Location, Location, Location: Where Is Best for Solar Success?

Is it really cheaper to build solar in the Far East, particularly when some of the fastest-growing solar markets in the coming decade are likely to be in Europe and North America? Or is the market becoming increasingly governed by strict regulatory issues that require manufacturers to locate production facilities in their target markets? In other words, how crucial is production facility location in the solar sector?

The received wisdom these days is that, for a variety of reasons, producing any kind of manufactured product in Europe or North America is going to be far too expensive. It therefore follows that the best place to build solar panels is bound to be somewhere in Asia, most probably China. After all, Asian labour costs tend to be lower while environmental restrictions are often less stringent than in North America or the EU.

But is it really cheaper to build solar in the Far East, particularly when some of the fastest-growing solar markets in the coming decade are likely to be in Europe and North America? Or is the market becoming increasingly governed by strict regulatory issues that require manufacturers to locate production facilities in their target markets? Clearly, the solar industry is growing fast and new technologies are constantly evolving, meaning that factories now have to be more high-tech than ever before. As such, are investment decisions in the industry now dictated by the need to locate factories close to universities and research centres of excellence?

REW spoke to a cross-section of mainly European and American solar manufacturers to find out which crucial factors helped them decide on the location of their manufacturing facilities. If one thing is certain, it is that the price for getting this decision wrong can be enormous, as illustrated by the spectacular failure of solar panel manufacturer Solyndra in August. The California-based company filed for Chapter 11 bankruptcy protection, closed its plant and laid off all 1,100 workers, despite receiving a US$535 million federal loan in 2009.

What makes the failure of Solyndra all the more compelling is that the company was visited by US President Barack Obama in May 2010 and held up as an example of the benefits of government support to the green technology sector. Former California governor Arnold Schwarzenegger also visited Solyndra’s $733 million state-of-the-art robotic facility in Fremont, known as Fab 2, which opened in September 2010.

The price of silicon-based modules has almost halved since Solyndra received its loan guarantee in 2009 to build a factory (Source: Solyndra)

According to an initial public offering by the company, the combined annual production capacity of the plants was projected to be 610 MW by 2013. But after expanding production in 2008, the company mothballed an older plant and postponed a planned production expansion, giving it an annual production capacity of about 300 MW. After declaring bankruptcy, the company said high production costs rendered it unable to compete with Chinese manufacturers such as Solarfun, Suntech, Trina Solar and Yingli.

Solyndra turned out to be the unfortunate victim of a solar market that has undergone a significant shift in recent months with module prices plummeting as low-cost Chinese manufacturers ramp up production. That put pressure on Solyndra, whose advanced thin-film solar modules were less efficient than conventional photovoltaic modules but had been cheaper to install until prices began to fall sharply in 2010. This suggests that, rather than being a victim of its North American location, Solyndra was simply unlucky to be making the wrong product at the wrong time.

Certainly, another three solar manufacturers that received backing from the Obama administration believe they will survive the onslaught of cheap Chinese panels. Loveland, Colorado-based Abound Solar and SoloPower won a total of $597 million in loan guarantees from the US Department of Energy (DoE) to begin building their first commercial solar panel plants this year, while 1366 Technologies has received a $150 million guarantee for a polysilicon wafer factory. 1366, based in Lexington, Massachusetts, is a product of the DoE’s Advanced Research Projects Agency-Energy, or ARPA-E, which makes grants to entities with innovative ideas that have strong commercial applicability. Whereas Solyndra tried to sell a markedly different product from its Chinese competitors, 1366 offers a commodity product made in a different way with lower production costs. 1366 says it is able to cast its wafers from molten silicon, rather than the conventional method of slicing the wafers from a large ingot, which tends to result in a lot of wastage.

Just in case a technical edge is insufficient, Abound Solar and SoloPower say their thin-film panels will compete on price against the most common type of solar panels, which are made from polysilicon coated with cadmium telluride, a technology also used by GE and First Solar, the world’s biggest thin-film maker. Thin-film panels are cheaper to produce than traditional panels using silicon-based cells, whose biggest producers include China-based Suntech Power and LDK Solar.

Solyndra Too Was an Innovator…

It could all come down to a question of luck and timing with location playing only a minor role. Solyndra was always keen to point to the light weight and ease of installation of its cylindrical thin-film solar products. However, these advantages were more important in 2009 when it received its loan guarantee to build a factory. The bottom line is that the price of silicon-based panels, made mainly in China, has almost halved since then. The price of the new technology is the vital factor now rather than the location of the production facility.

