London, UK [Renewable Energy World Magazine] The year 2000 began with Germany passing its renewable energy law, which established the first feed-in tariff and set the stage for the most profitable and highest growth decade in the 35 year history of the terrestrial solar industry. At the end of 2009, a cumulative 20.6 GW had been sold into the market – 95% of this, or 19.6 GW, in the last 10 years, mostly into grid-connected application.
Between 2000 and 2009, shipments to the first point of sale in the photovoltaic industry grew by a compound annual rate of 39%, and from 2004 to 2008 (boom years for PV), shipments grew by a compound annual rate of 51%. The last decade moved fast, took the industry to new heights and was a rocky, wild ride. It was a ride, however, that moved the industry to a new stage of growth and global acceptance as an energy source.
2009: The Year Pricing Became an Extreme Sport
For a while – four years as a matter of fact – cell and module prices went up, up, up, as the industry continued to promise that grid parity was just on the horizon. Then the industry slammed into 2009’s soft demand and prices went down, down, down, taking margins along with them. For most of the year the industry searched frantically for a new market to take the place of Spain, and for financing when a new market was found. The global recession took a heap of blame for a hard 2009, but it was only part of the problem (though, certainly not a trivial one). Manufacturers idled capacity in order to stop adding to already significant inventory. On the good news front, silicon feedstock was plentiful.
The PV industry struggled through over 30 unprofitable years until incentives in Japan, but primarily Europe, gave the industry a market. Germany’s innovative feed-in tariff model proved to be the most successful tool for stimulating the market for solar products for one very good reason: it provided an economic motive for installing a photovoltaic system. The feed-in tariff model provided a 20-year annuity for individuals buying systems, and soon caught the interest of investor groups. They realized that, along with a low cost of hardware and given typically high cost of retail electricity in Europe, multi-megawatt systems could provide many years of reliable returns for investors.
This did not happen overnight, but by 2004 demand for solar systems, both residential and commercial, and finally multi-megawatt fields, boomed leading to the first profitable period for manufacturers of solar technology ever. Unfortunately, strong demand for photovoltaic systems coincided with a significant constraint of silicon feedstock, and feedstock pricing pain for manufacturers of crystalline technology. The price of silicon feedstock reached $450/kg at one point during the boom, with manufacturers willing to pay to stay in the game. Meanwhile, a door opened for thin-film manufacturers. During the 2004–2008 boom, thin-film’s share of total shipments increased from 5% in 2004 to 14% in 2008, and will be approximately 25% in 2009.
Buying cells and modules during the 2004–2008 period was a wild ride, with strong demand driving prices up as much as 30% in some cases for all technologies. Meanwhile, other countries in Europe instituted feed-in tariffs and demand began to spread out from Germany, particularly to Spain. In 2007–2008, Spain’s generous feed-in tariff led to an oversold market in that country along with market conditions that were (in some cases) scandalous. The overselling of its market and the long term commitment implied by the 20-year tariff, led the government of Spain to cap its market, which essentially shut down an industry profit machine that consumed 41% of all PV sales in 2008. Aside from the dangers of overselling a market there is another lesson here – incentives are expensive to support and someone has to pay the bill.
With the market in Spain drying up along with the debt markets and the availability of financing, 2009 started out with over 2 GW of inventory, some on the supply side, but most on the demand side. Yet, at the beginning of the year prices were still high. At the beginning of 2009 there were few technology and system sales while manufacturers tried to hold on to their margins in the midst of soft demand. Figure 1 (page 43, upper) offers a picture of pricing from 2000 through 2009, with an estimate for 2010. Strong demand is expected to return in late 2010 (if Germany does not accelerate the decline in its tariff) and with stronger demand, prices will rise. What goes up must go down and, eventually, up again.
By mid-first quarter 2009 a vibrant secondary market had developed on the demand side, with system integrators and installers of all sizes reselling modules from inventory at slight discounts, then deeper discounts and finally at bargain basement prices. In the second quarter, significant inventory remained and technology manufacturers found themselves competing with their customers for sales of their own modules.
As the industry continued to work through its inventory, manufacturers slowed or shuttered production and settled in to wait out the demand lull, many preparing for a long wait. Rumours of an industry littered with the bodies of less strong companies grew along with manufacturer inventory with the entire industry assuming (and in many cases experiencing) the worst. Industry consolidation became a hot topic, though consolidation has come and gone and will come and go again.
Eventually, of course, the excess inventory was worked down, and by the third quarter demand in Germany perked up to a veritable frenzy – this will happen when only one market shows promise, consuming over a gigawatt of product. Meanwhile, manufacturers had begun dropping prices and a pricing war ensued. Areas with manufacturing support, specifically Asia, and therefore low cost manufacturing capability, shaved margins to the bone, forcing the rest of the industry to follow. Unfortunately, 2009’s low prices have had a painful effect on technology revenues, which will fall 40% from an industry high of $20.1 billion in 2008 to approximately $12 billion in 2009. Figure 2, below right, presents technology revenues from 2003 through 2009, with an estimate of revenues through 2013.
