Paula Mints, SPV Market Research/Strategies Unlimited
August 28, 2013 | 4 Comments
Many a demand/supply PV industry participant has met their Waterloo/Alamo — choose your dramatic historical analogy — on the issue of pricing strategy. Figure 1(below) is a snapshot of PV industry average selling prices (ASP) for modules and demand for module products (as well as systems) from 2002 through 2012.
During this ten year period ASPs declined by a compound annual rate of -12 percent, with demand increasing by CAGR of 48 percent. Compound annual growth and decline rates smooth over the natural bumpiness in a market; for example, in 2006 over 2005, ASPs increased by 12 percent and increased by 3 percent in 2007 over 2006 before beginning several years of often dramatic decreases. Noting the crossover point in and around 2009, the equilibrium price for modules (theoretically the point at which seller and buyer maximize value) would have been ~$1.50. Of course, there is theory, and there is the real market. The real market will almost never behave according to theory, thus spawning many new theories.
Aggressive pricing for market share has come and gone in the PV industry since its inception. Traditionally, buyers of PV cells and modules have had the most control over the price function. This is because sales of PV systems, particularly into the grid connected application, have relied close to 100 percent on government and utility demonstration projects and on incentives — that is, demand was ‘push’ not ‘pull’ market.
During the early days of the feed in tariff in Europe (which coincided with a shortage of polysilicon) demand pull was artificially created by the profitable FiT instrument. Manufacturers of cells and modules were then able to charge a premium. Unfortunately, this also coincided with a disastrous period of aggressive pricing as well as capacity building. Currently, with buyer expectations set as to price (meaning low prices for modules and for systems), the best the industry can hope for on the cell and module side of the supply/demand equation, is stability — that is, for prices to settle and stay flat until cost improvements can catch up.
Supply: One Day You’re On Top, One Day You're Not
As any PV manufacturer of cells and modules knows, even costs are not 100 percent controllable, so, the cost curve is also bumpy though less bumpy than the price curve. Costs for inputs, including consumables, increase and decrease given market dynamics; and currency adjustments for global buyers and sellers can be, well a real …
Table 1 (below) offers the top ten manufactures of PV c-Si and thin film technologies from 2007 through 2012. This table offers a supply perspective, that is, manufacturers of c-Si and thin film cells or modules. Note that this table includes companies that were formerly the top sellers, Q-Cells and Suntech for example, and who are now either acquired, otherwise occupied with recovering or, potentially not recovering.
One method of lowering costs that has a historical (though not necessarily successful) basis, is to attempt to leapfrog over the traditional time (years and years and years) from R&D through pilot scale to commercial production by developing champion (or lab) cell technology on commercial manufacturing lines. Typically manufacturers discover that instant gratification in PV manufacturing is almost always (leaving room for miracles) unachievable. However, cost reduction is a vital and necessary manufacturing function — in PV, higher efficiency and lower cost are twin goals. Quality is a goal that should never be shortchanged for demand and supply side participants.
Table 2 (below) offers regional supply shifts, that is, sales of c-Si and thin film cells and modules from 1997 through 2012. As with the top ten lists of manufacturers, overtime, regionals shifts are common. Note that the U.S. was the shipment leader in 1997, Japan the shipment leader from 1999 through 2006 and Europe the shipment leader in 2007 and 2008. Manufacturers in China have dominated shipments since 2009. It is worth noting that despite regional dominance, PV manufacturers have traditionally battled constrained margins.
Demand, Off-Grid, Grid-Connected and Regional Shifts
It has not been easy for the demand side of the PV industry to maintain healthy margins or regional dominance. Figure 2 (below) offers demand growth by region from 2000 through 2012. Note that Europe dominated demand from 2004 through 2012. Recalling Table 2, despite dominating demand, Europe’s manufacturers only enjoyed two years of a controlling market share.
A significant demand side presence (installers, system integrators, distributors) grew up in Europe along with the FiT-driven demand. At one point Europe accounted for over 80 percent of all global demand. Figure 3 (below) presents the demand picture for 2012 and an estimate for 2013. As the FITs have declined, disappeared and changed (often retroactively), both demand and supply side participant have been forced to seek new markets for PV modules and systems. These new markets are less profitable, nor are they easy to penetrate.
Currently, and likely for the longterm, PPA, tender and tariff rates are set by bid. Bidding in a vehicle that, other than art auctions and the like, tends to hold prices and margins down (low bidders may lose, but so will high bidders and the mid-range is not always the winner). PV industry participants had several years to develop new markets, however, a tantalizingly (albeit briefly) profitable FIT market was difficult to ignore and it was hard for many to justify expending effort on developing emerging markets.
The PV industry has successfully commoditized its product and is now maturing business models that will, hopefully, allow for more reasonable and sustainable margins. The lease model is one that, in its various iterations, is being pursued by solar firms as well as investors. Third party ownership, however, is unlikely to be a panacea for everything that ails — and has historically ailed — the PV industry. Vertical integration (typically, manufacturing owning a system business) will also not ameliorate decades worth of strategic missteps. Neither vertical integration nor leasing is new to solar. These strategic tools have been in the industry toolbox for decades. So has educating the system buyer as to the true value of independence from utility rate volatility. Now that margin recovery APPEARS (note that this is in caps) to be returning, it’s time for a long term strategy to refocus and plan for the future.