The Often Unprofitable, Always Challenging Road to Success of the Photovoltaic Industry

Paula Mints, SPV Market Research/Strategies Unlimited
February 06, 2013 | 7 Comments

Now you see it now you don't – disappearing margins for PV manufacturers are not a magician's trick, nor are they the phenomenon of current solar times. The low to zero to negative margins un-enjoyed by today's technology manufacturing sector are the result of years of choices made by an industry stalwart in its belief that solar is the answer yet beset by end users who, having many choices, many times choose something else.

For most of its history manufacturers have wielded little control over the price function. This was true because solar is the energy technology interloper trying to take share from subsidized conventional energy. The PV industry was also trying to change the buying paradigm from renting to owning the means of production. No technology change – including indoor toilets) has come easily. For the photovoltaic industry (and all solar) it has been difficult to sell energy buyers on the vague concept of energy independence, meanwhile the pay off and ROI arguments had limited success.

Any industry forced to push its product into the market will not have control over its price function. When promises of extremely low system prices are inserted into the mix the goal becomes antithetical to the development of high quality, long lived and reliable technology. The only tool in such a difficult pricing ecosystem that can and almost always works is aggressive pricing for share. Aggressive pricing is not unique to the PV industry. Periods of aggressive pricing can be picked out from most industry’s histories.

For the PV industry, all regions and most manufacturers have practiced aggressive pricing from one time or another. Panicked pricing is something entirely different, and this is the situation that the PV industry is currently embroiled in – with promises of grid parity, expectations from the installers/system integrators, and more. From end users to government entities (those that legislate either for or against incentives), the industry is currently caught under a ton of expectations with little wiggle room and no way to go but down in terms of prices. This is not a healthy situation and it is very difficult to change. If it were to change, system integrators and installers would face significant margin pressure themselves.

The current pricing climate is truly a no-win situation. Figure 1 presents cell/module revenues to the first buyer from 2001 to 2012, with a forecast through 2016. The revenue data in this figure does not include inventory reselling, or outsourcing (rebranding of technology by module assemblers and other technology manufacturers).

Figure 1: PV Cell/Module Revenues to the First Point of Sale

Who’s on First, and if Everyone Is Losing Money, Does it Matter?

It is the time of the year when the top ten manufacturer lists come out and a good time to pose this (hopefully) rhetorical question … if the manufacturers on the top ten list have low or negative margins, high debt and risky profiles, what does the list mean? Granted, low margins have historically been an industry reality but it should not be viewed as the status quo. Removing subsidies for all energy technologies would help make solar competitive while the high prices for conventional energy might just convince energy buyers of the value of energy independence.

Table 1 offers the top ten lists of PV cell and modules manufacturers to the first buyer from 2002 through 2012. Note that some on this list are no longer producing. Also note that the names have changed overtime. Sharp Solar has the distinction of being at the top of the list for the longest period since 2000.

Table 1: Top Ten Cell/Module Manufacturers 2002 – 2012

Conventional Wisdom

There is an argument to be made that true wisdom should not be conventional…nonetheless, CW is rumbling lately that PV technology manufacturing will now be in Asia due to low manufacturing costs. Aside from the fact that if all manufacturers in all regions are losing money and struggling to survive regional leadership has switched over time.

The US was the manufacturing leader for many years, followed by Japan, Europe and now China. Eventually another region or country will take over cell/module technology shipment leadership. It would be best if this happened in a healthy industry with margins that included room for R&D and a marketing concept that educated and then wrenched electricity consumers free from renting electricity to owning the means of production. Table 2 offers regional shipment leadership from 2002 through 2012.

Table 2: Regional Shipment Leadership 2002 – 2012

Lead image: Dark road via Shutterstock

7 Comments

ANONYMOUS
February 15, 2013

In reply to Commenter #2... my question is, at what point do you consider the playing field level between solar and legacy power generation technologies, for instance, the nuclear industry. When total energy output achieves equity? When the cumulative total federal funding is equivalent? Federal funding levels are minute for solar when compared with those of fossil fuel and nuclear. We're still a very long way out on those measures reaching parity, so to grind on the fledgling solar industry at this point is shortsighted, extremely premature and grossly unfair.

