Hydropower, Solar

Is Booming Growth Sustainable? The Global Photovoltaic Industry

Issue 4 and Volume 11.

The PV industry has been striving for acceptance as a mainstream energy resource for decades. Overnight success for this 30-year start-up industry has brought more converts to the sector. Solar conferences are overcrowded, and conversations about the technology’s inevitability abound. Everywhere you go, people are excited about the solar revolution and what this means in the face of global warming and increasing energy costs. Paula Mints analyzes the industry’s development and finds that now, with enough volume to deliver manufacturing economies of scale, incentive programmes, and sufficient raw materials, PV still has work to do to develop into a mature, secure, industry.

There is an old saying that ‘you can’t argue with success.’ Not to quibble, but a little discussion is always a good idea. However, no one can credibly present an argument that can detract from the phenomenal success of the photovoltaic industry over the past few years, which has confounded all expectations.

Indeed, PV industry growth of late has been extraordinary by any standard. In 2006 industry demand grew by 41% over 2005, surpassing this number in 2007, to grow by 55% in the midst of a severe shortage of the industry’s primary raw material, silicon. From 2002 through 2007, PV demand grew by a compound annual rate of 44%, and over the 30 years since 1977, industry demand grew by a compound annual rate of 34%. Given these impressive numbers, it seems that it is not only hard to argue with such success, it is close to impossible.

Nonetheless, it has been a bumpy road for the PV industry. Back in 1997, after the industry hit its goal of more than 100 MWp in sales in a single calendar year, the ambition was to build manufacturing facilities with an annual capacity of 100 MWp or more. This goal came under the premise that these facilities would show economies of scale, leading to lower manufacturing costs. Thirty years ago, total industry sales into all applications were 500 kWp – compared with over 3 GW in 2007 – and now the goal is to build 1 GW facilities, taking advantage of further economies of scale, and thus leading to even lower manufacturing costs.

In terms of industry goals, then, it seems as if nothing much has changed. In fact, the accelerating volumes of PV product currently hitting the market are driving enormous changes right across the industry. New business models are being developed that will drive industry demand as incentives decline over time, manufacturing costs are reducing, and the industry is attracting top talent from outside its traditional stomping ground. This new talent needs educating, but brings with it new ideas and the ability to look beyond traditional barriers. The solar industry is an exciting place to be these days, though a lot of hard work remains to make its growth sustainable without the need for subsidies and incentives.

Figure 1. PV industry demand/sales 1982–2007

Cumulatively, more than 10.3 GW of photovoltaic product has been installed globally since the 1970s, 50% of which was installed in the past three years. Figure 1 details industry sales from 1982 through 2007. Viewing this figure, please note that in economic terms, sales (shipments) and demand are equal. Unmet demand cannot be accurately measured, as the expressed intent to buy a solar system is not quantifiable. Some assumptions, however, can be made about potential unmet demand. For example, if module product had been available in 2007, it is likely that the developing world would have consumed more product – though, probably not that much more.

Like it or not, solar electricity does not exist in a vacuum. It coexists with other substitutes for conventional energy, including energy efficiency. And, since a solar electric system remains an expensive purchase, economic pressures (recession, inflation, stagflation) will inevitably have an effect on the decision to buy. Success or not, as with any industry the photovoltaic sector cannot be guaranteed infinite demand. If we build it, they may not buy it. But, despite these cautionary words, the upward – and close to exponential – trajectory of the demand line in Figure 1 is exciting to everyone in the PV industry, many of whom have been patiently waiting for many years, believing that success would eventually come.

The times they are a-changin’

In 2004, demand for grid-connected PV began to surge, stimulated by the successful German feed-in-tariff law (the EEG). That year most, if not all, PV manufacturers became significantly better off. In an industry that had suffered many an unprofitable year, at last 2004 was a year for break even and even profitability. These were heady times for stalwart PV participants who had waited years for financial redemption. In 2005, the PV industry first shipped more than 1 GW of product into the market to fulfil demand. Exuberance over strong demand and anxiety over a significant raw material shortage kept pace, while outside investors looked to reduce cost to the point where PV electricity would become an inexpensive and mainstream energy choice.

Unfortunately, success brought with it as much anxiety as it did rejoicing. The high volume of industry demand, coupled with raw material shortages, threw the industry into a panic. The technology standard had long been, ‘if we build it they will come,’ but the new mantra soon became, ‘they are coming and we can’t build it.’ The industry reacted by buying silicon feedstock futures, and by raising module and system average prices globally – the higher prices being the result of simple supply/demand economics.

