PV cost vs. pricing: Back at the crossroads

Paula Mints explains the important distinction between “price” and “cost” (and why they get confused), and the current crossroads of pricing behavior through which PV manufacturers must once again learn to navigate.

November 11, 2011 – Pricing strategy is a choice, not a destiny. In a normal industry, a group, region or country that controls the largest share of manufacturing capacity also controls the price of the good delivered. Granted, there are no truly normal industries, and the laws of supply and demand are therefore essentially mutable (much like the traffic laws in Italy). Nonetheless, the grid-connected application in the PV industry is 100% incentive-driven, and as this application represents 98% of PV demand — no incentives, no industry. Given current high levels of manufacturing, product will be shipped even if the manufacturer loses money.

In terms of normality, as long as demand in the PV industry (and solar in general) remains incentive-driven, and as long as a significant share of its manufacturing capacity remains heavily subsidized, industry behavior will not and should not be equated with:

  • The law(s) of supply and demand;
  • Normal pricing theory;
  • Any other industry with which a similarity is assumed; and
  • The demand for any other consumer product.

Rumors are inherently untrustworthy and messy

As with the rumors of American humorist Mark Twain?s death, rumors about pricing (the subject of my previous article) are exaggerated. There is primary market selling and secondary market selling, which are different subjects — and intermingling them creates inappropriate expectations about the true price, and cost to manufacture, of PV technology. Rumors are now referred to as the spot market, with outlier low prices assumed to be the average price for c-Si technology. Let’s be clear: these prices are not the average, nor can the low price of third-tier manufacturers be seen as reflective of the true market price. Unfortunately, it will be some time before things settle down and until then every day will bring a different rumor.

The figure below shows average selling prices from 2001 through 2011, along with technology (modules) shipped to the first point of sale in the market (the first buyer).

Price vs. cost: A crucial difference

First, a reality check: there are manufacturing costs, and there are manufacturing cost roadmaps — neither of which are prices. Unfortunately, in PV the terms “price” and “cost” have become synonymous. When feed-in tariff rates and other incentive rates are set, assumptions are made that the prices in the market accurately reflect the cost of manufacturing the technology; surely no entity would willfully set price at or below cost. Thus, it is believed there is no difference between the two subjects.

Over time in the PV industry, the cost of manufacturing the technology has decreased by a compound annual 5% CAGR. There have been periods when costs did not improve significantly, other times when costs decreased significantly, and times when costs increased. PV technology manufacturers typically have little control over the inputs to their process, so when the price of raw materials increase (consumables, labor, equipment, etc.) it pressures their manufacturing costs up. During periods such as the recent polysilicon shortage, manufacturers tend to innovate faster to lower their cost of manufacturing, and learning accelerates. In the PV industry, manufacturers usually cannot pass on increased costs to customers. An exception was the 2004-2009 FiT-driven solar boom (Figure 1 again), when the PV industry behaved in a somewhat normal supply and demand fashion: demand was high (because of generous FiTs), and so prices increased. The high price of polysilicon during this time was not the only reason for increased prices. The cliché “a rising tide floats all boats” applies here; demand was high for anything solar, and all solar technologies, even non-silicon based, saw prices increase accordingly.

A personal message

At the beginning of that solar boom, specifically through the end of 2008, many new entrants spoke with me about pricing behavior. I explained the industry?s behavior from an historical and anthropological perspective. During this period, prices were going up, up, and up again, encouraged by generous tariff levels that allowed for positive IRRs despite the increase in the price of the PV technology. When asked, I said that in terms of PV technology prices what goes up will inevitably come down, and what goes down will eventually level out at a higher price point (though not the highest historic point). For incentive levels, what goes down will continue to go down and eventually disappear. This was not a message that many wanted to hear — and some of the entities that rejected it are no longer manufacturing PV technology.

So here we are again: the current price levels for PV technology are unsupportable and will eventually increase, though not as high as previously. Manufacturers and demand side participants should not plan long-term strategies based on today?s price levels. Concerning incentives, these rates will continue to fall and manufacturers should absolutely plan on this eventuality.

Paula Mints is principal analyst, PV Services Program, and director in the energy practice at Navigant Consulting. E-mail: pmints@navigantconsulting.com.

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