Paula Mints, SPV Market Research/Strategies Unlimited
October 14, 2013 | 9 Comments
Traditionally the solar industry has tracked its progress along the learning curve by observing price behavior. This methodology has led to premature announcements of success under the headings of grid parity and the PV industry’s version of Moore’s Law. The price function is more complex and because it is market-based, assumptions of success in this regard were not only premature, but led to the unfortunate conclusion that price declines were indicative of true learning.
Figure 1 (below) depicts PV industry average prices (ASPs) and shipments from 2002 through 2012, and the equilibrium price (the point at which demand equals supply) is indicated. As costs are not included in Figure 1, the potential of the equilibrium point being misleading is high.
Figure 1: PV Industry Cell/Module ASPs and Shipments
Price strategy is the result of various considerations such as entry pricing (typically aggressive), the availability of substitutes (defensive pricing), inventory (shedding), and premium pricing, to name a few. Aggressive pricing strategies typically count on the ability to make a U-turn at some point to profitable pricing (once competitors are trounced). The PV industry with its many substitutes (including entrenched conventional energy), the perception of being too expensive and promises of grid parity is a bad choice for an aggressive pricing strategy. The illusion of success via rapid price declines led governments (the bodies that legislate incentives) to assume that PV was becoming inexpensive enough so that support (subsidies and incentives) could be removed.
A better way to represent PV industry progress is by using costs either instead of prices or along with prices. Figure 2 depicts ASPs, average costs and shipments from 2002 through 2012. In Figure 2 the periods during which cost was higher than price are apparent. Note that the equilibrium price is below the cost of production.
Figure 2: PV Industry Cell/Module ASPs, Costs and Shipments
During the period beginning in 2002 and ending in 2012, PV cell/module ASPs declined by compound average 14 percent while costs declined by compound average 10 percent. The 10 percent decline in costs represents significant progress. Unfortunately, when the true progress represented by the 10 percent cost decline is compared with the compound average 14 percent decline in ASPs, the reason for the current consolidation becomes clear.
Moreover, too low prices cannot be explained away as the result of over capacity. The solar industry has historically been in an over-capacity situation. Aggressive pricing is not new to the solar industry, but the recent period has had a pernicious effect on it in that a higher degree of progress was assumed and expectations for continued significant decreases in price were set. This pricing is a critical factor that led the industry down a slippery slope from which it was impossible to make a U-Turn and recover.
Figure 3 offers PV industry ASPs, costs and the cost/price delta.
Figure 3: PV Industry Cell/Module ASPs, Costs and the Cost/Price Delta
Low polysilicon prices are giving PV cell/module manufactures a bit of a break currently, but true recovery will take time and will require prices to hover in holding pattern as costs continue to decline. Since polysilicon prices will not stay low forever, strategies with this expectation are bound to fail eventually and perhaps spectacularly. Currently, too low prices are threatening participants all along the PV value chain as well as participants in the CSP and CPV industries.
The goal should be a situation where costs decrease at a faster rate than prices leaving enough margin for a healthy industry to continue progressing.
Lead image: U-turn sign via Shutterstock