Paula Mints SPV Market Research/Strategies Unlimited
December 10, 2012 | 13 Comments
Over the course of its terrestrial history, solar industry growth has primarily relied on incentives and subsidies for growth and as a mark of success, instead of healthy margins and profits. For most of the industry's history buyers of technology (cells and modules) have enjoyed price control. The primary reasons that buyers have controlled the price function for most of the PV industry's history are: a) The industry requires incentives/subsidies for its growth b) Without subsidies there is not pull for the technology c) There are many substitutes, both renewable and conventional d) all substitutes enjoy some degree of subsidies themselves e) the task of educating consumers that owning the means of electricity production offers more control than continuing to rent electricity is daunting and f) the industry continues to promise prices so low that continued investment in high quality technology and R&D is almost impossible.
The solar industry – referring to all solar technologies and the entire solar value chain – has courageously persevered in the face of significant doubts, cheap (and subsidized) conventional energy, and the powerful lobbies of conventional energy along with its own sometimes questionable choices. The industry has persevered primarily because of its belief that solar is the energy technology of the future. In terms of success, believing will not necessarily make it so, and years of battling entrenched conventional energy remain ahead, but without this core belief in the rightness and inevitability of victory, solar will not succeed. It takes courage to plow ahead during tough times and relatively easy times simply because you believe that you are on the right path.
As demand for solar products is fragile, and the industry’s incentives are controlled by governments (who often do not understand the technology or the industry), participants tend towards extremes in terms of wishful thinking often seeking out information that confirms its hopes. It is difficult for any group or individual to avoid confirmation bias, which is the tendency to seek out information and data that supports a closely held view. This behavior brings out the best and the worst of an industry that has overcome much in its ~40 year history, has more to overcome, but no matter what, is not going away. Success will, however, continue to require hard work, development of new business models, cost reduction and, yes, believing in the impossible.
1. Crystalline Technology is the technology of the past
In 2004, the Germany feed-in-tariff incentive model began to stimulate demand in Germany and was quickly copied by other countries. Noting the apparent security of the FiT, investors became interested, and the market in Europe surged. This period of strong demand coincided, unfortunately, with a shortage of polysilicon. This shortage had been expected by the solar industry for decades. Prices of polysilicon increased signs, supplies of crystalline modules were constrained and these factors, coupled with high demand, led to a significant increase in the price of c-Si cells and modules. Despite the high price of polysilicon, manufacturers of c-Si technology – for the most part – began enjoying higher margins. At the beginning of this period, there was insufficient capacity of thin film technologies to fill the gap. As prices increased, investors, venture funds and other began to show significant interest in thin film technologies. Fairly quickly, the end of c-Si was pronounced along with a rapid increase in market share for thin film technologies – widely viewed at this time as the technology of the future. Regarding the death of c-Si technology, consider Mark Twain, commenting on the announcement of his demise: “The reports of my death are greatly exaggerated.”
Figure 1 PV Module ASPs to the first buyer, 2001 – 2012
Figure 2 Crystalline & Thin Film Technology % Contribution, 2001-2011
2. Thin films are dead
Referring again to Mark Twain, “The reports of my death are greatly exaggerated,” the pendulum has swung back and the death of thin film technologies is often heard. The primary reason for the current lack of confidence in the future of thin film technologies is current low price of crystalline technology. The assumption is that thin films cannot compete with crystalline technology’s progress in this regard. This assumption ignores the confusion over the difference between inventory pricing and the average price to the first buyer as well as the fact that no technology manufacturer – globally – is currently healthy. If the current low prices for PV modules were progress, then the industry would be enjoying profits, investing in R&D and encouraging technology startups instead of watching a steady march into bankruptcy.
