Note: the full version of this article (including tables) will be available in the May/June issue of Refocus magazine. To subscribe, click here.
Inventory, incentives, commodities and PV industry pricing
Currently it seems as if prices for PV technology change minute by minute, with the allusive lowest price rumoured and seemingly just out of reach. In many cases low prices are referred to as progress, or “proof of grid parity”. But these same extremely low prices have driven almost all manufacturers to low or negative margins, losses instead of profits and in some cases, failure (or major cutbacks in production).
The tension rope between buyers and sellers is taut. With the considerable amount of confusing pricing information currently being repeated in the market, it is important to remember that prices for “re-sold” manufacturer and demand side inventory should not be confused with the average price of technology to the first buyer, nor should they be taken to represent progress (see factfile at the end of the article for PV pricing information).
2011: The year of losing money
99% of industry demand is incentive driven, and, therefore, profit for this 99% follows the trend of the available incentives. When incentives come into question, as they have in recent times (that is, as the incentive level decreases), profit decreases and demand decreases. Meanwhile, technology prices remain low despite low to negative margins for manufacturers.
In 2011, extremely low technology prices were no longer the direct result of aggressive pricing for share, but the indirect product of this practice. Prices were held down, and continue to be held down in 2012 by high levels of manufacturing capacity (~35-GWp), high levels of inventory for both demand (~3.6-GWp) and supply (>2-GWp), decreasing inventory - along with rumours of extremely low prices.
Rumours of low prices set up the expectations along the value chain. These expectations become reality when buying is delayed until the expected price is offered. The current low prices are leading to low or negative margins and to the failures of several manufacturers.
The current period of PV industry consolidation, long expected, is rendered far worse by continued unrealistically low prices for technology. Artificially low prices for technology are exacerbating the normal tension between buyers and sellers along the PV value chain. Low prices for crystalline technology are having a particularly deleterious effect on thin film manufacturers, who are struggling to survive in the current competitive climate. Some points of comparison from 2010 to 2011:
- Thin Film Average Selling Prices (ASP)s fell 42% in 2011, from US$1.35/Wp in 2010 to US$0.78/Wp;
- Cell ASPs fell 38% in 2011, from US$1.15/Wp in 2010 to US$0.71/Wp;
- The ASP for a crystalline module to the first buyer in 2011 was US$1.44/Wp;
- The global average for all buyers, regions, countries and technologies in 2011 was US$1.37/Wp;
- Module ASPs for Large Quantity buyers decreased by 14% in 2011 over 2010, from US$1.48/Wp to US$1.28/Wp;
- Module ASPs for Mid-level buyers decreased by 29% in 2011 over 2010 from US$2.36/Wp to US$1.67/Wp;
- Module ASPs for Small Quantity buyers in 2011 over 2010 fell 24% from US$2.90/Wp to US$2.21/Wp.
The thin film conundrum
During the 2004 to 2008 boom, investment in thin film technologies became highly interesting to venture and investor groups who, observing the increase in the price of polysilicon due to constrained capacities, assumed that low cost manufacturing would be the key to success in the photovoltaic market.
Given the high cost per kilogram of polysilicon (at one point >US$400/kg), and the increasing price of crystalline modules, an assumption was made that the price of crystalline modules would continue to rise while the price of thin film panels (CdTe, tandem and single junction a-Si, CIGS and CIS) would continue to fall.
During this period equipment manufacturers Applied Materials and Oerlikon (among others) entered. Sales of thin film turnkey equipment, primarily for single and tandem junction a-Si (micro-morph) technology offered an assumed faster entry to entities wishing to enter the PV industry, but having no experience in it. The conundrum for thin films, and this holds true for all PV technologies, is how to sell the true value and positive attributes of the technology to a market that has been trained to think cheap.
