NB: this article is reprinted from the Solar Outlook, issue 2008-2 – written by Paula Mints – with the kind permission of Navigant Consulting.
Just in case anyone asks where all the solar modules went in 2007, the answer is easy – Europe. After that, should anyone ask what application they went into, the answer is also easy – grid connected. Figure 1 offers detail about where the technology was shipped from, what region it went to, and into what application it was intended for.
The detail in Figure 1 is not a surprise – the demand trend to Europe and the grid connected application has been clear for several years. Actually, the trend to grid connected solar PV sales is much younger than the industry may remember. Grid connected sales took over a majority share of the market in 2000 at 51% of total sales. In 1996, 14% of solar module product was sold into the grid connected application. The grid connected share of market increased (due to incentive programs in Japan and Germany) to 34% in 1997, 31% in 1998 and 39% in 1999. And as incentive programmes are increasing, particularly in Europe, the trend to grid-connected sales is set.
There will be changes in the current incentive programmes – which are expensive to support, and someone must pay for them – but a cessation in the majority of programmes is unlikely.
Nevertheless, demand that is stimulated by incentives is artificial, and must not be taken for granted. There are renewable alternatives for solar, including energy efficiency. And some governments continue to tout cheap coal, clean coal technologies, and nuclear power as better alternatives to “expensive” renewable energy. Solar continues to battle an expensive image when compared to fossil fuels – though, considering the true cost of conventional energy (its carbon cost), and removing all subsidies from conventional energy, the playing field does level slightly.
Solar systems though, do remain pricey, and the industry continues to promise Governments, investors and electricity consumers that the module cost will decrease. The cost of manufacturing the technology is decreasing – though, not at the breakneck speed that is assumed. Efficiencies for thin-film and crystalline technologies are also increasing.
Meanwhile, despite industry promises, solar module and system prices are also increasing. This increase in the end product is entirely reasonable when a basic market reality is considered: The market sets the price – and high demand will drive prices up.
Table 1 offers average module price information from 2002 through to 2007 in three categories (the ASPs are representative of a global average):
- Total modules – includes all sizes (5W and upwards) of modules, and buyers with the least buying power;
- Power modules – includes modules >75W, and buyers who purchase in smaller amounts, and thus have less buying power;
- Large quantity modules – includes buyers who have buying power in the market and buy in large amounts.
Despite good progress in lowering manufacturing costs, average module prices have increased by a compound annual rate of 9% in the total module category, 4% for power modules and 5% for the large quantity category. In 2007, module ASPs were flat, but in 2006 over 2005, the total module ASP increased by 30%, the power module ASP increased by 7%, and ASPs in the large quantity category increased by 12%.
The solar module remains the most expensive component of a PV system. The remaining balance of systems (BOS) is also marked up from the manufacturing cost, continuing through to the installation of the system, which includes the labour and profit for the installer. Currently incentives are driving strong demand, particularly for large field / roof investment installations. And, strong demand is, of course, driving prices higher. The price is simply what the market will bear. To keep its incentives, the industry has promised to lower cost; meanwhile, the market continues to behave rationally, driving prices up as demand increases.
Though it may seem that the industry is breaking its promises to drive down the cost / price of a solar electric system, this is not the case. The solar PV industry is a business, and in a healthy business, profit must be taken at every point in the value chain. In an industry that suffered many unprofitable years, in which almost every year it has had to go begging for the continuation of necessary incentives, and where demand will decrease significantly without incentives, a little healthy profit taking is economically sound. That said, the industry must weigh the size of its margins with the risk of losing those incentives altogether.
Investment in solar PV, which is maturing rapidly in Europe and just beginning in the US (the US being a less mature market for solar), is growing in popularity because it is profitable in Europe under the feed in tariff (FiT) model, and the electricity customer understands the concept of renting electricity.
For years, the solar PV industry struggled to make owning a solar system sexy, and to teach potential customers that owning the means of electricity production was preferable to renting it. Unfortunately, the high capital cost of owning the means of production, tended to trump the joy of watching the meter spin backwards. In the future, more systems will likely be leased, even in residential applications, and more solar electricity rented than systems are acquired – but this is the future. Regardless of the method of deployment, incentives will be required for a good long while, and the industry will have to walk a fine line to keep them in place.
70% of demand went to Europe (2157.3-MWp) in 2007, and not, vert, similar 93% of demand in Europe was for the grid-connected application (2006.3-MWp).
Figure 2 provides regional demand shares for 2007. Despite there remaining a real need and a real hunger for electricity in the developing world, modules can be sold at a higher price into Europe, and Europe is hungrier (i.e. has higher demand) for module product. An efficient market will sell into areas where the highest price can be achieved.
The demand share situation is not expected to change. Currently the solar industry is in a period of accelerated demand and growth, and this demand will continue to come from Europe. Furthermore, some countries (China and India) are in the process of developing a domestic industry, but have not invested in developing a domestic market.
There is potential in these countries for strong demand growth in the future, should that investment be made. Table 2 provides an accelerated regional forecast to 2012. The industrialised world, Europe, North America and Asia, will consume over 90% of module product by 2012.
Incentives are typically for the grid-connected application and not for the off-grid applications, which are considered already economically viable. However, if the off grid system cannot be afforded, the point of economic viability is moot. In the USA, renewable portfolio standards (where they favour solar electricity), encourage utilities to include solar in their portfolio.
But remote applications, particularly during periods of supply constraints, are starved of module product. In Europe, large investment systems are drawing module product away from remote applications, and even from the residential application. Table 3 offers an accelerated application forecast from 2007 through to 2012.
As indicated in Table 3, demand into the grid connected application will continue to dominate. Grid connected solar installations are now being considered as an answer for the developing world's electricity needs. Large investment systems in remote areas of the world might serve both urban and rural areas. In this way, poor populations can also benefit from incentive structures that encourage the use of solar.
Strong compound annual growth is expected in the grid connected application, 46% for grid-residential from 2007 through to 2012; 45% for the grid commercial application; and 42% for the grid utility application. The grid commercial application will consume more volume than the residential application in coming years, with strong growth expected in the residential application as new business models emerge (lease, and investor-owned residential systems).
In 2008, the grid connected application is expected to consume 92% of worldwide module product, increasing to 94% in 2009, 95% in 2010, 96% in 2011, and 87% in 2012. The remote applications will see moderate growth (by PV standards) during the forecast period, and much lower volumes installed than into the grid connected application.
During the next five years, more incentive programmes are expected to come on line in the USA and Europe, which should drive the new business models that are necessary for the industry to continue to grow. Strong growth in the solar PV industry cannot happen in a vacuum. This growth requires new business models that allow options other than single owner system ownership – it requires creative methods for electricity consumers (worldwide) to overcome the affordability hurdle and enjoy the clean abundant energy offered by solar electricity.
|About the author|
Paula Mints is the principal analyst for Navigant's PV Service Market Research Program, Executive Editor of the Solar Outlook Newsletter, and Associate Director in the Energy Division.
The PV Services Department at Navigant Consulting was founded in 1974 at Strategies Unlimited, and Ms Mints moved it to Navigant Consulting in 2005. The practice is based on classic market research principles, that is, all data are primary, not secondary, and the analysis is independent and not based on the work of others.