The PV industry is a bare-knuckle boxer, fighting for its life against conventional and other renewable energy technologies, the energy buying public’s attention span, high costs, and low margins. Navigant Consulting’s Paula Mints suggests some updated rules to make it a fairer fight.
by Paula Mints, Navigant Consulting
February 22, 2011 – The boxer dances in the ring, bouncing, protecting, rear fist by the chin, lead fist a few inches forward in front of the face, one heel up, bobbing, weaving, jabbing, avoiding the rope sometimes laying back on it — dancing in the face of the opponent.
The photovoltaic industry has been around long enough to be described in terms of its characteristics, which are primarily pugilistic: it’s a bare-knuckle boxer fighting for its life against conventional energy, other renewable technologies, the energy buying public’s attention span, and the high upfront capital cost to install a solar system (of any size), often at painfully low margins. The PV industry has been fighting and persevering for over 35 years and at times has gone from punch-drunk contender to world champion and back and it is still standing.
The data referred to in this article are technology shipments to the first point of sale in the market: an integrator, distributor, installer, retailer, or another manufacturer. Sometimes, manufacturers will buy cells and modules from other manufacturers and actually report these purchases as their own output. This practice, common in all widget industries, leads to double- and sometimes triple-counting and exaggerates the size of the industry.
PV’s unstable history
In the volatile and perpetually unstable PV industry, every year is another round in the ongoing bout to gain share in the total energy market. Going back to the Year One of solar (1MWp in 1978), growth in this industry has not been a smooth ride (see Table 1), with several years exceeding 75% (1978, 1980, 1983, 2008, and 2010). Growth at this significantly strong pace cannot be expected to continue as the industry matures — and is unlikely as incentives time out and new methods of stimulating the market (business models among them) take center ring.
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| PV industry growth, 1978-2010. |
Points of interest along the 1978-2010 journey include a 32-year compound annual growth rate of 35% — amazing for any industry over such a long period of time — and no down years yet (1986 and 1993 were relatively flat). Particularly striking is the fact that 90% of the PV industry’s cumulative volume was shipped from 2005-2010. And still, industry behaviors have not changed significantly — the PV industry still behaves like the pugilistic bare-knuckle boxer, often backed into the ropes and always fighting its way out of tight corners. It cannot relax — nor should it.
Given the rapid changes to the incentives upon which the industry still relies, understanding growth drivers during specific periods is important. Figure 1 illustrates industry growth rates and background for 1974-1984, 1984-1994, 1994-2004, and 2004-2010.
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| PV industry growth, 1974-2010. |
Round 2010: A flurry of punches
Unfortunately, developers of incentive programs still do not understand that an approaching tariff degression, or program end, will stimulate a significant amount of unwanted and expensive activity. There was a mad rush in 2010 to ship product into FiT areas and get it installed before the expected degressions. In the US that meant fulfilling initial requirements in case the grant in lieu of ITC was not extended. Aggressive pricing from China and Taiwan kept average selling prices low, which compressed margins for manufacturers but made buying easier for demand-side participants. A late-year slight uptick in silicon prices (quality problems) was not enough to ease price pressure on thin-film technologies.
By year’s end the industry was reeling from a flurry of combo-punches:
- the Czech Republic had instituted a retroactive tax;
- Spain had changed its rules again;
- drastic reductions in the German FiT were a reality;
- France had essentially halted its program;
- Ontario was still trying to figure out how to police its domestic content requirement; and
- the US saw approvals on several large projects…followed immediately by injunctions to stall, or stop completely, building for many of them.
Figure 2 presents PV technology shares for 2010. Shipments of thin-film technologies grew by ~54% in 2010 over 2009 for a 13% share (a four-percentage point decrease vs. 2009). Shipments of crystalline technologies grew by ~103% in 2010 over 2009, gobbling up more turf for an 87% share of the total market. Monocrystalline (mc-Si) technology increased its share in 2010 from 35% to 42%, with poly c-Si decreasing from 46% to 43% amid a continued trend of demand for higher-efficiency technology.
Given the significant competition offered by low-priced c-Si, 54% growth for thin films in 2010 over the previous year is worth celebrating and more significant than the decrease in share.
| PV technology shares, 2009-2010. |
Regionally, the shift to technology shipments from China/Taiwan continued, with the US and Europe also making significant supply-side gains. As the markets (demand) in the US and Ontario continue realizing their potential, more manufacturing will locate in North America, particularly if financial and tax incentives are offered. Table 2 presents shipment data (technology from regional point of origin) from 2005 through 2010. Note that the China/Taiwan share of market each year has rapidly increased, from 6% in 2005 to 58% of the global market for PV technologies in 2010.
