Downward price pressure has haunted the solar industry from the outset — but cost and efficiency improvements, and reasonable margins, are needed at all levels of the value chain. Paula Mints explains why the lure of grid parity need to change.
February 14, 2012 – Grid parity is killing the solar industry. The result will be the end of many new careers, the stalling of some mature careers, and the loss of the very expertise the industry needs to continue innovating.
Lower manufacturing costs and higher efficiencies are the result of years, and sometimes decades, of research and development. Innovation does not happen overnight — it is the result of long hours in the lab, years going from pilot-scale to commercial-scale manufacturing and years in the field proving reliability. Lack of support for incremental improvements, too much focus on champion cell results, and using announcements and roadmaps as data have placed the PV industry — and all solar — firmly on the slippery slope of unmet expectations. Profit, or simply breaking even, is sacrificed on the altar of grid parity.
Every conference, it seems, includes one or two presentations about the industry achievement of grid parity, proclaiming how PV has arrived and is finally at the point where it can compete without subsidies with conventional energy — which is itself the beneficiary of tax subsidies, direct subsidies, and indirect well-hidden subsidies. (At recent conferences, speakers have tried to switch focus from technology manufacturer failures and losses to tout system prices as proof that the industry has achieved grid parity and will continue to grow despite these losses and failures. Financial statements, even from manufacturers in China, point to unsustainably low technology prices.) Some say that the system price is the important metric when discussing grid parity and that the cost of the module is not the point.
However, without the module there is no system, and without today’s artificially low module prices there would be no grid parity. Without reasonable margins, technology manufacturers globally will continue to fail, and without manufacturers there will be no PV industry. The module has borne the brunt of downward price pressure for far too long — cost and efficiency improvements are also available at the balance-of-system level, not to mention the efficiency improvements left to be explored at the installation level. And in the U.S. and other areas of the world, permitting and other costs artificially raise the system cost and constrain margins for demand side participants.
Accepting that all levels of the PV (all solar) value chain need to realize reasonable margins requires an acceptance that at all levels there are costs over which the manufacturer (even of raw materials) and installer have no control. These costs include raw materials, consumables, equipment and labor. Concerning utility-scale (multi-megawatt) installations, performance is the important metric, and the cost of unexpected weather events, such as extreme sand storms, must be taken into account by investors and system owners.
Assumptions and repercussions
Downward price pressure has haunted the solar industry from the outset. To combat government and public opinion over its supposedly high (but actually realistic) system prices and the cost of its electricity to the end user, the industry has promised to be competitive with conventional energy without subsidies. Hence, from its inception the industry has been forced to push system prices down regardless of manufacturing realities, and with both the demand and supply sides experiencing negative margins at one time or another. During the recent past at megawatt levels of capacity and supported by large oil companies (BP, Shell) and as subsidiaries of other conglomerates, losses on the manufacturing side went by and large ignored. At multi-gigawatt levels, significant losses on the manufacturing side cannot be ignored because PV technology manufacturers are failing almost weekly.
In the mid-2000s, the relatively new feed-in-tariff (FiT) incentive model caught the attention of investors. These investors, realizing that the generous and (at the time) stable incentive could result in profits, pushed the industry in a new direction toward utility-scale (multi-megawatt) installations from which profits could be derived for ~20 years. This period coincided with a severe polysilicon shortage (not the first time, by the way). During this time, and not only driven by high prices for polysilicon, prices for technology (modules) increased significantly, and manufacturers enjoyed healthy margins for a few years while margins for the demand side (installers, system integrators, et al), particularly for small to medium entities, suffered. It was during this time that the topic of grid parity became popular, and many new technology companies were founded under the assumption that lower costs would result. Quite a few of these new entrants, of all sizes, are no longer around.
Ignored during this time was the potential that the incentives could: a) change drastically and become less profitable, as these instruments are designed to do; or b) suffer retroactive changes that would render already installed systems unprofitable; or c) disappear suddenly. (See Spain as an example of a, b and c.)
It was during that highly profitable FiT era that China took notice and began investing heavily in its PV industry, specifically in crystalline — an action that went largely ignored partly because of the widely accepted assumption that crystalline technology represented the past. When ready, manufacturers from China (and in some cases Taiwan) began pricing aggressively for share, a strategic tactic not new to the solar industry and widely practiced by other industries. Fact: the region or group that invests the most heavily to support its manufacturing will usually win. Unfortunately, the current situation proves the cliché: you get what you pay for. Paying closer attention to PV industry behavior and margin data for its manufacturing side might have resulted in more judicious action by all, as would the understanding that incentive-driven industries that compete with many substitutes are inherently risky.
Accept and change
There is an energy revolution going on globally, and it will be costly to push toward a change in the way energy is sourced. In the end, a higher price of electricity — and cost of it — will have to be accepted. It will be neither easy, nor fun. Solar and all of its technologies are not going away, but all levels of the value chain need to have healthy margins. New business and financing models will help, but are not the entire answer. A strong stomach is required to survive the current period — a period where consolidation has become a buzzword for failure.
In the end, solar is not going away, but maybe promises of grid parity should. That, or a new definition of grid parity is needed.
Paula Mints is principal analyst, PV Services Program, at Navigant Consulting.