Table 1: Off Grid Applications
3. Micro-grids are the next big thing
Incentive driven industries – particularly those without pull and where competing substitutes enjoy significant advantages as well as those in which the incentive environment is insecure, will grasp at any potential savior that presents itself – much like a drowning person grasps at any floating object in his/her reach. Currently interest in the off grid market and its many applications is experiencing a renaissance of sorts. As the solar industry enters a low incentive environment, micro-grids (or village grids) are gaining attention as a potential multi-gigawatt market for PV and other solar technologies. It is true that the potential for micro-grids is strong – it has always been strong. The reality of serving this market however remains non-trivial. Granted, replacing inefficient, expensive and polluting diesel generators is a laudable and environmentally necessary goal, and, granted the use of solar in hybrid configurations continues to have potential, but, obstacles to deployment continue to include multiple levels of bureaucracy (down to the local village level), uneven support by utilities, affordability, lack of incentives, setting up and administrating payment for generated electricity, acceptability by local populations, O&M training, among other concerns specific to working in developing areas of the world and with off-grid applications. That there is demand for electricity and potential for this application is unquestionably true, this aside, serving the population most in need of the micro-grid sub-application is also expensive, time consuming and not for the faint of heart. During the successful early FiT years the solar industry could have planned for its low incentive future by developing a micro-grid business model – it did not and so is unprepared to mine the multi-gigawatts of potential that are currently exciting to contemplate and daunting to serve. The off-grid applications dominated PV industry demand through 1999. In 2011, off grid was 1% of the multi-gigawatt market for PV systems.
(Table 1, above) Share of PV Market Demand, 1991 - 2011
4. PV cell and module prices are not too low
The viewpoint that PV cell and module prices are not too low and that these low prices represent progress comes from the demand side of the PV industry. On one hand, these prices are responsible for increased interest in solar. On the other hand, these low prices are responsible for manufacturer failures and low investment in R&D.
5. PV cell and module prices will never increase
Referring back to Figure 1, it is an old market research pricing adage, what goes up will come down and then back up, though not as high as before. Price behavior is a roller coaster with many ups, downs and swift, nerve wracking changes in direction. Today’s prices for PV technology are unlikely to go up until the inventory is worked off and the consolidation is complete. At that point, depending on the available incentives and demand, prices will stall and may well tick up for a while. Over time prices for PV technology have decreased by a compound average rate of 6% a year. Individual years have seen significant upswings and significant decreases depending on the market environment.
6. An industry-changing new PV technology is just around the corner
Over its ~40 year history as a terrestrial technology, the PV industry has continued to improve its manufacturing costs while increasing conversion efficiency – these improvements and innovations are incremental and the result of long years of R&D and pilot scale manufacturing. PV technology is a high quality, reliable, long lived energy technology that converts the freely available fuel from the sun to usable clean electricity. The potential applications for this innovative technology and its incremental advances are too many to name. In developing this technology the scientists, engineers and others involved do not lack imagination nor does the industry lack innovation. The PV technology breakthroughs have been in development for at least a decade. Innovations in balance of systems, including storage, in deployment and in the utility grid are crucial at this juncture. In fact, innovations in the way electricity is delivered are crucial – variable sources can be managed and in doing so we will all, genuinely, breathe easier.
7. Quality concerns are overblown
Sadly, the PV industry, which used to hold itself to strict quality standards, eased these standards a bit as prices for PV modules crashed. Just a few years ago, B, C and even D grade modules were not acceptable. The cliché “you get what you pay for,” could be rephrased, “you get what you settle for.” It is time that the industry returned to its high quality roots – solar is the best, highest quality electricity generating technology.
8. PV cell and module manufacturing outside of Asia is dead
To paraphrase Mark Twain … reports of the death of manufacturing outside of Asia certainly seem to be true, but in fact are due to a complex series of choices by industry participants that include governments choosing (over time) to either support domestic manufacturing or not to support domestic manufacturing, the choice of governments to support a domestic market or not to support a domestic market, the choice of technology manufacturers to price aggressively for share or not to price aggressively for share, among others. For an incentive driven industry with significant downward price pressure to promise to be a close-to-free electricity source and then enter into an aggressive pricing strategy in order to gain market share the pertinent and rhetorical question is, was it worth it? Aggressive pricing is not new, and regional leadership has shifted over time from the US, to Japan, to Europe and now to China. A more widely disbursed technology manufacturing sector would result in a healthier industry. Given today’s low margins and continuing failures, a controlling share in the current market hardly seems like success. Regional leadership comes and goes. Even now there are solar startups developing technologies that address the industry’s twin goals of lower cost and higher efficiency.