Some manufacturers, such as First Solar, have the advantage of low manufacturing costs and can therefore compete with less pain. But in the main, pricing levels seen at mid-2009 were already unsustainable. By the fourth quarter, prices to large buyers averaged $1.90, with reports of crystalline product prices as low as $1.40/Wp and buyers of all sizes able to enjoy prices below $3/Wp.
Despite a new and conservative government in Germany and that government’s stated unhappiness with the oversold market in that country, demand in Germany remained strong well into Q4 and manufacturers began testing the market with higher prices. At time of writing, these higher prices had not taken hold. However, if strong demand continues into 2010, prices will certainly recover. Unfortunately, with governments (on whose legislation the industry’s incentives rely) watching carefully, the industry may have to swallow its current low margins in order to keep its support. For certain, as demand recovers and strengthens, pricing will recover with it, even from producers in regions where low manufacturing costs and manufacturing subsidies allow for stronger competitive pricing.
A true winner during these times of soft demand and low margin pricing are high efficiency products. Current research indicates that buyers are prepared to pay a premium for efficiency (though as a caveat, this research is not yet concluded and all data are not in yet). This would result in higher bankability for modules assumed to be of higher quality (higher efficiency/higher quality) and would quantify the importance of efficiency in the market.
So what now? The top shipper of technology to the first point of sale in 2009 is First Solar, followed by Suntech. Not only did thin films make significant market in-roads during the boom, the technology established itself in the market. (Though lower efficiency thin film products are having a struggle competing with inexpensive and higher-eficiency crystalline products). Bankability of thin films is frankly due more to an anxious debt market than to the unreliability of thin films. To combat investor unease, some thin film manufacturers have begun discussions (some successfully) with the insurance industry.
The real problem at the beginning of 2010 will be the significant degree of double counting (it really was cheaper to buy instead of make, and sending wafers out for processing was cheaper than in-house processing). Hunting down the original manufacturer of the technology will be no easy task.
Add to this the significant inventory (2.5 GW) at the beginning of 2009 and installations will be higher than shipments by approximately 2 GW. Unfortunately this will make the 2009 market very difficult to parse. Ths inventory situation at the beginning of 2010 may be as high as 1 GW, which will prove problematic.
Supply and Demand … the Age Old Partnership
The industry’s supply and demand picture continues to be unhealthy, with one major market, Europe. Viewed through a micro lens, if a company has one client consuming over 50% of its products and that client discontinues its business, unprofitability ensues. In 2009, Europe was 79% of global sales (with Germany consuming about 60% of the 5.8 GW shipped into the market). The PV industry continues to have a fragile demand/supply picture and the necessity to develop new markets remains crucial. Should Germany make significant changes to its tariff in 2010, the industry would not have another gigawatt market available to consume product.
Currently, there is industry lobbying in German aimed at forestalling significant decreases to the tariff in 2010, and so the government may bow to pressure. But then again, maybe not. For the global solar industry right now, anxious week after anxious week passes with no definite decision along with proliferation of rumours about the future of the German programme.
All is not as gloomy as it may seem, however. In November 2009 Japan started a feed-in tariff of its own, China and India are still wait-and-see propositions, but the market in Ontario, Canada, shows promise (for the short term at least) and the US seems to be waking up to the job creation possiblities of a strong solar market. None of these new markets will boom overnight, though changes in the PV market structure do appear to be slowly coming about and with them the demand stability that the PV industry needs in order to mature.
In 2009, shipments to the first point of sale in the market look to be flat, a far better outcome than originally expected. Conservative to accelerated growth is expected for 2010, and if the PV industry oversells the German market, 2011 may provide a wake-up call – that is, if the call does not come in 2010.
Changes, however, are coming to an incentive near you. California remains the strongest (at 65% of US demand) market in the US, and though other state markets are slowly emerging, the key word here is slowly. The CSI (California Solar Initiative) expires in 2016. Though this is still a long ways off, other programmes need to emerge before the CSI expires. California system owners may now officially choose between being paid for their net excess generation or rolling it over to the next period, but without an official increase in the net metering allowance from 2.5%–5% (at least), the benefit of this market stimulating measure is moot. The US also – despite its strong potential – remains a difficult market to work in, with upgrades needed for transmission, a hodgepodge of state-by-state incentives and a slow moving federal government standing in the way of a vibrant US market for solar products.
A new conservative government in Germany could spell trouble should overselling of its market rile them. Technology prices are unsustainably low and many in the industry simply do not understand this. Though Germany has picked up the slack, promising markets such as South Korea are disappearing while others are slow to develop and poor economies continue to constrain markets with strong growth potential.
However, at the end of the year technology shipments (sales) were stronger than originally feared and the high levels of inventory have been worked off. 2009 was a good year for installations, which will outstrip technology sales (though, this will be confusing to many). One manufacturer sold in the region of 1 GW of product.
Once ignored, the PV industry is now the place to be and many are looking to it as a growth area. With 2009 disppearing in the rear view mirror, many are looking forward to seeing 2010 solve a host of remaining problems.
And, it will, if only because progress continues in down years and up, because the PV industry is made up of great scientists and engineers, innovative business people and because, face it, solar is the future.