The current PV industry consolidation is affecting every level of the PV value chain as well as pressuring the prospects for the CSP and CPV industries. Unfortunately, despite continued margin compression and a steady stream of PV manufacturer failures there is little consensus about pricing and many misunderstandings about it.
In any industry there are different levels of buyers along with different buyer behaviors. For PV and the other solar technologies there is another level of pricing pressure that does not typically affect other industries. The grid-connected application, representing 99% of solar industry sales in 2011, is driven by the availability of subsidies and incentives of some sort. That is, there needs to be a mechanism – even if it is set by bid – to stimulate the market. The primary reason these mechanisms are necessary is the high upfront cost of installing the solar hardware. Conventional energy also receives significant subsidies. In some countries utility electricity has a retail delivery price below the cost of producing it. Solar does not face a level playing field in this regard and this is unlikely to change.
Incentives for solar are designed to scale down and eventually phase out over time as the cost of delivering PV electricity decreases. As the solar industry remains incentive driven, its response to any available incentive (particularly profitable FiTs) can be likened to the annual running of the bulls in Pamplona, Spain.
Currently, the PV industry is over capacity. It also has an inventory problem on the demand side of the market that has been compounded by manufacturer failures, anti-dumping proceedings in the US, among other concerns. Unfortunately, the situation PV manufacturer Suntech faces with a demand side partner may not be unique, and, if it is not unique the solar industry (all technologies) as a whole will face far more significant problems in the near future. A good analogy in this regard is the global housing crash and another is the derivative trading that helped topple the industrialized world into recession. A more recent example is the Libor scandal.
The PV value chain stretches from its raw materials, including consumables, through machinery, to the person who installs a PV system on his or her roof. The CSP and CPV industries have their own value chains. In the current situation of low PV pricing, no participant is untouched. The PV manufacturer’s low margins flow to its suppliers who then face margin pressure. Buyers of PV technology and systems, educated to expect low prices, may delay purchase.
The following A B Cs relate to the price of PV technology.
PV Pricing A
There are different prices in the PV market for technology (modules). There is the price to the first buyer (first sale in the market). The first buyer can be a distributer, an end user, an installer, system integrator, a module assembler or another PV manufacturer. Typically, module assemblers and distributors are in the business of reselling PV modules at prices that include a markup. When manufacturers buy technology from each other and rebrand it or assemble it into modules they are engaging in outsourcing (common since the dawn of terrestrial PV time).
Even during relatively healthy periods in the PV industry there have been inventory sales among manufacturers and demand side participants. These inventory sales are typically lower than the original price, sometimes significantly so. To use a U.S. cultural example, sales of inventory are a bit like a garage sale. That is, the point is to get rid of the inventory because it represents a cost to the hold of it. Figure 1 offers an example of the PV pricing currently in the market; first buyer, distributor to second buyer along with inventory pricing. Expectations of prices that will continue to be lower than that of resold inventory act as a market mechanism to hold prices down. When roadmaps for lower prices are developed from inventory prices these roadmaps act as a mechanism to hold prices down. As incentive levels drop and project bids (tender, PPA) are set too low, they act as a mechanism to hold prices down.
Figure 1: Examples of PV Pricing
PV Pricing B
Cost and price in the PV industry have only a glancing relationship to each other, that is, there is only occasionally a relationship between the two. Figure 2 traces PV pricing from 2001 through Q2 2012 from the technology manufacturer to the first buyer. During the early 2000s the price for PV technology (essentially the module) was below the cost of production. During most of the PV industry’s terrestrial history it has been a buyer’s market.
In 2004, the European Feed-in Tariff incentive model began driving demand for PV systems. From 2004 through 2007, prices for PV technology increased, as did the price for polysilicon (raw material for crystalline technology). Rapid growth fueled by an assumed stable incentive instrument caught the attention of investors who put a significant amount of money into both the supply and demand sides of the industry. Utility scale (multi-megawatt) installations were born. During the mid-2000s PV technology manufacturers began enjoying healthy margins and profit, most for the first time. In the early days of terrestrial PV the existence of a healthy parent, often a utility was a necessity – this changed in the mid-2000s. During this time many companies chose to become public entities. The IPO boom in PV did more than just provide necessary R&D and expansion money to the industry; it also revealed the fault lines in it. The rhetorical question is … was this young industry ready to make its growing pains public?
Incentive rates are typically set by observation of market pricing behavior and are lowered when price drops are observed and when markets begin overheating. Basically, prices are assumed to reasonably reflect the cost of manufacturing. This behavior is serving as a mechanism to hold prices down to unhealthy levels and leaves little room for the industry to recover. As a PV technology manufacturer typically has little control over its raw materials, this means that when the price for materials rises the manufacturer’s margins become tighter – particularly in a low incentive environment. This could lead to short cuts and lower quality technology and system installations.
Figure 2: PV Technology Pricing (ASP) to the First Buyer, 2001 – Q2 2012
PV Pricing C
PV pricing C is about appropriately educating the electricity buying public and setting appropriate expectations. Though some buyers in the market prefer to rent electricity and those needs can be met by solar leases and utility ownership, there are still customers who would enjoy the energy independence that owning a PV system provides. This second group, system buyers, could benefit from zero to low interest financing and education about solar. During the industry’s few profitable years, roughly 2004 through 2008, it did not invest enough in educating potential solar system buyers about energy independence. It did, however, invest a significant amount of money in educating governments and potential buyers that technology price declines would accelerate and that grid parity was imminent. The fact that grid parity with subsidized conventional energy is a mirage did not stop the celebrations as PV prices began to crash. Certainly now that PV industry failures outnumber the successes a different message can be developed and delivered.
The current solar industry consolidation has been expected for years and it will be long and painful. Eventually it will affect demand side players. The industry’s recovery does not have to be equally as long. It can be shortened by a strong campaign to change the expectations of the buyers from expecting cheap to expecting high quality and by industry participants standing together to create a strong, unified message instead of lining up on opposite sides and fighting amongst themselves. Pulling together as an industry still leaves room for healthy competition. Accepting that today’s low prices and margins are not healthy might just be the first step to recovery.
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