Solar PV in perspective 2011

Paula Mints

Part two: No time to panic - a solar history lesson

Editor's note - this article is taken from the September/October issue of Renewable Energy Focus (REFocus) magazine. For a free subscription, click here. Tables and Data in this article can be viewed by opening the pdf version of this article via the 'downloads' opposite.

REALITY CHECK alert: really big scandals happen in other industries, all the time. So we must all keep a sense of proportion about solar's current woes.

A handful of bankruptcies and it's easy to get carried away with the doom and gloom.

But it's not just the solar industry that is in the midst of challenging times. The whole world is currently edging (back) towards recession. Lingering effects of the financial industry scandals continue, with significant amounts right now being spent to subsidise the fallout (both pre- and post-scandal). Take Greece for example – significant Government (i.e. public) money is being spent right now to stop that country defaulting on its debts (although to what extent this will be successful is still up for debate).

In the past, scandals have enveloped Enron, WorldCom, Tyco, and Rite Aid, not to mention the derivative nightmare that brought about a global recession in its wake (also revealing the Madoff Ponzi scheme).

While the solar industry is currently mired in problems, we mustn't forget that the debt crisis in Europe, which now includes Italy, and the potential default of Greece, have far more significance than that of a startup U.S. solar manufacturer with a total capacity of 0.277778% of total global PV manufacturing capacity.

The point is this: yes, there has been a string of unfortunate (and one very public) bankruptcies of solar companies in the U.S. (four at the last count, because as we go to press Stirling Energy Systems has become the latest casualty). But it is more important to understand the market environment that helped lead to them, and what the current market environment portends in this regard.

This is important particularly in the U.S. where well-needed funding is being cut from the National Renewable Energy Lab (NREL) in Golden, Colorado, and because the pendulum of investment (from all sources) in the U.S. into the solar sector has swung from one extreme to another in just a few weeks.

Learning from history – the early years

In the 2000 to 2010 period, the PV industry grew from Megawatts to Multi-Gigawatt level of shipments (and demand) - see figure 1 in the pdf download opposite. But how did this level of growth happen?

In 1989 Germany introduced its 1000 rooftops program, taking place from 1989 through to 1993, and though this program did not precisely lead to a boom in demand for solar technologies, it did increase interest and activity.

In 1994, the government in Japan announced its own rooftop residential program – also providing subsidies to its PV manufacturing sector. These two subsidy programs were right at the vanguard in terms of Government experiments to stimulate the market for solar, via artificial subsidy instruments. Also during this time, the first Renewable Portfolio Standards appeared in the U.S.

During the late 1990s, Germany's 100,000 roofs program – along with zero financing – drove the industry over the 100-MWp mark in shipments.

On the manufacturing side, discussions about potential upcoming polysilicon shortages began, and the industry started to take advantage of the economies of scale possible with 100-MWp worth of shipments. But it is important to remember that technology manufacturers lost money – negative margins – during this time. Significant R&D took place in large companies, oil companies as an example, as they positioned themselves to focus on the goal of a large, vibrant, profitable future market.

It is worth noting that in 1997, the first year the PV industry shipped more than 100-MWp, the total demand in the U.S. was 15.6 MWp, with total demand in Europe at 31.9 MWp (Europe demand was primarily into Germany).

Table 1 in the pdf download opposite presents supply data; as well as shipments from regional manufacturers to the first point of sale (from 1990 through to 1999), along with average module prices (ASPs).

To the present day – 2000 to 2011

The Feed-in Tariff (FiT) model of incentives, which is the most successful instrument for stimulating demand in PV industry history, was first implemented in 2000. In February 2000, Germany implemented a 99 pfennig power production buyback for grid-connected PV systems, with a 20-year duration of payments.

Beginning in January 2002, the initial rate began to decrease by 5% per year until the end of the program. In 2004, the revision of the EEG (Germany's renewable energy Act) created an even more attractive market for solar, and other countries in Europe started to take notice of this market's success.

In the U.S., the renewable portfolio standards (RPS) – which broadly mandate utilities to use renewables – began expanding, though, with the deadline for RPS fulfillment not imminent and penalties for non-compliance often weak, these platform programs did little to drive demand at this time.

However, as deadlines for utility participation approached, utility activity stepped up. And at this time, the U.S. is a utility market – meaning that utilities buy the electricity produced. But incentives are still needed to stimulate demand.

