Paula Mints, SPV Market Research/Strategies Unlimited
March 20, 2013 | 39 Comments
Globally, average module prices (ASPs) decreased by 42 percent in 2012 from a global ASP of $1.37/Wp in 2011 to $0.79/Wp in 2012. In early 2013, ASPs have already decreased by 18 percent to $0.65/Wp with inventory averages ~$-.58/Wp. Many will proclaim this as progress. Some will say that the ends justify the means. A few will devote a brief paragraph to the losses and failures of manufacturers before going on to write of the hugely successful 2013 to come. Some manufacturers may join the chorus lest they be drowned out by drumbeats broadcasting success.
Simply put, a 42 percent decrease in price in one year is not progress by any logical assessment of it, nor is it representative of true learning. The PV industry leapt off of the learning curve several years ago caught up in pricing for share that has turned into a nightmare. Should prices decrease by 42 percent in 2013 the ASP will decrease to $0.46/Wp. Logically it would be difficult to make an argument that prices this low relate in any meaningful way to cost — yet, some will make this argument. Figure 1 presents PV module ASPs from 1992 through 2012, including the average price for inventory in 2012.
Market theories of pricing are useful to provide a framework for the behavior exhibited by participants in a market. Unfortunately, these theories are often used to justify opinion at the same time ignoring details such as the availability of substitutes, the macro and micro economic environment in which the behavior exists as well as the constraints in which the market operates. In the case of PV, electricity is viewed as a basic need and so utilities and others take seriously the need to provide it at as low a cost to the consumer as possible.
Every entity along the energy value chain will try and maximize self-interest, including the need for positive margins and profits. Pitting self-interest against self-interest typically reveals passionate explanations as to why each side has merit over the other. Arguments for continued low cell/module pricing are shored up by saying that the point is to get more PV installed — basically, the ends justify the means. Though the evidence is now quite clear that current PV module prices do not support continued R&D or positive margins the facts become blurry in the face of high deployment figures. An industry wherein only one side or another makes a profit at any given time cannot be described as healthy. Figure 2 offers data on PV manufacturer revenues and losses in 2012.
There Are No Normal Markets, Only Theories About Normal Markets
Forgetting the normal tension between buyers and sellers in any market — simply put, buyers seek the lowest price while sellers seek the highest price with the assumption that the equilibrium price is somewhere in the middle — this assumption assumes a normal market with pull that is not legislated and that does not require an instrument (incentive) of some type to exist. The U.S. RPS model is a legislative instrument and unfunded an mandate requiring utilities to install a certain level of renewables by a certain time. A market where incentives and legislation are necessary to stimulate purchase is not mature. Nonetheless, the basic concept applies; installers and system integrators seek to buy modules at the lowest price in order to maximize value. PV manufacturers, however, are discouraged from seeking the highest price by set expectations that progress has been made, by high levels of module inventory and by the availability of substitutes — all of which set up a painfully steep slope of downward pricing pressure.
Referring to Figure 1, in 2004 prices for PV modules began increasing because the highly profitable FiT model stimulated demand and because of an increase in the price of polysilicon starting material. High demand stimulated by the FiT model was by far the most significant reason that module prices increased during this brief period. During these brief profitable days vertical integration was considered and occasionally acted upon but not seen as the last chance for PV manufacturers clinging to the last vestiges of margin. Nowadays vertical integration is less a strategic choice than it is a last stand against potential failure.
Figure 3 offers four charts that follow PV industry growth from 1975 through 2012. From 1975 through 1982 the industry was in period of high incentives and high government/utility demonstration projects, prices declined by a CAGR of -18 percent while demand increased by a CAGR of 88 percent. From 1982 through 1992 PV industry growth was slower, at a CAGR of 22 percent, while price declines slowed to a CAGR of -10 percent. In 1992, the industry began to move into a period of moderate incentives. In particular, California, Japan and Germany enacted rebate programs aimed at stimulating domestic demand. Demand growth for the period increased to a CAGR of 25 percent, while price declines, despite increased demand, slowed to a CAGR of -6 percent.
The final period observed in Figure 3, 2002-2012, saw a high incentive environment (FiTs) drive the industry to gigawatt levels of deployment and a CAGR of 48 percent, while prices, viewed through the lens of compound annual declines, decreased by -13 percent. This decline obfuscates significant annual declines of -27 percent in 2009, -40 percent in 2011 and -42 percent in 2012. The compound annual rate by which prices declined during the 38 year period observed in Figure 3 is -11 percent. The 2002-2012 period also saw overheated markets collapse, the beginning of tender bidding on projects (this tends to hold prices and PPA rates down). To be fair, it also saw the markets in Latin America and Africa begin to emerge while the low prices helped to encourage China to make significant progress in domestic installations.
The PV industry has a long history of aggressive pricing (by all regions at one time or another). This pricing strategy is also referred to as pricing for entry or defensive pricing. In any industry with significant downward price pressure the control over price setting is almost always out of the hands of the manufacturer.
A Brave Few Make a Likely Futile Stand
A few PV cell/module manufacturers have stalled price reductions and in several cases are trying to increase prices by $0.02/Wp to $0.05/Wp. Given current high levels of inventories (in some cases including modules that were bought for failed projects) manufacturers are competing with their own modules. Some installers/system integrators agree that current price levels are not healthy for manufacturers. Nonetheless most buyers will hold the line against price increases in what has historically been a market where buyers control the price function.
History is rife with brave and often futile stands with the rightness of the stand identified with the passing of time or political fashion. Likely relatives of General George Armstrong Custer and his men thought poorly of the Indians at the Battle of Big Horn where Custer, essentially, allowed his troops to be surrounded by several tribes and thousands of Indians and dispensed with (to put it mildly). From the Indian’s point of view, having suffered through broken treaty after broken treaty, it was a stunning but ultimately short lived victory. The 1836 battle of the Alamo in Texas could either be a land grab or fight for independence from Mexico depending on which historian’s account you read. The history of the world is filled with people fighting bravely on one side or another of a cause held dear by someone. Bringing this back to PV, the current fight against whether or not PV module prices should or can increase is not new (just as aggressive pricing strategies are not new). The PV industry is simply too big now to continue losing money on such a wide and public basis and to pretend that low to negative margins and significant losses are okay.
For the industry to take its place as a mainstream energy choice it needs to be true to its quality roots, get back to the basics of pursuing incremental improvements towards higher efficiency and lower costs so that it can compete with substitutes as an energy choice — and do so profitably. In the future the energy business is likely to be one of customer choice in which owning the means of renewable energy production is viewed as a hedge against escalating energy prices and a deteriorating environment. Energy conservation will be the matter-of-fact way in which people live their lives. For PV to survive it continued innovation is required — and though ideas are free, innovation and manufacturing cost money. 2013 should be a year of increased deployment along with positive margins and net incomes.