PV industry pricing to the first buyer from 2001 through 2011 (with an estimate for 2012) range from as low as US$0.50/Wp to >US$3.00/Wp. The average price for PV technologies is heavily weighed by c-Si prices. In 2011, c-Si was 86% of the market for PV technologies (note - data are a weighted average that includes region, technology, and buyer category, among other factors. See full article in the May/June issue of Refocus for full details of pricing history).
In general, thin film technologies need to price technology on the order of 12% less due to the area penalty paid for lower efficiency.
And now what?
The theme at three recent conferences in Europe was a combination of where do we go from here, and, what now?
Both are good questions and should not be considered rhetorical. During the recent boom in demand, 2004 through 2010, there was time to plan for a low incentive environment. The best time for planning would have been during the good times of relatively easy sales.
Lest the industry lose itself in gloom, it should remember that all the difficult years before it have made it highly innovative and instilled in it survival skills that are rarely found in other industries.
Since the Feed-in Tariff (FiT) incentive pushed the PV industry to Gigawatt levels of demand, the primary attribute used to describe and sell PV industry is grid parity, in other words, it is cheap.
Perhaps it is time to focus on the other attributes of PV, that it is a clean, reliable, energy source with low running costs, and with the potential to generate electricity for over 30 years. Grid parity was never a fair goal, as it requires solar to compete without subsidies or incentives with conventional energy, itself the recipient of significant subsidies and incentives.
Factfile: Important things to bear in mind when talking about PV industry pricing:
- 99% of industry demand is incentive driven, and, therefore, profit for this 99% follows the trend of the available incentives. That is, as the incentive level decreases, profit decreases and demand decreases, meanwhile, technology prices remain low despite low to negative margins for manufacturers;
- High levels of manufacturing capacity are expensive to support. Currently, manufacturing capacity is at 35-GWp, with utilisation at ~67%;
- There are high levels of inventory on the manufacturer side, and inventory is an expense for manufacturers;
- There are high levels of inventory on the demand side that, with lower demand, will be resold at below its original price;
- There is still significant manufacturing capacity held by off-brand and unfortunately, low quality cell and module manufacturers. This capacity is being resold at extremely low prices;
- Rumours of low prices set expectations for those prices. Demand will wait until these rumours become fact, which they will by virtue of manufacturer desperation;
- Low bids on large projects (1-MWp to 20-MWp) mean that either the project developer loses money, or, the developer will wait until the low price is available (in many cases the project will not be built);
- In the U.S., specifically, low prices to the hub and to the consumer for natural gas have an effect on expectations for PV pricing;
- In Germany, public opinion for solar is low, and the incentive for the largest global market is changing significantly, causing uncertainty for global investors in the technology;
- Globally, a slowly recovering economy and pressures on social services has an effect on the price consumers are willing to pay for renewable energy;
- The effect of three years of aggressive pricing has set up unrealistic expectations for near term prices;
- Continued failures in the PV sector will limit the number of manufacturers. Remaining manufacturers will still not have full control over the price function;
- The secondary market is the buying and selling of PV modules through distributors and retailers. The distributors and retailers may buy at the large quantity rate and resell this product on the secondary market to smaller participants. Distributors and retailers also resell inventory. This group takes a margin based on the current market situation;
- Manufacturer inventory is sold at a lower rate than the (hoped for) ASP of the manufacturer, based on market conditions including a) the level of inventory carried by the demand side and b) the cost of carrying in house inventory. Inventory is a cost to a manufacturer and, depending on market conditions; it may be cost effective and efficient to sell this inventory below the original cost to manufacture it. When sold, this category is factored into the price point to the first point of sale in the market (first buyer);
- Demand side inventory is that product that is resold, typically at a price slightly above but often significantly below the original price. The reselling of demand side inventory significantly skews the price on the market and leads to irrational expectations of extremely low prices. These rumors tend to encourage other demand side participants to stay out of the buying process until the rumors become the reality. This category is not part of the calculation of the price to the first point of sale in the market. The ASP for inventory is currently <US$1.00/Wp.
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.