Gerry Wootton
February 12, 2013

Thanks Dennis. The main point that unsustainable low pricing is a bad thing is well taken. From the technology side, R&D thrives on margin and when there is none, R&D is pretty much the first baby to go out with the bathwater. When capacity well exceeds demand, or more exactly, when inventory well exceeds demand, panic selling / fire sales are an inevitable result and that sets a bad precedent. Of all the ways that one can make PV less expensive, technology, particularly technologies that drive efficiency up, is the most powerful tool. Unfortunately, in the current market many players are caught with an expectation of lower cost and zero budget for R&D and/or upgrades to production tools. This is certainly a no-win situation.
There are two sides to the coin - too much capacity / insufficient demand. When capacity is underutilized, unit costs go up while panic selling or whatever you want to call it drives prices down, clobbering margin. In an efficient PV plant, there is a substantial amount of capitalization and other fixed costs so even at a low market price, margins can swing from negative to positive as utilization swings from 50 to 100%. The options are limited: survival of the fittest, which is not good for the overall health of the industry in many ways, or a substantial increase in demand (the marketing thing). An undercurrent in the article and some previous ones is that the PV industry is not presenting the best crafted value proposition - probably true.

Dennis Heidner
February 11, 2013

GeraldR, I agree with most of what you have said. The issue with trying to attract buyers was explained by Paula when she stated:

"Panicked pricing is something entirely different, and this is the situation that the PV industry is currently embroiled in – with promises of grid parity, expectations from the installers/system integrators, and more. From end users to government entities (those that legislate either for or against incentives), the industry is currently caught under a ton of expectations with little wiggle room and no way to go but down in terms of prices. This is not a healthy situation and it is very difficult to change.
If it were to change, system integrators and installers would face significant margin pressure themselves." Paula Mints

The LCOE of PV is getting very competitive. Duke Energy is now suggesting that they will be installing more solar than wind in 2013 (here in US). There are buyers for systems and modules - but the buyers are now in the gas war mentality - wait to fill up tank until the next price drop. Of course the problem with that is that if consumers are not buying - producers get out of the market, consolidation occurs, selection goes down and prices will go up faster.

Based on studies I've seen comparing $/W cost in US and Germany, I believe the squeeze is already starting on the installers. I suspect we may see fewer (but larger) solar installers in 2014/2015.

Gerry Wootton
February 11, 2013

I believe the article correctly identifies the difficulty of recruiting buyers, particularly when they are expected to change economic models as well as technology as is the case for rooftop solar. Mostly, Americans and Europeans function on rent based economy: although they consistently end up paying more for most things, they are comfortable with this while concepts of self-sufficiency and paying up-front have less resonance than one would like to hope. As an antiquated engineer my observation is that successful products consist of 1/3 design, 1/3 execution and 1/3 marketing although there are numerous examples where marketing trumped the rest.
An issue that Dennis points up is that incumbents enjoy a stacked deck: first because they have had plenty of time to integrate themselves and can use the power of common practice over common sense; second because large market share gives them substantial leverage in the political system. We're all familiar with the political cover story: policies are based on the advice of industry 'experts'. This is political currency because it's human nature to be more comfortable with what is rather than what might be.
Also, the point that "there has ALWAYS been some sort of government intervention" is well taken. Government is, in fact, a powerful, often good, force in the economy. Monty Python's take( Life of Brian): "apart from the sanitation, medicine, education, wine, public order, irrigation, roads, the fresh water system and public health, what have the bloody Romans ever done for us?". The PFJ attitude is alive today with parties who on the one hand want less government while at the same time declaiming that 'they should do something' about every issue that bothers them.
One can overplay the 'cheap labor' tune when, in modern PV production, labor represents ~7% of cost. The bigger challenge to American manufacture is the inadequate supply of commodities with suppliers more interested in high margin than high volume.

