Navigant Consulting’s Paula Mints explains why the solar PV market will keep chugging along, at a slower and more sustainable pace, once the market subsidies and incentives stop. Costs, efficiency, pricing, and China all play a role.
by Paula Mints, Navigant Consulting
October 22, 2010 – When the music stops, people usually stop dancing. Sometimes you get your odd couple that keeps on dancing to their own music, but most couples (or the odd individual) either stop in their tracks or slowly disengage. This analogy may hold up when the subsidies stop for solar — when the market subsidies and incentives stop, the market will go on, though at a slower pace.
Consider Japan’s market for solar systems. When Japan’s original residential subsidy for rooftop systems expired the market slowed, but it also continued at a lower and sustainable growth rate. There are, of course, a variety of reasons for the continuation of Japan’s market: The nation imports electricity so it is vulnerable and its electricity rates are higher; the government has shown commitment to both its industry and it market; and the population is educated and has put a high value on photovoltaic system ownership. When the music stopped, people stayed on the floor chatting.
Bottom line: when the market and manufacturing subsidies stop, owning a solar electric system will get more expensive. This means that an already innovative multi-gigawatt industry will have to get even more innovative, and quickly.
A brief history of today’s PV industry
Perspective is everything, and the PV industry perspective has a few good lessons to teach us. First, many have forgotten that on the manufacturing side (technology, not module assembly) the PV industry was unprofitable until 2004. Yep, this means negative, not just constrained margin. (Come on, you know who you are, and you know this is correct.) In 2004, the hyper-stimulating feed-in tariff incentives drove the industry from megawatts to gigawatts in sales, and from losses to ever higher margins — and this was despite higher polysilicon prices. Meanwhile, thin-film technology manufacturers (a prime example is First Solar) got a chance to focus strategy on the high-value market (Europe) and gain market share. Though thin films have held double-digit market share in the past, it was from much lower volume — 17% market share (2009) in a gigawatt market is not too shabby a feat. This period of high polysilicon prices and escalating FiT-driven demand also spawned the entrance of other industries into PV (notably semiconductor) and the rise of turnkey manufacturing facility sales (notably thin-film turnkey suppliers Applied and Oerlikon).
Primarily because of the loss of Spain as a major market (about which not enough has been written), 2009 opened not with a whimper but with a groan. With little market growth until mid-year, technology prices crashed, and manufacturers competed with their customers (system integrators and installers) as modules were sold and then resold again. Mid-year the market in Germany was rediscovered and demand boomed again. Prices, however, remained low and then slipped lower still.
The PV industry has two goals, which are interrelated and are pursued by all manufacturers: lower manufacturing costs and higher efficiency. Lower costs give a manufacturer more cushion in the margin so that it can compete without (hopefully) falling back into unprofitability. Note that grid parity is not a “goal” — it is a market-specific situation where all solar technologies compete one-on-one with other energy-producing technologies. The irony for solar is that when the industry achieves grid parity without subsidies, the competitor (conventional energy) will likely still be receiving them.
The figure below traces PV industry pricing through 2010. The data are assessed by buying category (large volume buyers receive the largest discount), and include a global weighted average and a weighted average across buying categories. The analysis is based on the mother of all weighted averages.
|PV industry pricing 1989 through 2010.|
Why are modules so cheap, and what that means to an incentive near you
When demand surged mid-2009, the expectation (via economic theory) was that prices would increase, since they surged ~40% during the high-demand 2004-2008 period. Instead, average module prices continued to decrease led downward by manufacturers from China and Taiwan. This is called aggressive pricing for share.
Manufacturers in China had an edge over manufacturers in other regions thanks to many factors: a controlled currency, inexpensive labor, significant government subsidies, and other benefits that helped its domestic PV industry vertically integrate from raw material (polysilicon) through to the distribution channel. The big Chinese manufacturers now control economies of scale all through the value chain. As a result, the Chinese PV industry currently dominates global production and will likely sell 49% of total industry shipments of ~15.6GWp in 2010. Together, manufacturers from China and Taiwan will ship at least 57% of total. Outsourcing and tolling — which always took place in the PV industry — is even more commonplace, and is frankly out in the open now. In 2010, it is still in most cases cheaper to buy and rebrand than it is to manufacture in-house.
The US government, citing Section 301 Provisions of the US Trade Act of 1974 — and led not by the US PV industry but by the United Steelworkers Union — has announced an investigation into the situation. In doing so, it may be missing the point. The US PV manufacturing industry lost share to Japan, then Europe, and now to China/Taiwan because it has failed to support its market and its manufacturing to any significant degree. The exception to this lack of market support remains California, where the voters will hopefully fight off Proposition 23, an effort mostly supported by out of state interests that would roll back AB 32. The table below shows the rise of manufacturing strength outside of the US, as shipments from technology manufacturers to the first point of sale in the market. The ROW region includes technology manufacturers from Malaysia, the Philippines, India, and Singapore, and other countries.
|Regional shipments 2005-2010, in MWp.|
The likely result from the music stopping in terms of manufacturing subsidies in China would be higher prices for modules and lower margins for the demand side, which includes system integrators and installers. Margins for the demand side would suffer because the incentive system — specifically feed-in tariffs — are rapidly decreasing as a government reaction to high and seemingly uncontrollable demand, and crashing prices.
An unintended consequence of the recent price crash is that governments assumed lower costs are the sole reason for the price drop. Higher prices in China would likely lead to a more even playing field, but it might also slow the market — solar must live with significant downward price pressure. The government in China might, at that point, invest in its domestic market, but it is also likely to develop it for its own multi-gigawatt manufacturing industry. China invested a lot of money in its domestic PV manufacturing, envisioning an export industry. This begs the question: Why, with significant idle capacity, would it invite other regions to play in its government-supported market?
Currently, and globally, manufacturers are competing with low technology prices from China and Taiwan. In the US innovation will likely suffer simply because it takes a long time and a lot of money to develop technology that is required to sit in the sun and efficiently generate electricity for ~25 years. PV was always an unlikely fit for venture money, and now more than ever it requires a strong investor stomach and much true-believership. The PV industry is changing — but this is nothing new, and to be expected. The US PV industry gave up its leadership years ago, yet it continues to innovate and innovation may well be the road to leadership.
The morals of this story:
- Forcing China to end subsidies could well have a negative effect on the PV industry in terms of margins.
- Innovation should and will continue despite competition that is not entirely fair — and really, PV should be used to unfair at this point.
- When the music (incentives and subsidies) stops, the industry will keep dancing whether it makes any money or not.
PV — and all solar technologies, really — is an industry of survivors and innovators.
Oh, and in California, vote No on 23.