Table 2: Regional PV Cell/Module Shipments 1997-2011
9. New multi-gigawatt markets in Latin America and South Africa are the future of solar
The markets in Latin America and South Africa are not new but they have increased in size. As these are low or no incentive markets with tender or PPA rates set by bid, these markets are highly unlikely to be highly profitable. Markets where the rates are set by tender serve to hold down the already low price of solar technology – and this, like it or not, is not a healthy trend. Companies working in Latin America report that despite reports of gigawatt levels of demand, many of the announcements will not happen. It might be a good thing for the solar industry to remember the lessons of the FiT. Basically, under the subheading When Good Markets Go Bad … when markets overheat, they usually collapse; better slow and steady growth in these emerging markets than a huge success followed by a spectacular failure.
10. Moore’s Law applies seamlessly to PV technology price/cost
Gordon Moore, Intel, observed in 1965 that the number of transistors per square inch on an integrated circuit doubled every year. Today, as the time to double has slowed, this is held to be ~18 months. For the PV industry Moore’s Law is taken to mean that the price of a PV module will decrease by ~20% when industry growth doubles. In the early days of the solar industry, when annual growth was in the low megawatts this was more-or-less the case and so, it was easy to accept what is basically an if-a- then-b comparison between Moore’s Law and solar prices. The PV industry surged past the megawatt mark with the advent of the FiT incentive model -and is now slowing, meanwhile, prices continued behaving erratically. During the early years of the FiT prices increased and when prices decreased it was due to aggressive pricing – and government subsidized manufacturing – and not to a theory that has been somewhat arbitrarily applied to the PV industry. PV technology manufacturers have little control over raw materials, consumables, equipment costs and demand/supply side incentives. Prices – in any industry – are a not-entirely logical result of market forces. Price behavior for any industry is erratic at best and Moore’s Law is a poor fit for it. Perhaps the industry could rethink the appropriateness of how Moore’s Law is applied to PV and all solar, and consider efficiency as a more appropriate metric. Better yet, the solar industry could review its history and come up with a metric that supports its own innovation history and that comes from observing its technology development overtime.
11. Solar is a commodity
Electricity is a commodity, natural gas is a commodity, wheat is a commodity – a solar electric system is the means of electricity production that can be owned by individuals, communities, governments, investor groups and others. When an installation, this is specifically PV but can also be CPV, is close to the community it not only generates clean electricity it educations and promotes community involvement. Multi-megawatt installations (CPV, CSP, PV) far away from the load have multiple problems on the way to success, one of which is the very distance from the load. The generation of anonymous kilowatt hours effectively commoditizes solar. This is not an argument against large scale solar, this is a sector that certainly has its place. Better the industry consider why people buy things in the first place. Transportation consumers buy cars for many reasons, and the car typically makes a statement about its owner. A car is not a commodity; the gas that goes into the car is a commodity. In the case of solar, the fuel for a solar system – the sun – is necessary for life. Commoditize that!
12. Anti-dumping tariffs and regulations jump-start local manufacturing
Nope. Even more important, protectionism cuts many different ways and almost never results in a true winner. The economy is global, better partners than adversaries.
13. The saving grace of a worthwhile cause
So the battle has gotten tougher, the margins tighter and the naysayers louder. Meanwhile, climate change is now obvious to most, with even the doubters finding alternate explanations difficult to come by. The twin goals of achieving lower manufacturing costs and higher efficiencies remain, and even now in the midst of a painful consolidation, startups work to find answers, universities continue R&D and new business ideas percolate. Despite all the difficulties the saving grace of the worthwhile cause that is solar is, well, worth it.
Lead image: Myth via Shutterstock