Dennis Heidner
February 10, 2013

The authors article is about the challenges facing the PV manufacturers, and not about the solar industry in general. Arguing the question of whether or not solar can effectively balance the grid is mostly pointless - because it really depends on the region/country.

Arguing that PV subsidies and FIT are industrial welfare brings back images of the statement

"The endeavor of this paper is to present, from the point of view of the engineer, certain aspects of the attitude of capital towards XXXXX powers. Actual and threatened laws, popular prejudices, and some cases of unprofitable developments in the past, have retarded the development of XXXXX powers, but there are also physical and natural difficulties which handicap XXXXX as compared with steam-electric plants, and make it essential that a reasonable profit in promotion be offered, in order to induce investment." [1 - see note below]

Sounds similar?? just replace "XXXXX" with hydroelectric. [1] The quote is from an abstract of a paper presented at the 321st A.I.E.E written by Gano Dunn and presented on April 21st 1916. Available from IEEE.

Throughout history there have always been battles over which choice of power is better, wood, peet, coal, wind, nuclear, solar, etc. And there has ALWAYS been some sort of government intervention!

I believe, Paula is trying to look at the current pricing and the industry impact. Not whether or not a FIT makes sense OR the grid can be balanced with solar. Instead it focuses on the economics of manufacturing, it is the filling station gas wars of the late 60's and 70's... Great for a few tanks - but not good for the neighborhood gas stations (or consumers in the long term).

I find table2 in the article interesting - because it also reflects the priorities of solar for many of the nations involved and the importance.

If I remember correctly there are now far fewer gas stations (mergers) than the 60's and very few full service gas stations.

ANONYMOUS
February 8, 2013

Solar PV with its subsidies and FITs has always been an industrial welfare system with a vague life span. Project ROIs (breakeven ROI) - depending on the project - usually forecast at 15-4,000+ years - WITH the FITS and tax incentives ad infinitum. The solar industry typically calculates these welfare payments into their budgets and capital forecasts - then cry foul when the subsidies dry up. This is overt industry and institutional fraud and deception, fiscal and financial irresponsibility, as these risk factors are obvious to any legitimate responsible financier - and are part of the standard financial due diligence process. There are a plethora of financial tricks to make solar financially feasible and profitable - even on low margins - some ethical - many not - choose your flavor. Most of what we see in this industry is accusatory whining - trying to deflect blame for either incompetent, negligent, or usually outright fraudulent business practices - onto big government or the Chinese. Government is definitely not innocent either - as the FITs implied longevity as opposed to short-term limited assistance - the FITs typically have expiration dates (all legal contracts must have expiration dates) but either come with renewal clauses or the government itself yields to industry lobbying and issues a FIT renewal - but these things MUST eventually go away (except for oil and energy company tax benefits which seem institutionally perpetual...at taxpayer expense). I applaud the government interventions to give these technologies a foothold in an unfair monopolized playing field (big oil, big energy), however, the tech must eventually stand on its own as a self-sustaining, sustainable operating business as opposed to yet another social welfare project involuntarily dumped on the taxpayers - note: some taxpayer communities elected to build and construct their own RE utilities - obviating the need for FITs and the plethora of other temporal government benefits.

rolf westgard
February 7, 2013

IMO erratic solar and wind are not effective as supply to a carefully balanced utility scale electric grid.
Expensive solar shines as a stand alone supply in areas where there is no grid and lots sun. Large parts of Africa and India for example. The solar and wind energy can intermittently pump water to fill a tank which is the storage that it needs. Like those original Holland windmills.

Add Your Comments

To add your comments you must sign-in or create a free account.

Paula Mints

All Solar, All of the time -- I started my solar market research career with Strategies Unlimited in 1998, moved to Navigant in 2005 and am now I am excited to announce the founding of a new company, Paula Mints Solar PV Market Research....