Thursday, May 17, 2007

Price decrease for solar modules might start consolidation in solar PV supply chain

By: Edwin Koot (Director
Rotterdam, 7 November 2006

The solar energy market and industry have been experiencing a price decrease in solar modules since the second half of 2006. Based on its contacts with suppliers and the activities on the Trading Floor, SolarPlaza experienced a price fall of 10% or even more compared to just a few months ago. More and more companies are offering (large) quantities of modules. It seems as if the acute module shortage which was limiting project development has vanished. Is this just a temporary development, or could this be the start of continued price decreases? Let's look at 3 major trends in the market and their possible implications.

Considerably lower sales in Germany

The German market will consume considerably fewer modules in 2006 compared to last year. Precise figures are still not available, but everybody within this market is convinced. The feed-in tariff has decreased 5% at the start of this year. At the same time the module shortage was rising to its peak with prices rising. Simple financial calculations showed that PV installations and, moreover the larger free-field power plants, were no longer as attractive as they were the year before in 2005. Simply count the new large projects inaugurated in Germany in 2006: fewer large power plants means significantly fewer MW. The impact is accordingly: with Germany being the world's largest market, a drop of 10-15% in module sales means some 100-150 MW of modules can be sold elsewhere, and the predictions that can be heard within this market are: sales of 600 MW or even less in 2006 instead of the 730 or more in 2005.

Continued strong production growth

With the continued strong global growth in production capacity and production of cells and modules, the production of modules has risen further compared to 2005. The shortage of silicon did not seem to affect this development too much. New cell manufacturers have started production and seem to be able to obtain wafers. This must be additional quantities, since no breakdown of any cell manufacturer has been reported so far. It seems the semiconductor industry has found its way to make better profits by moving to solar wafer and cell production. In this perspective it is no coincidence that semiconductor nation Taiwan now already has 7 solar cell manufacturers. So, with more cells and modules and fewer sales in Germany, where do all the modules go?

Slow growth of module sales in rest of the world

Based on our contacts and market research, these modules do not all reach Spain and Italy. Although both very promising markets, they are not yet taking up even 100 and certainly not 150 MW of modules this year. The sales in these countries will be less than 50 MW each, related to both administrative and bureaucratic issues. The world's third market, California, is just at the beginning of a new and promising era of market growth and secondly-ranked Japan is going strong but not with any serious market growth. The conclusion is that more modules should be available on the market. And this has of course an influence on the price.

What will happen next year?

Chinese existing and new manufacturers are ramping up production capacity in cells and modules. More silicon is expected to be produced next year in the world, specifically in China. Which markets will consume these silicon, wafers, cells and finally modules? Not Germany it seems. The feed-in tariff will be decreased another 5% as regulated by law. Furthermore, a revision of the German feed-in tariff is planned in 2007. Therefore, the German market can only become attractive again with much lower module prices. At least another 10% less seems necessary to create market opportunities for solar systems bringing an acceptable financial yield for investors. Without a price decrease this market will only shrink once more. One way to stimulate the growth of module sales for the industry would be a significant sales price decrease. Other indicators could enhance this development as well. There are already more than 70 cell and more than 230 module manufacturers in the world. The larger and stock-listed producers will have to show their shareholders growing numbers for sales and market shares. And as other markets have shown: if you can't sell more, you either lower prices to increase sales or you buy other companies out of the market. Both of these developments can put a serious pressure on the market prices. Small companies will have to make serious efforts to keep up with the larger corporations. The question is whether these companies will be able to get their hands on cheap wafers and cells or whether they will have the financial resources to lower their prices and margins to go along with the market.And there is another visible trend which is putting pressure on the smaller manufacturers. The growing attention for product quality and (financial) reliability and sustainability of PV companies. Like the Huerta Solares projects in Spain, more and more large multi-megawatt PV projects are being developed. In this price-unstable market, the developers purchasing modules not only want to do business with companies offering the lowest prices, they also want to be sure that the seller will still be there in 10 years to fulfil product warranties.

Further price decrease after 2007

Will the smaller cell and module manufacturers be able to survive price decreases after years of heavy investment? Will this be the beginning of a consolidation phase? The enormous growth speed of the bigger manufacturers will definitely require maximum efforts by the smaller ones to keep up within this unstable market. They could become fodder for the larger companies to strengthen their local market positions or, even worse, break down if prices fall faster and margins melt like snow in the sun. And prices could fall further after 2007. The new silicon production capacity currently being built could bring considerably more solar-grade silicon on the market after 2007. That means that, finally, the enormous surplus of cell and module production capacity can be used. This could lead to further price decreases since it is not unthinkable that the global market growth will not be high the coming 2 years.

Modest market grow in 2007

It is uncertain what will happen with the feed-in tariff in Germany with a revision coming up in 2007. If continued as it is now, the growth will depend very much on the required lower module prices to pump up this market again. Japan is growing modestly and an explosive growth does not seem likely in the coming year. The world's third market, California, is very promising with its new incentives, but has only just started. Experience in other markets shows that it takes time to educate a market before really big sales numbers can be achieved. Look for example at Spain and Italy. Already in action with good incentives for over 1 year, they could start growing seriously, but are currently showing some uncertainties related to revisions of the feed-in tariff. Many other new markets might pop up (France, Canada, Greece), but they will not be able to consume big numbers of megawatts in their early years of development. Therefore, for the long term, the global market development looks great.

Consolidation seems likely within the coming years

Based on the above scenario, in the short term a consolidation within the supply chain could take place. Would it matter if the 'big guys' with access to large amounts of capital take over some 'smaller guys'? With continued price decreases achieved by large-scale and optimized production, solar modules will become more and more a commodity product. Therefore, in the end, concentration and consolidation in the supply chain will have a positive effect on market prices and therefore competitiveness of PV with other energy sources. And that is what all stakeholders want to achieve, because then the markets and business opportunities will really take off for PV. In the development of the solar energy market and industry, the current market phase could be the start of a new era in the development of photovoltaic energy as a major energy source. As foreseen by several industry experts, photovoltaic energy systems could even become a price-competitive energy source within the next decade.

Chinese solar industry dominance?

Within this consolidation phase, the Chinese manufacturers have an interesting advantage. As with other products (toys, computers, cars, etc.), the Chinese manufacturing industry seems to be very competitive compared to industries in western countries. Moreover, western multinationals have build up their manufacturing facilities in China, most often in joint ventures with Chinese companies. Government incentives, tax advantages, cheaper labour, plenty of capital, enormous numbers of highly educated people, and a culture and spirit to work harder and longer, provide competitive advantages that are hard to beat. Their strongly growing energy consumption and programs to stimulate domestic use of renewable energies will further enhance the Chinese solar industry. All these developments make it worthwhile to keep a close watch on what will happen in the Chinese PV industry over the coming years.

The solar industry seems to be at a turning point in its development. Global production capacity is rapidly growing and shortages in the supply chain are vanishing. Prices are decreasing again, turning the market from a sellers market into a buyers market again. The expected consolidation phase could create a good starting position for a new era heading towards solar energy as a price-competitive renewable energy source.

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