During the first wave of excitement, investors showed strong interest in silicon raw material start-ups. As the reality of the time and financial investment involved for successful initial production of silicon feedstock sank in, the investment community turned its attention to thin-film technologies instead. Current thin-film technolgies include cadmium telluride (CdTe), amorphous silicon (a-Si), tandem junction amorphous, and CIGS/CIS. The strong success of First Solar, whose shipments grew by a compound annual rate of 205% in the five years from 2002 through 2007, fuelled even stronger interest in thin-film from both within and outside the industry. The silicon shortage afforded thin-film technologies an opportunity to prove attributes of reliability and energy delivery. These are significant attributes which had been long overlooked because of the technology’s lower efficiency when compared with crystalline technologies.

In 2007, thin-film represented 11% of overall shipments, primarily into the growing grid-connected sector. During the year, Applied Materials and Oerlikon emerged as competitors in a new market for turnkey thin-film manufacturing equipment. Nonetheless, despite such advances, in Spain, where demand is surging, even lower efficiency thin-film modules, which are typically priced at less than crystalline equivalents, have sold at more than US$4/Wp.

Figure 2. Technology contribution 1980–2007

Figure 2 illustrates the thin-film technology contribution to overall industry sales and demand from 1980 through 2007. The strong showing of thin-film technologies in the mid-1980s was due to demand from consumer indoor applications such as watches and calculators, which peaked in the late 1980s.

In general, manufacturing follows low-cost areas of production and/or the market. Both regional manufacturing and sales for the PV sector underwent significant changes in 2007, and these changes are likely to yield long-term effects.

The US was the shipment (sales) leader until 1999, when Japan, showing strong fiscal support for its domestic market and industry, took the lead. Japan controlled the strongest share of sales until 2007, when it slipped into third place behind Europe and the rest of the world (RoW), primarily China. Even though Europe is the world’s largest market for solar products, at greater than 70% of the total, South-east Asia is likely to rise gradually into a dominant position over the years ahead. Indeed, China’s support for its domestic PV manufacturing sector, along with the low-cost manufacturing available in South-east Asian countries such as India, Taiwan, Malaysia and the Philippines, will probably propel the region into the leadership position in sales for many years.

Globally, governments are recognizing that solar is big business, a business creating jobs, revenue, profits, and taxes. However, for all its economic might, the US remains behind the rest of the world in this regard. Though it may recognize the benefits of building a strong domestic PV industry – in terms of both manufacturing and market – it has apparently been unwilling to invest sufficiently in its execution. California has stood alone in making a commitment to its market for solar. To regain its leadership as a global solar manufacturing force the US needs to offer incentives to both the supply and demand sides of the market. Table 1 provides shipment, or sales, numbers for PV technologies to the first point of sale in the market from 1997 through 2007.

Applications – where does it all go?

Unquestionably, in 2007 most PV modules went to grid-connected applications – with a 90% share of total sales – and to Europe, with at least 70% of the market. Despite the rise of Southeast Asia, this is still likely to be the case for many years to come.

Figure 3. Conservative and accelerated grid-connected forecast 2007–2017

The grid-connected application remains driven by government subsidy programmes such as Europe’s feed-in tariffs and US rebates. Without government subsidies, the market for grid-connected PV products would dramatically decrease. However, at this point it is highly unlikely that there will be a complete cessation of incentive programmes in Europe, the primary market. Furthermore, even the US appears to have momentum in this regard. As Figure 3 shows, conservative ten-year forecasts for the size of the grid-connected market are still positive, with a 31% compound annual growth rate anticipated until as far out as 2017, on the basis that such support schemes are expected to continue.

Traditionally, the grid-connected application has experienced volatile demand, and this is unlikely to change – though now the overall trend is for the market to fluctuate between strong demand and even stronger demand. However, there will be more volatility in the grid-connected sub-applications of utility, commercial and residential installations. Indeed, new business models are emerging that do not require end-user system ownership and are driving strong demand for commercial and utility systems. Where once more than 70% of grid-connected systems were down to the residential sector, in 2007 just 31% of grid-connected systems were residential, some 55% were commercial and 14% were utility, a significant shift from the previously observed status quo.

Table 2 provides data on demand for grid-connected systems from 1982 through 2007. As the figures show, demand for grid-connected PV systems has ranged – sometimes wildly – from 3% of annual demand in 1989 to 90% of annual demand in 2007. In 1983, demand for grid-connected systems grew by 212% over 1982, falling by 21% in 1984 – with, of course, much lower volumes than are experienced today. Past volatility aside, the trend towards renewable energy production is here to stay, and, despite the initial expense of system ownership, new business models and various incentive schemes featured across the globe are stimulating demand for solar electricity.

