Feature

Comment: Trade wars, sinking ships, and a solar PV sector at risk of self-destruction


Paula Mints

PV pricing condundrum: If the current state of affairs for the photovoltaic (PV) industry was compared to a sinking ship, it would be one in which as the ship sunk, the passengers ignored the life vests and ordered another drink in the bar.

With its very survival at stake, the PV industry continues to ignore the growing graveyard of formerly promising PV startups and established players, in favor of infighting and continuing to promise even lower prices.

Promises of achieving grid parity with conventional energy have largely ignored the inherent, and obvious, fallacy of this goal: parity with a subsidised source of electricity - the true costs of which are largely difficult to ferret out - is not possible. Actual parity cannot be achieved, only the appearance of parity.

Meanwhile, given the subsidies that conventional energy enjoys, and given the current low price of natural gas, this unfair race can simply not be won. The cost to the environment of using fracking to access natural gas, particularly in the United States, remains largely ignored. The low prices of natural gas, which are often not passed on to the consumer, are celebrated.

Concerns about the PV sector, however, have influenced investor confidence in Concentrated Solar Power (CSP) and Concentrated Photovoltaic (CPV) technologies. Even more troubling is the current state of transmission and distribution, along with a lack of a plan for the smart grid technologies that will be needed in the future and are, in fact, necessary now.

Currently, the most significant factors affecting PV pricing are expectations of low prices and lower incentive rates. The low prices for PV technology may lead to increased installations, however, these prices are also likely to lead to lower quality technology and installations. This could lead to a backlash against solar, perhaps globally.

Figure 1 (above) presents average PV module prices (ASPs) to the first buyer (first point of sale) from 2001 through Q1 2012. Note that prices for inventory, not presented here, are as low as €0.65/Wp. The significant downward pricing trend observed in Figure 1 began in 2009 as technology suppliers in Taiwan and China began aggressively pricing for share.

Aggressive pricing strategies are not a new phenomenon in the PV industry. The difference in the outcome from past aggressive pricing is that this period coincided with generous feed in tariff (FIT) rates in Europe. The combination of low prices and generous tariffs led to the expectation of even lower prices.

Meanwhile, capacities increased and new market entrants flooded the industry, most assuming that the outcome would be high profits. Neither the new supply, nor the new demand side entrants, realised that incentives are designed to decrease over time and eventually time out. Nor that the primarily differentiating feature in the PV industry is cost/price and efficiency. As there is a direct connection between efficiency and installation costs, the two goals cannot be disconnected.

Generous FIT rates led to an overheated market and drastic, often retroactive, reductions in FIT rates and changes to programmes. Overcapacity and high inventory worked together to hold prices down as lower incentive rates made it impossible for prices to increase.

Low average prices for PV technology have led to consolidation and failure on the supply side (technology developers). On the demand side, low bids on projects (PPA and Tenders) - based on the assumption that price decreases would accelerate - have led to a queue of projects globally that may not be developed or will prove to be loss generators for the project investors.

In the US, and potentially in Europe in the future, tariffs to combat dumping have led to a severely divided industry. This division is not in the PV industry’s best interest, particularly as it enters a period where the need to work together is crucial. 

At this point, the likelihood of a necessary price increase actually happening is slim. Unfortunately, the PV industry (and the side industries of CSP and CPV) may have to wait until the industry consolidation grinds to a halt (which will result in an uptick in pricing) and costs descend to a level that is not mutually exclusive from prices.

In the meantime, industry players should work together to continue maturing business models and innovating balance of system (BoS) components and system design along with developing efficient installation techniques so that when the consolidation finally ends the industry is ready to rapidly capitalise on the large global market for electricity.

Paula Mints is the principal analyst for Navigant's PV Service Market Research Programme, 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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