This article is excerpted from the Jan/Feb 2012 issue of Renewable Energy Focus (REFocus) magazine. For a free subscription, click here. Note, the magazine article contains additional historical analysis, including data on 2012 technology prices and forecasts*.
Farewell 2011, the solar industry will not miss you.
Along with crashing prices, company failures, rapidly decreasing Feed-in Tariff (FiT) rates, 2011 left us with something even more tangible – close to 6 GWp of inventory on the demand and supply sides of the industry. This inventory will haunt the solar industry for some time, as it will be resold at ever-lower prices.
This reselling will affect margins until at least the second quarter of 2012, likely longer.
Meanwhile, expectations for lower prices are being cemented in the minds of politicians and energy consumers, meaning that the spectre of margin-less grid-parity will haunt the solar industry for some time. Figure 1 presents a snapshot of “Solar 2011” as we trundle into “Solar-2012” (editor’s note: see the full article in the January/February issue for all tables and further information in this article; subscribe here).
From SpectraWatt, to Evergreen Solar, through to Solyndra, Photowatt, Solar Millennium, BP Solar (and more), in 2011, manufacturers and some system integrators declared bankruptcy; shut down production temporarily (or for good); lost money; changed strategy; or stepped back deciding to wait out a painful market correction.
Industry pioneers BP Solar (an amalgamation over time of BP Solar, Amoco, Solarex and others), Photowatt (one of the first PV companies to become profitable), and Evergreen Solar declared bankruptcy or, in the case of BP, shut down its solar division.
When startup Solyndra (based out of Fremont, California), suddenly ceased operations and locked out its employees, it sent undeserved shock waves throughout the global solar industry – which were out of proportion to the company’s manufacturing capacity (actually only 0.27778% of global capacity). Almost overnight many in the media turned into doubters. Schadenfreude: one day they love you, the next they suddenly remember all their doubts.
And at the other end of the scale, as the likes of BP walk away from solar declaring it unprofitable, Total continues its commitment, courageous at a time when many are questioning the value of solar investments.
So what went wrong?
In 2004, the beginning of the profitable FiT era, prices for technology increased – though, few remember this now. This period, running from 2004 through 2008, coincided with a shortage of polysilicon.
Though the increase in the price of this raw material put margin pressure on suppliers of c-Si technology, it cannot be blamed for the high price of the c-Si cells and modules at that time. During the 2004 through 2008 period, all technology manufacturers (yes, even thin film manufacturers) enjoyed significant positive margins driven by healthy FiT levels. In the early days of the FiT, this incentive behaved like a 20 year annuity. Investors of all sizes could count on it as in the beginning the rules did not change (as they later abruptly and retroactively did with Spain and the Czech Republic).
Unfortunately though, the designers of the FiTs did not build in controls – over and above annual digressions – because it did not occur to the architects of the FiTs that markets would not behave in an orderly fashion. So though the FiTs can be credited for the accelerated growth of the industry to multi-Gigawatt levels, they also encouraged markets to overheat (through lack of controls).
One direct result of these profitable FiT markets was aggressive pricing for share. This practice, not new in PV, started with manufacturers in China, spread to Taiwan (though not to the same degree), and essentially rendered manufacturers in other regions uncompetitive.
Another trend in the early, heady days of the FiTs saw investors, recognising a stable investment, enter the market with little understanding of the industry they were entering. These investors in installations did not see an end to the FiTs that made these systems profitable. And at the same time investments in thin film technologies were made based on the assumption that prices for c-Si would stay high.
Fast forward to 2011, and some of these investments have proved not necessarily a poor choice, rather the unrealistic expectations placed on them have simply doomed some of them to failure. Market exuberance, coupled with poor understanding, led to many an early success, much hubris…and ultimately in some cases to current failure.
Layered on top of this, we can add a global recession that was driven by another beleaguered industry (housing and the selling and reselling of derivatives) with the afore-mentioned aggressive pricing for share. In short all these elements collided; in other words if you have a poor economy combined with unstable incentives - let the bad times roll.
2012: Solar survival pains
2011 therefore should be dubbed the year of losing money - aggressive pricing for share became a self-fulfilling prophesy with consequences that will continue to effect the solar industry in 2012.
Such aggressive pricing for share actually began in 2009 and rapidly pushed prices down to unprofitable levels, leading Governments to accelerate decreases in their incentive levels, and also leading to overheated markets. All of which convinced many that grid parity had finally arrived. Had it? Well, perhaps, but bringing with it insolvency; negative margins; and hopefully, a realisation that incentivised markets are inherently risky.
Now that incentive levels are on the decline, the solar industry (overburdened as it is with multi-Gigawatt levels of manufacturing capacity) must deploy this capacity for negative margin, while developing strategies to help it succeed in this brave new world of low-incentives.
As we go into 2012, manufacturers in China control the largest market share for shipments and manufacturing capacity, and they are likely losing money on every Watt they ship. The current prices are artificial, unsustainable and held down by high capacity, high inventory and low incentive rates.
Yet many still tout these prices as progress, while trumpeting the arrival of grid parity. So the rhetorical question for 2012 becomes - can it be true grid parity if the price at which it is achieved drives manufacturers of technology out of business?
To survive, manufacturers need to wait it out, while developing strategies for a low-incentive environment. Of course, miracles do happen, and in this case the miracle would be a FiT, set at profitable levels (this would encourage prices to rise), with rules set that controlled the market (caps), while also setting rules that control the tariff queues. Unfortunately, this is not easily done as the industry resists caps, and establishing an orderly queue is difficult, if not impossible.
The way forward for the solar industry likely involves more vertical integration for multi-Megawatt installations, allowing the manufacturers to take advantage of the lower cost of technology; along with business and financing models for the residential, and small to medium commercial applications.
Prediction for a painful correction year
Before leaving 2011 behind (though the analysis of 2011 has not yet seriously begun), the top five manufacturers will likely be Suntech, JA Solar, Trina, Yingli and First Solar. It is highly likely that no manufacturer on any top 10 or top five list will be profitable in 2011.
2012 will see a lot of selling (and reselling) of inventory. Some manufacturers will wisely hold off on capacity increases (and even selling) until inventory is worked down. At some point in 2012 prices will increase, though, prices are unlikely to rise to a healthy level. There will be more exits – but hopefully no more scandals.
If Europe dips back into a serious recession the collapse of the market for solar in Italy may come more quickly than feared. Margins will stay low. The U.S. may or may not serve as a bright spot as it continues to just barely avoid recession itself (also, when social programs and funding for schools are cut, this indicates a necessity for a realigning of priorities.)
In 2010, shipments to the first point of sale grew by 120% over the previous year. In 2011, growth to the first point of sale will slow to 32% to 34% (still quite strong, if only positive margins accompanied this growth). 2012, starting off with significant inventory overhang, should be slower, and the correction may last through 2013. And to add some perspective, in the U.S. the housing market has still not recovered.
With all that in mind, it’s safe to say that 2012 will be a bumpy ride.
*Tables and data included in the full article, subscribe here (free of charge):
Figure 1 presents a snapshot of Solar-2011 as Solar-2012 begins;
Figure 2 shows global average prices for technology to the first point of sale in the market (includes prediction for 2012);
Figure 3 presents a technology revenue forecast;
Figure 4 offers a forecast to 2015 for shipments to the first buyer.
About the author: Paula Mints is the principal analyst for Navigant's PV Service Market Research Program, and executive editor of the Solar Outlook Newsletter. She is widely recognised as an industry expert on photovoltaic (PV) technologies and markets.