For the foreseeable future, the primary market for solar products will remain in Europe, which is expected to continue consuming more than 70% of total on-going module production. Demand at this level does not leave much for the rest of the world and even as more is produced, it is likely to be sold into Europe and either installed there or put into inventory.

Initially, Europe’s extraordinary demand growth was stimulated by Germany’s successful feed-in tariff programme. But other European countries followed, and this infectious demand growth bug has now spread to Spain, Italy, France and Portugal among others. At its heart, the feed-in tariff allows for profits from system ownership. This economically rational stimulus has led to rapid maturation of the market in Europe, encouraging investor groups to view large system ownership as a profitable long-term enterprise. At this point, the market in Europe is primarily for large field, commercial or utility systems. The ultimate goal of incentives is to encourage lower system prices. Unfortunately, this goal is in direct contrast to the market’s natural reaction to strong demand. Given the rapid market growth, as the demand/supply ratio increases, prices typically rise until demand slows, at which point prices fall. Solar electric systems with their high upfront capital cost have historically been price inelastic, that is, high system prices kept demand slow. In the US, price inelasticity continues to hold sway. In Europe, where it is possible for system owners to profit, not just break even, on electricity costs, solar system prices have thus far been elastic. There is still grumbling in Europe about the high purchase price of modules and systems, but demand remains strong. By contrast, in the US, there is grumbling about both the high price of systems, and because any excess electricity produced by a PV installation belongs to the local utility rather than to the system owner.

The feed-in tariff programmes that have been introduced in some European countries have proven to be an effective mechanism to encourage demand growth. Indeed, such mechanisms have been so successful that some governments have recently begun designing control mechanisms so that demand can (hopefully) be regulated. Nonetheless, despite some new attempts to control demand, Europe is expected to consume 75% of worldwide module and system production this year. Table 3 provides both historical and future estimates of Europe’s demand for solar products under an accelerated scenario.

Figure 4. Global demand share for 2002, 2007, 2012, accelerated estimate

As the table shows, under the accelerated forecast, demand growth for regions and countries of the world beyond Europe’s shores will be strong, even while Europe remains the strongest market overall. However, in the future, Europe’s share of global demand will depend not on supply constraints, but rather on the preference of manufacturers for the higher potential margins available from sales in a high demand region. Nevertheless, other regions will still have access to enough available module product for domestic markets to develop and flourish. Figure 4 presents demand market shares for the US, Europe, South Korea, Latin America, Japan and the Rest of the World for 2002 and 2007, along with an accelerated view of market shares for 2012. As the figures show, by 2012 Europe is expected to have accelerated its demand to reach some 75% of the total market. Meanwhile, the US will see its market grow to cover around 12% of the total. South Korea, India, and Japan remain strong demand zones.

Time to grow up

It seems likely that the future holds the prospect of rational incentive programmes that recognize the difference between cost and price. Business models that extend power purchase agreements (PPAs), investment and lease options to the residential sector are likely to become more widespread and available. Furthermore, the development of new financing models that are either zero interest or low interest are expected to emerge. Such schemes allow residential and small commercial customers to enjoy the benefits of solar electricity (along with the rest of society) more easily. Also anticipated is the introduction of new business models for the developing world that will allow the more than two billion people living without electricity to benefit from the life-changing attributes that solar photovoltaic technology has to offer.

In the future, instead of system ownership, at least half of the systems for residential, commercial and utility applications are likely to be investor owned – this figure may possibly even reach more than half. For these visions of the future to come true, manufacturing costs need to decline to the point where right along the value chain – from technology manufacturers through to suppliers, installers and system investors – healthy margins can be maintained while solar generated electricity and solar systems remain affordable.

For over thirty-years the PV industry has tried to change the paradigm of renting electricity, to one in which consumers own the means of electricity production. Trying to do so without addressing the affordability problem has simply not been successful. Reducing the cost of the technology does not necessarily overcome the affordability problem – nor does it convince end-users to become energy producers. Offering these electricity consumers the ability to profit from system ownership – as in Europe – does address the key buying motivation of a positive valuation.

In an economically rational future, everyone can win by participating in the PV sector. The photovoltaic industry is still in its infancy. Granted, it has been a long infancy, but though still a toddler in many respects, it now manufactures and sells its products in sufficient volume to realize manufacturing economies of scale. It has sufficient raw material and capacity expansion to contribute to lower costs, along with incentive programmes to support rational margins. It is a fundamentally healthy industry, and it has the talent to develop the products, business models and financing schemes that will create a mature, vibrant and sustainable future. The industry still cannot relax … but it shouldn’t want to.

Paula Mints is principal analyst, PV Services Program, and associate director, Energy Practice, for Navigant Consulting.
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