PV technology pricing: Why it’s a zero-sum game

Navigant’s Paula Mints hashes out misconceptions about grid parity, the source of pricing pressures, and achieving real “progress” in solar PV — starting with a reversal to higher prices.

November 7, 2011 – Let’s jump right in… here are some of the variables that influence the price for PV technology:

  • The availability of incentives;
  • Decreasing incentive levels;
  • Aggressive pricing for entry or share;
  • High or low levels of inventory;
  • High or low levels of capacity;
  • PPA prices set by utilities or governments;
  • Competition with subsidized substitutes;
  • The global economy; and
  • Promises of grid parity.

If you listen to the rumors, it would seem as if prices for PV modules change hourly — basically, someone just told someone else who repeated it to someone who used it in a presentation at a conference. Once the price point appears in a presentation it is taken as fact, then used in more presentations and repeated many more times with the genesis forgotten, as is what the data point, the price being repeated, truly means. Currently quoted prices from the technology manufacturer to the first point of sale are being confused with secondary pricing (pricing between demand-side participants, e.g. distributors, system integrators, retailers, et al) which represents the secondary market. As technology can be resold more than once on its way to the installation, it is can be difficult to ferret out the current average price of a module.

Market research is a specific discipline that counts components, raw materials, equipment, and other things from one point to the first point at which it stops and on to the next point, and the point after that, and so on. In the case of a module, the MWs are counted from the technology manufacturer to the first point of sale in the market (that is, the first buyer), which can be a distributor, a retailer, a system integrator, a module manufacturer — and increasingly commonly with current low prices, another technology manufacturer. Typically, the price from the distributor to its customers is higher than the price to the first point of sale, but not necessarily. Market dynamics dictate the first price, and then the different price points that follow. Note the pricing history below (Figure 1), which includes the average secondary price for 2011. Manufacturers deciding on pricing strategy should not use the secondary price, as it is as close to a mirage as a price can get.

Figure 1: ASPs 1991-2011. *Reseller average price in 2011: $1.05.

Grid parity and other price pressures

To truly understand PV pricing, one must understand PV industry history. Demand for the grid-connected application is incentives-driven — without them, the grid-connected market evaporates rapidly. When annual demand was in the low megawatts (and before that <100MWp), sales to off-grid applications could take up the slack in demand in low- or no-incentive environments. With industry demand at mult-gigawatt levels and the grid-connected application being 98% of this demand, the off-grid application can no longer support the industry as incentives wane.

It is worth remembering that all manufacturers of PV technology lost money until 2004. This is important because industry dynamics are based in this struggle for survival, coupled with a genuine belief in the mission of solar. After 2004, and despite constraints in the supply and high prices of polysilicon, prices for PV technology (all technologies including thin films) increased and margins were positive during 2004-2008. In 2009, manufacturers from China (and to a certain degree Taiwan) began pricing technology aggressively in order to gain share. During this time, manufacturers (particularly in China) increased capacity significantly while pricing it significantly below prices of manufacturers in Europe, Japan, the US, and the rest of the world.

Meanwhile, manufacturing capacities increased along with demand. In 2011, there is 30GWp of capacity to manufacture PV technology, with even higher capacity to assemble modules.

In the beginning, the feed-in-tariff (FiT) incentive was generous, acting like a 20-year annuity, and investors rushed in to take advantage of it. Systems sizes increased to the point where today 5-10MWp installations are considered medium-size and in some cases even small. Manufacturers rushed to fill demand for large systems. Governments soon discovered the expense of supporting the market they had created.

From 2004-2008, the PV industry promised even lower technology prices along with the inevitable realization of grid parity. Even after 2009, when manufacturers outside of China began to feel the pain of price competition, promises of grid parity continued.

In the context of the PV industry, grid parity means that the PV will compete with conventional energy, along with other energy technologies, without the aid of incentives. The inherent fallacy of grid parity, though, is that when and if it is achieved PV will still compete against other subsidized energy sources, including conventional ones: nuclear energy is heavily subsidized, oil is heavily subsidized, coal is heavily subsidized.

Given today?s low prices for PV technology, grid parity may well exist in more than one market. Unfortunately, low and negative margins and bankruptcy are the result of prices set at or below the cost of production. The PV industry may well have made a promise that it cannot keep without collapsing.

Currently, aggressive pricing (which sets expectations for continuing price decreases), decreasing incentive levels, high levels of capacity, high levels of inventory (and the reselling of that inventory at low price points), promises of grid parity, and a global economic climate that does not favor continuing subsidies are coinciding to hold prices at unreasonably low levels.

Pricing up to progress? Try survival

A zero sum game is one where the gain of one party comes with the loss of another. There is a natural tension between buyers and sellers in a market: the buyers want the lowest price, sellers want the highest price. Equilibrium exists when these expectations meet with both sides retaining value.

In an industry as price-sensitive as solar, higher module prices will increase tension between buyers and sellers while pressuring margins for buyers. With the size of the project development community, raising prices will not be popular — but it is necessary. For a long time the PV industry and its proponents have said that ever-lower prices represent progress; true progress, however, would not drive manufacturers out of business. Today?s artificially low prices need to increase. It is simply a matter of survival.

Unfortunately, given the downward direction of incentives and tariff rates, the low levels of PPA prices, and the expectations that have been set for buyers and end users, it may be some time before there is a return to rational pricing. For that to occur, inventory will need to be worked down, capacity growth will need to slow, third-tier manufacturers and many module assemblers will need to go out of business, and incentives will need to stay in place in some form.

Meanwhile, there is room for innovation in balance-of-systems (BoS) and in system design and installation. Business and financing models will mature. More progress will be made in lowering the cost of manufacturing PV technology. If manufacturers are forced into negative margins, though, there will be no money for R&D.

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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