Comment: Solar PV and the incentive bubble

Paula Mints

For the solar industry to grow up, or, mature, it needs to be less reliant on incentives, mature its business models and develop a structure where all participants enjoy positive margins, believes Paula Mints.

In 2011 there was speculation about whether the surge in demand for solar products from 2004 through 2010 was indicative of bubble behaviour.

Using the price of PV technology (average module prices) as the metric, the value of the solar asset increased from 2004 through 2007, before essentially crashing in 2009, 2010 and 2011.

Conversely, as Average Sales Prices (ASPs) crashed, demand increased. This market behaviour defies classic economic theory because when demand is strong, prices theoretically increase. This market behaviour also defies classic theories about bubble markets because, again, as the market increased, prices again decreased.
The behaviour evidenced by the solar market from 2004 through 2011 was due to the following factors:

  • Generous FiT incentives beginning in 2004 that encouraged entry and drove prices up;
  • Aggressive pricing for share beginning in 2008 that drove prices down;
  • Overheated FiT markets that began to collapse or change (often retroactively) the rules in 2008;
  • Growing inventory levels on the demand and supply sides of the market;
  • Significant levels of manufacturing capacity;
  • Decreases in FiT levels rendering markets less profits;
  • All of the above holding prices down at artificially low levels.

The dotcom (internet bubble) was different because in many cases there was no exchange i.e. the product was offered for free. Even now the primary revenue generator for websites such as Google is advertising.

And the basic assumption during the housing bubble was that the value of real-estate would continue to increase over time, with potentially some annual declines and at most a soft landing – something akin to snowflakes falling gently to earth. There is no need to point out the fallacies in this thinking.

Solar, however, is a hardware business that does not rely on advertising for revenue. Solar hardware (the module) has decreased in price over time, held down by the above factors. Unlike housing, the goal is cheaper hardware and inexpensive electricity. Incentives for the solar industry stimulated market behaviour that was bubble-like in that the participants believed the incentive structure would not end, or, would be replaced by a similar market instrument. Believing this, market participants were encouraged to continue adding capacity and to price aggressively in order to control the market.

As with all bubbles, exuberant market behaviour (based at least partly on the belief that nothing excessively untoward could possibly happen) has led to some significantly untoward outcomes -including company failures and industry infighting.

Table 1 below offers the average annual module price decreases along with average market growth from 2008 through 2011. The data are for the sale (shipment) of PV technology (typically the module) to the first point of sale in the market (first buyer). The size of the PV market is the amount of technology shipped to the first buyer. PV technology is often shipped to several points and recounted several times. Double or triple counting significantly increases the size of the market.

Let the air out of the bubble please

For the solar industry to grow up, or, mature, it needs to be less reliant on incentives, mature its business models and develop a structure where all participants enjoy positive margins.

Currently, manufacturers of PV technology – globally – are struggling because the price of the technology is artificially low. This last statement is laid bare for all to see in every manufacturer’s financial statement. The losses are mounting, along with the failures and the annual top-10 list of PV manufacturers will be filled with companies that lost money in 2011.

At one point in 2011, prices for cells (crystalline technology) were below 50-cents/Wp (US$). An argument cannot realistically be made for the continuation of prices at these levels, as long as manufacturers continue to report losses and manufacturer failures continue to mount.

Supply and demand problems

In classic market research terms, supply and demand must equal; that is, if it was sold, someone bought it.

In 2010 (likely the tipping point during which an increase in technology prices may well have headed off several company collapses in 2011); Europe consumed 80% of PV technology while China and Taiwan shipped 54%.
Currently in the U.S. a battle rages for and against the application of tariffs on imported technology from China. It appears that both sides have ignored the likelihood of continued failures – even among Chinese manufacturers – if prices do not increase. If grid parity had really been achieved by the PV industry, manufacturers would not be failing. Even the façade of parity that currently exists turns a blithe eye away from what it means, which is parity with subsidised conventional energy. Bluntly put … this is not parity.

In 2011, Europe consumed 65% of shipped PV technology, with China/Taiwan shipping 61% of total. For several years, the trend for China/Taiwan has been to gain an average of seven percentage points a year in share. Given this trend, in 2012, China/Taiwan would ship close to 70% of total PV technology to the first point of sale (buyer).

With no time to correct, it is time for a correction

The solar industry has been anticipating, fearing, expecting and denying a correction year for a long time. Over its 40 year history, there have been years of flat growth, and even years of no growth but never a decline in growth. Should 2012 show a decline in shipments it would be historic, painful, but eventually healthy.

All industries experience corrections on their way to maturity. Even mature industries experience corrections. The automobile industry is experiencing resurgence after several painful years. The housing industry, unfortunately, has a long ways to go before it climbs out of its correction. For housing, the correction resulted from housing values that escalated far beyond the true value of the properties. The housing correction will continue until the bottom is reached, and the fact that these prices have not bottomed out as of yet is troubling.

For PV, the values are too low and need to go in the opposite direction, which is equally painful and will be difficult. There has been too much focus on the cost/price of the module for far too long. And there is room for learning (meaning cost reduction) still available in balance of systems components and installation practices; and other areas where maturing will lead to a healthier industry, such as financing and business models.

For 2012 and 2013 I estimate a conservative forecast is as the most likely (shipments of between 19 and 20 GWp); in 2011 by comparison more than 23-GWp was shipped to the first buyer.

Average price decreases and market growth 2008 -2011
YearAverage annual price decreaseAverage annual market growth


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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Photovoltaics (PV)  •  Policy, investment and markets  •  Solar electricity