While U.S. and Chinese solar firms square off, Navigant Consulting’s Paula Mints points to four things that need to happen to get everyone’s focus back on the real prize: a level playing field against other energy sources.
Aggressive pricing for share in the PV industry is not new — in the early 2000s aggressive pricing by specific companies put competing manufacturers in a similar situation, at much lower volumes. Basically, it is the volume (GWs) at which aggressive pricing is taking place, along with the high level of manufacturing capacity (here I refer to technology manufacturing, not module assembly).
In a highly competitive industry that continues to be incentive-driven, lower incentive rates along with high levels of inventory (GWs) are holding prices down. Other competitive strategies include entry pricing (new companies) at levels that are at or below cost and vertical integration, where technology manufacturers use their in-house produced technology for installations at manufacturing cost plus transfer cost.
Manufacturers shift to lower-cost areas with better manufacturing incentives, such as Eastern Germany, Malaysia, Singapore, the Philippines, for example, in order to preserve margins. In the US various states offer manufacturing incentives. None of these entities have supported domestic manufacturing to the degree and complexity as has China. It is likely virtually impossible to unravel the various incentives in China.
At this point, the original aggressive pricing strategy is punishing even those manufacturers responsible for executing it in the first place while current industry dynamics make it very difficult to emerge from this low margin period.
In order to return to a situation of healthy margins (which are required to fund necessary R&D and innovation on all levels of the chain), here’s what needs to happen:
- Manufacturers need to stop participating in the pricing race to the bottom;
- All industry participants need to stop referring to these low prices as “progress”;
- Inventory needs to be absorbed; and
- There still must be incentives available to stimulate demand.
Capacity additions will continue. In 2011, there is ~30 GWp of commercial technology capacity. During the necessary correction, there will be factory closures and many of the third-tier manufacturers will disappear or be absorbed by stronger entities.
There will be pain. But, there is pain now.
Finally, a little perspective: the US has the smallest share of global manufacturing capacity, while European manufacturers have the largest market for PV technologies. The US market is growing, and typically manufacturing follows the market and/or least expensive areas to manufacture. Even if there were sanctions against manufacturers in China in the U.S., there is not enough manufacturing capacity (technology) to take up the slack in demand — though, likely prices would rise.
A truly level playing field for solar would eliminate all supply side incentives globally — including those for conventional energy and all other renewables. Frankly, this is just not going to happen.