“Silicon panels have so relentlessly cut costs that other approaches haven’t been able to keep up,” said Kevin Landis, portfolio manager at Sivest Group Inc, a San Jose, California-based investment manager.

The falling prices mean Abound and SoloPower will need to sell their thin-film solar panels at no more than $1.05 per watt to be competitive in 2013 when the plants are expected to go into full production, according to Bloomberg New Energy Finance.

“In 2013 we should be able to sell at a dollar, 90 cents or even as low as 80 cents per watt and still make money,” Julian Hawkins, senior vice president of sales and marketing for Abound, said in a recent interview. “When Solyndra started up it was a completely different time for the industry. Nobody expected the huge drop in polysilicon prices.”

With the Obama administration taking heat in the media for its close ties to Solyndra, U.S. politicians are understandably concerned that other companies which received government backing will follow Solyndra into bankruptcy. Sector analysts are equally wary. “The odds are stacked against these startups coming into a highly competitive market with new technologies,” said Paul Clegg, a solar analyst at Mizuho Securities USA in New York. “One of these guys might succeed but the amount of money needed to reach scale is huge and its often underestimated.”

Abound, which received its $400 million guarantee last December, is keeping the faith in America. It’s expanding a plant in Colorado this year and plans to complete a new one in Tipton, Indiana, in 2013, which it claims will be the largest thin-film solar production facility in the U.S. In total, Abound will employ 1200 people at the two factories. Abound’s director of marketing Mark Chen says that to prosper in the current marketplace it’s important to have economies of scale. ‘You need to think big to be able to compete with the Asian manufacturers and you also need to have a technological advantage,’ says Chen.

“We’re already competitive and will be moreso as we ramp up production,” says Julian Hawkins. By the end of 2012, Abound expects to treble capacity to 200 MW, “where we start nearing the $1-per-watt level,” says Hawkins. “Competitors were basing their businesses on the assumption they could sell panels at $2 per watt or more, which was unsustainable,” he adds.

“Abound claims their process is more refined and less costly,” said Jesse Pichel, analyst at Jefferies & Co. “It’s awfully hard to compete with First Solar.”

California-based SoloPower recently announced plans to significantly increase its thin-film capacity while expanding into Oregon. The San Jose company which, like Abound Solar, specialises in flexible thin film solar cells and modules, recently received a $197 million DoE loan guarantee that the company says will allow it to produce about 400 MW of modules each year. According to the company’s website, SoloPower moved into its current 20 MW plant in 2008. The company says it will expand its existing operation in San Jose and build two new facilities in Portland, Oregon. The expansion will create 450 permanent positions and 270 construction jobs.

Companies not favoured with DoE funding have fared a lot less well. In August 2011, Massachusetts-based Evergreen Solar was forced to file for bankruptcy, blaming overcapacity in the sector due to falling subsidies and growing competition from government-subsidised solar panel makers in China. Evergreen plans to close its plant in Midland, Michigan, at the cost of around 65 jobs but its factory in Wuhan, China, built with a $33 million investment by the local government, will remain open, at least for now.

Another victim of the brutal price competition sweeping the world is German solar manufacturer Solon, which also decided in August to close its solar panel factory in Arizona in response to intense global competition on prices. But while Evergreen decided to get out of the solar panel business to focus on making silicon wafers, for Solon the decision to abandon its U.S. plant was more a matter of size. The Germany-based company said it would phase out a Tucson panel facility by October, cutting 60 jobs in the process. Instead, Solon will focus its product development efforts on designing and building large-scale solar installations using panels from different makers. “We came to the strategic conclusion that as a small 60 MW manufacturer, trying to compete against 200 manufacturers at least, with some of them being multiple times our size, is kind of like beating your head against the wall,” said Dan Alcombright, CEO of Solon North America.

Renewable Energy Corporation (REC) carries out its polysilicon production in the U.S. and has solar wafer, cell and module production in Singapore. But it is its production facilities in Norway that have suffered in recent months. REC recently decided to extend a temporary shutdown of about 45 percent of its wafer capacity in Norway to the end of the year after market prices failed to recover. Production at the oldest solar wafer plants at Herøya and at the solar cell plant in Narvik was initially halted in May this year. But the future appears bright for REC as the Oslo-based company has been singularly successful in recent negotiations with Italy despite the fact that the company and, more crucially, its manufacturing facilities are located outside the EU. After lobbying by the company and some strenuous diplomatic efforts from Norway’s government, equipment produced by the company will be eligible for a 10 percent feed-in tariff (FiT) bonus offered under Italy’s Conto Energia IV, which lays down the incentives for PV electricity through to 2016.

