.31/Wp in 2012, a drop from $1.37 in 2011 and $1.48 in 2010. Although many look to China to mop up demand as European markets wilt, Mints is sceptical. ‘China is starting to lower its incentives,’ she says. ‘I, and others like me, had felt it would be difficult for China to support both exports and its domestic market.’
Mapping of regional demand and supply shares reveals that last year China contributed a whopping 46% of supply while providing only 10% of demand. ‘We need to slow down,’ is Mints’ perspective on the PV industry’s best path forward.
The Road to Recovery
But Mints finds grounds for hope amid the PV sector’s woes. ‘The industry will emerge leaner from this correction with the business and financial models necessary to move it to a low-incentive environment,’ she says.
In particular, the industry will have to improve very quickly in terms of balance of systems as well as system design and installation, she argues. ‘That includes large fields,’ she says. ‘We need to discover new ways to design fields – for example, to collect different spectrums of light. We need new business models. However, with complexity comes cost.’
PV industry capacity for 2001 to 2012
Neither vertical integration nor enhanced dependence on Chinese manufacturing will get PV on a more sustainable track, Mints argues. Rather than a ‘big bang’, a series of refinements in technology will bring the sector out of the correction.
In Europe, she sees the complexity of the current system, and the expense this adds, as another hurdle to be removed from the sector’s path.
In sum, the solar sector should rediscover its roots as an industry as it returns to an environment without substantial subsidies.
‘I’m expecting accelerated learning,’ she says.
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