In 2009, the market for solar products continued to soften, and by September, prices had crashed by 32% to 42%.
Paula Mints, Navigant Consulting, Palo Alto, CA USA;
In 2009, the market for solar products continued to soften, and by September, prices had crashed by 32% to 42%. This was great for the system integrators and installers who could source cheaper modules, (hard to resist at these prices!), but not so good for technology manufacturers who experienced squeezed margins and downward sloping revenues.
(In fairness, system integrators have felt pressure to provide ever-lower system prices.)
2006 was a particularly auspicious year for price increases, with average module prices rising by 30% for the small buyers, 7% for mid-range buyers, and 12% for large-quantity buyers. The significant turnaround in pricing of 2009—which could be described as an overcorrection—does not mean that an efficient market price was arrived at. Rather simply, the market was willing to pay more at one point than it was at another.
In 2009, soft demand because of the loss of a major market (Spain), a global recession, and problematic debt markets (among other reasons) drove prices down, while significant levels of inventory on the demand side allowed a vibrant secondary market to develop. Suddenly, there were daily, always-downward pricing changes. The global market for cells and modules pseudo-corrected because it crashed—not a healthy situation for anyone.
On the manufacturer side (supply), the module business was unprofitable for more than 30 years, up until the boom; average pricing during some of these years was below cost. During the boom, margins swelled along with profit, and the industry behaved as if the party would never end.
The PV industry remains in start-up mode with applications, business models, marketing strategies, and technologies continuing to mature. As the high-growth grid connected application remains incentive-driven, it is hard to drape solid economic theory over industry pricing behavior. Moore’s Law (the doubling of transistors per square inch on an integrated circuit doubles every 12 to 18 months) does not apply perfectly to pricing. Over the long term—and only in the long-term—there is clearly a systematic reduction in the price of cells and modules. In the near- to medium-term, though, there are many hiccups (up and down) in cell and module prices, and a smooth line cannot be observed. Until there is true, un-incentivized pull in the market for solar products, wild swings in demand and pricing will continue.
Efficient market theory holds that the market will establish (with the occasional correction) a rational and correct price for a good. This is great in theory; however, the market is an organism that reacts to market pressures by often inflating prices (supply side) when market conditions are good, and madly deflating them when market conditions turn in the other direction. It does this for any good, often regardless of its manufacturing cost.
With easy access to information these days, the overload of constant module price updates can and does trigger much anxiety. Market drives price, and also value, and people are the market. Understanding this does not exactly help manufacturers ameliorate pricing anxiety, particularly when all around prices can be observed dropping like stones into a pond.
So, accepting that the market is not logical or efficient when it comes to pricing, what does this mean for solar? It means that there are no set rules for market pricing, but some understanding of the triggers might slow panicked selling.
In the case of cost reduction, the PV industry can be proud of the significant progress it has made in reducing manufacturing cost and increasing efficiency. In this arena, there is some logic—and in an industry with downward price pressure (live by the incentive, die by the incentive), lower costs are a necessity.
Lowering costs. Now there is a rational war worth fighting.
(This article appears in its entirety at: www.electroiq.com)
Paula Mints is principal analyst, PV Services Program, and associate director in the energy practice at Navigant Consulting, Palo Alto, CA USA; email@example.com