During this period, FiTs proliferated across Europe, and in other countries such as South Korea, Japan and (to some degree) the U.S., prices increased, and, for the first time in PV industry history beginning in 2004, technology manufacturers enjoyed positive margins and profit.

Figure 2 in the pdf download opposite presents average module prices from 2000 through to an estimate for 2015. The historical data in Figure 2 are hard, reflecting the global average price to the first point of sale in the market.

What went wrong with solar?

As we all know however, sometimes, even though plans seem to be well laid out, things do go wrong, or, at least in a different direction much of the time.

In solar, FiTs drove the market sky high, and for a while, prices with it. As prices soared, startup manufacturers (and others) entered the industry, promising to drive costs down while maintaining profits.

Investors, enjoying the promise of trouble free returns from FiTs, stimulated growth of the multi-Megawatt (utility scale) application. In addition, manufacturers in China announced plans to integrate from raw material through wafer and cell manufacturing, to module assembly and distribution.

Manufacturers in Taiwan, albeit a little more circumspect, focused on cell manufacturing. Though doubted by all, they succeeded in this regard. Considered together, manufacturers in China/Taiwan improved their share of global shipments from 2% in 2000 to 54% in 2010. The driver for interest by manufacturers in China/Taiwan (and for Government support in China), was the rapidly growing market in Europe.

From 2000 through 2010, demand in Europe for PV systems (primarily multi-Megawatt) grew by a compound annual rate of 69%. Europe's demand growth is stronger than that of the compound annual growth for global shipments, which grew by 53% for the same period.

Shipments from China and Taiwan grew by a compound annual 39% for the period, with shipments from the U.S. declining by a compound annual 15%.

Table 2 in the pdf download opposite presents shipment shares by region and ASPs from 2000 to 2010. And Table 3 presents European demand, global shipments and the shipment share of the U.S. and China/Taiwan from 2000 through 2010.

Great expectations, realistic outcomes

The current unfortunate spate of company failures can be traced back to the beginning of the solar boom. During this time individuals, companies from outside the solar industry, and entire countries (China for example) viewed the market for solar as one that would exponentially increase annually – for many, many years to come.

Viewing the twin goals of all solar manufacturers – decreased manufacturing costs and higher conversion efficiencies – they, by-in-large, chose lower cost as a goal, and equating this goal with price, assumed that they could achieve their goals rapidly and with healthy margins. In fact, the need for margins has been largely publically ignored for the past five years in favour of the misunderstood goal of grid parity. The reality is that grid parity (which has many different meanings depending on whether it is wholesale; retail; the region; or the level of subsidisation of conventional energy, to name a few) must float on top of margins. That is, a company must make money in order to, well, exist.

Many new entrants, unfortunately, assumed that they could control price and cost, when in fact, neither are entirely in their control. Many assumed that there would be a premium for solar energy or for efficiency, neither of which has been established. During 2009, when aggressive pricing for share was the tool (not unheard of historically in PV) of entry for the Chinese and Taiwanese manufacturers, they likely did not realise that they might be stuck with these prices for some time.

Proponents of the successful FiT incentive model obviously did not foresee that this instrument would be a) so difficult to control and b) so expensive to support.

The new entrants of just a few years ago must learn what the old guard knew before the few short years of easy incentives and healthy margins gave way to the current uncertain market conditions and low margins.

They must learn to survive and thrive with a patchwork of uncertain incentives, many of which lack the key requirement for a thriving market – stability. They must find the allusive price-elastic customer – that is, the customer who will pay more for electricity generated from solar for philosophical reasons, or because for some reason they need the reliable electricity supplied by solar (one example of a potentially price elastic customer is mining. operations. By contrast the off-grid customer is not price elastic).

In the end, most companies with a value proposition (a product that fits today's market), and that are lucky enough to have investment (meaning money) will survive, though even some of these companies will fail. The solar market is brutal, and the industry is still in startup mode. It needs and deserves public and private investment so that it can continue to develop its technologies.

Currently, the U.S. solar industry is suffering the slings and arrows of visible failures that happened on the eve of an election that promises to be brutal. The U.S. solar industry does not deserve to be fodder for either the media, or any particular party's political agenda.

In Part 3 - Why PV doesn't follow the rules of supply and demand, and why that is a problem...

NB: All of the data and analysis used in this article is based on primary research, which is, no secondary sources, no other literature, et al, were used. No data were harmed in the analysis presented, which is based on classic market research principles.

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.

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