REC has production facilities in Norway, Singapore and the US (Source: REC)

According to Italian law, 60 percent of a module’s components must be manufactured in the EU in order to qualify for the bonus. With its Norwegian factories, REC faced being left out in the cold. Norway has never joined the EU, fearing the huge net financial contributions its immense oil wealth would force it to make in return for membership. Norway is, however, part of the European Economic Area (EEA) agreement, which allows some non-member states to trade with the bloc under EU internal market conditions.

“We talked to the governing bodies and the appropriate people and made them see our point of view,” said John Harald Grønningen, REC’s vice president for sales of cells and modules. “The Norwegian government was heavily involved,” he added.

A Major Blow to the Company

“We’re talking about 10 percent on the whole lifetime of the FiT scheme, so yes, it’s an issue for buyers,” Grønningen says. “Italy is one of the major markets in Europe and it’s a major market for us.”

Norway’s neighbour Sweden is in the EU and another Norwegian company, Innotech Solar, made the decision to manufacture its new polycrystalline-silicon solar modules at its SweModule factory in Glava, Sweden.

“Innotech Solar has made a conscious decision to use European production sites,” said Thomas Hillig, Innotech Solar’s director of sales and marketing for EMEA. “Hence in addition to our factories in Sweden and Norway, we have just built a further site in Germany. Our clients can therefore rest assured that our products meet the high standards typical in Europe.”

But the “Made in the EU” provision has nevertheless proved a controversial step, with some claiming it could be a dangerous precedent for an industry whose first priority should be cost-competitiveness with wind energy and then fossil fuels.

Factories today have to be more high-tech than ever before (Source: Gehrlicher Solar)

Non-EU-based manufacturers, including First Solar, have also been granted the right to use a “Made in the EU” sticker on their modules, thanks to their production facilities inside the bloc. First Solar, which stressed that most of its raw materials for its German production are found within the EU, is in the process of doubling its manufacturing capacity at its Frankfurt plant. Current plans have the facility projecting a yearly capacity of 500 MW.

Manufacturers have also been targeting EU production facilities. Taiwan’s DelSolar has said its solar modules will be stamped “Made in Europe” and therefore eligible for a 10 percent premium over normal Italian feed-in tariff rates, for example.

Other countries such as India have even more stringent “Made in” requirements for FiTs. As things stand, solar modules must be produced in India to gain FiT under the Jawaharlal Nehru National Solar Mission. This law is expected to become stricter with solar cells also to be produced in the country in future.

One of the strictest and most controversial schemes is in the Canadian province of Ontario where, since the launch of the FiT programme in October 2009, several big solar manufacturers have announced plans to set up or expand their operations in the province to capitalise on growing demand for Ontario-made products. Starting this year, solar projects in Ontario must meet a 60% domestic content requirement. Suppliers and manufacturers have responded by developing products and alliances to allow developers to meet the steep local content threshold. SunEdison, for instance, has begun deploying a locally-produced racking system for solar rooftop installations across the region.

Global manufacturer Canadian Solar is building a new facility in the town of Guelph that will be capable of manufacturing 200 MW of modules a year and will create around 500 jobs. South Korea’s Samsung is the largest foreign investor in the market to date with its $7 billion contract from the Ontario government to develop the province’s wind and solar industries.

So far the Ontario plan appears to be having an impact. According to data from Toronto-based ClearSky Advisors, prior to the FiT’s launch there were three solar manufacturers in the Ontario market: 6N Silicon, SolGate and SatCon. Today there are 18 module manufacturers, three of which are manufacturing through a local contract manufacturer, and 15 inverter manufacturers, six of which are using local contractors. In addition, there are numerous racking/mounting manufacturers that have sprung up since the scheme began.

The downside is that many believe that the Ontario position constitutes an improper competitive practice, and Japanese solar companies Kyocera and Sharp are currently pursuing their case against Ontario in court. If the Japanese win in court then the decision could set a legal precedent that could weaken the business case for locating production facilities in order to take advantage of what could turn out to be only temporary regulatory benefits.

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