PV market forecast: Playing chicken with pricing

Navigant Consulting’s Paula Mints projects five years out for worldwide markets for solar products. Good news: low technology prices should ameliorate the affordability problem of system ownership. Bad news: low margins may drive out innovative manufacturers and restrict R&D spending in a technology industry that relies on it.

August 15, 2011 – Forget, for a moment: grid parity, LCOE, spot pricing, or even commodity pricing. In the PV industry, pricing is currently a game of chicken, a game in which the opponents challenge each other by rushing forward simultaneously. The first opponent to step away loses, and if no opponent steps away — well, both lose. Picture this: two cars rushing towards each other … no one blinks … BAM! … margin fall-out all over the place. In solar, even the bystanders are suffering because extremely low module prices create expectations for the cost of all solar (that means CSP and CPV too).

To understand PV technology pricing, it is important to take everything into context. Basically, everything matters: GDPs, unemployment, manufacturing capacity, decreasing incentive rates, inventory levels. It is crucial to remember that high inventory levels will affect the solar market going forward.

Take a snapshot of the turbulent 2000-2010 period: the global economy fell head-long into recession; the financial markets were found to be playing an un-clever and under regulated game of chicken with derivatives; FiTs drove markets for solar systems up and over a cliff; and technology manufacturers in China priced aggressively and took control of the global market for PV technology. (Aggressive pricing for share is neither a new concept nor an unheard of practice in the PV industry.)

Prices went up, and then prices went down — and kept going down. The demand side of the industry, which essentially controlled price for over 30 years, briefly lost control during a period of manufacturer profitability (2004-2008). In 2011, pricing of PV technology is arbitrage with all solar technologies involved (including CSP and CPV). Simply put: the low price of a PV panel affects all stakeholders and competitors.

Figure 1 presents solar industry pricing to the first point of sale (not end-user pricing) for solar modules from 1989 through an estimate for 2011. The low price of solar modules, particularly into multi-megawatt installations, affects price/cost expectations for CSP and CPV.

Figure 1: Average selling prices for PV technology, 1989-2011.

The driver for market growth in 2010 continued to be the FiT incentive model in Europe, along with utility participation and anxiety over the end of the Grant in Lieu of ITC in the US. Planned decreases or changes to incentive programs also serve as significant drivers for annual demand. In 2010 and continuing into 2011, abrupt changes to solar programs shook investor confidence resulting in more risk being passed on to the solar selling channel for these large systems. Figure 2 presents the forecast for three demand scenarios: reduced incentives, conservative, and accelerated, from 2005-2015.

Figure 2: Global forecast 2005-2015, with three demand scenarios.

With continued price pressure along with selling solar electricity as a commodity, it is a volume business — and volume businesses need very low manufacturing costs. Selling solar electricity as a commodity is not the same thing as selling solar systems. Using sales in the US from a PPA entity to a utility, the principal attribute (among several) is that the electricity is sold cheaply. Buyers of distributed generation solar systems for homes, schools, government buildings, and small/medium commercial facilities want different things, such as control of electricity costs and participation in a cleaner environment.

Following 2009’s 16% decrease in global PV technology revenues, technology revenues increased by 120% in 2010 to $31.1 billion, while PV system revenues increased by 82% to ~$93B (see Figure 3). System revenue estimate is based on primary survey returns for all application segments: remote industrial, remote habitation, consumer power and consumer indoor, residential, small/medium/large/multi-megawatt commercial and utility owned. Continued downward pressure on technology prices will constrain margins for cell and module manufacturers going forward. For system revenues, stronger margins may be available for residential and small-to-medium installers/system integrators. For systems installed under PPAs, the commodity sold is electricity. For PPA systems, downward price pressure is even more significant.

Figure 3: Global technology revenues and demand, accelerated scenario 2005-2010.

The point of Figure 3 is simple: sell more and make less. In 2009, the beginning period of aggressive pricing, technology manufacturers sold 44% more technology product and made 16% less in revenues. Revenues recovered in 2010 as manufacturers sold 120% more, and sales increased by 86%. In 2011, there is a high likelihood that revenues will be flat. In 2015, assuming demand of 46GWp at growth of 30%, revenues would increase by only 17% and margins would be extremely slim.

The good news is that low technology prices should ameliorate the affordability problem of system ownership. The bad news is that the low margins may drive out, or keep out, innovative manufacturers and restrict R&D spending in a technology industry that relies on it.

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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