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| Technology shipments 2005-2010 in MWp. |
Round 2011: Zeitgeist
What with the wild market in Italy, the taming of the market in Germany, and a whole lotta uncertainty going on, it is business-as-usual in 2011 for the PV industry — meaning, anxiety over decreasing incentives has driven supply and demand players into aggressive selling and installing. This behavior is nothing new. Simply put, in an incentive-driven industry where the rules change rapidly, even warnings of potential changes can cause accelerated market behavior. Even the suggestion that a market is overheating will, unfortunately, cause it to overheat faster, as everyone tries to take advantage of the market before it becomes unprofitable or shuts down.
In a free market there is simply no way to stop market activity, and expecting polite Marquess of Queensberry rules of participants is simply absurd. (For those unfamiliar with these rules, they were meant to help ensure good sportsmanship and fair play.) Free markets are not polite; they are aggressive and timid, opportunistic, and typically blind to outcomes — and if you recall the recent financial collapse, they also can be self-destructive.
2011 begins with soaring demand and activity. In Italy, no one really knows the size of the 2010 market yet and will likely not for several weeks. Margins are feeling the squeeze in Germany. The promise of a significant market in the US is clouded by the fact that many of the states are broke. Yet, with manufacturing capacity exceeding 20GWp, it is simply unfeasible for activity to grind to a halt (profitability yes, activity no). Larger manufacturers will devour smaller ones, and vertical integration will continue to offer a way for manufacturers to control costs and margins. The systems side of the business is, however, expensive, and requires a commitment to some initial lean times during which capital requirements will be a strain — and with so many public companies, the strain is visible. Manufacturers that stick with vertical integration are seeing some of the margin pain ease. First Solar and SunPower are good examples of companies that are controlling their future in this regard.
2011 began with less inventory on the supply and demand sides because of a manic 2010. With continued strong activity in Italy and the US, along with overselling in Germany, 50% growth is entirely feasible in 2011, to ~25GWp. If the emerging markets fail to, well, emerge as expected, then 2012 may prove problematic.
Marquess of PV rules
Wouldn’t it be nice if the PV industry had fairer market rules to deal with — rules that allowed for orderly market development? It is possible, after all, to be highly competitive and fair at the same time, even in an immature industry. Surely, some of the Marquess of Queensberry rules could be adapted:
- To be a fair stand-up boxing match in a 24-foot ring or as near that size as practicable. Translation: Set reasonable annual caps that stimulate while controlling.
- The rounds are to be of three minutes duration and one-minute time between rounds. Translation: Governments should set reasonable rules and stick with them.
- If either man fall through weakness or otherwise, he must get up unassisted, 10 seconds be allowed to do so, the other man meanwhile to return to his corner; and when the fallen man is on his legs the round is to be resumed and continued until the three minutes have expired. If one man fails to come to the scratch in the 10 seconds allowed, it shall be in the power of the referee to give his award in favor of the other man. Translation: If an auction process is the method of setting FiT prices a reasonable floor must be set as sometimes bidders will not act in their own best interest. Rational markets and free markets are different beasts and a rational market does not exist without controls.
- A man hanging on the ropes in a helpless state, with his toes off the ground, shall be considered down. Translation: If the market collapses through lack of controls, don’t blame the industry — fix it, even if the fixing causes pain. (Exhibit A: Germany.)
- No seconds or any other person to be allowed in the ring during the rounds. Translation: For the U.S., standardize permitting so that transaction costs do not strain costs for installers, integrators and others, and for some markets in Europe, control speculation.
- Should the contest be stopped by any unavoidable interference, the referee (is) to name the time and place as soon as possible for finishing the contest, to that the match can be won and lost, unless the backers of the men agree to draw the stakes. Translation: Set programs up correctly in the first place, and do not shut the program down instead of fixing it. Retroactive taxes, rule changes, and degressions are not “fixes.”
- The gloves to be fair-sized boxing gloves of the best quality and new. Translation: Set standards for the quality of everything.
- Should a glove burst, or come off, it must be replaced to the referee’s satisfaction. Translation: Again, set quality standards for components and installation (so many egregious examples of poor quality in an industry that can ill afford them)
- A man on one knee is considered down, and if struck is entitled to the stakes Translation: Yep, this means fairness.
Paula Mints is principal analyst, PV Services Program, and director in the energy practice at Navigant Consulting. E-mail: [email protected].
