PV Still Facing a Bumpy Ride: Working in a Low-incentive World
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Conventional energy producers have not promised low energy prices without subsidies and are expected to continue to enjoy — without much negative press — indirect and direct subsidies for many years to come. This is the unfortunate irony that all industry participants face: they must participate enthusiastically in a process that leads to low margins, losses, failures and therefore a lack of the very R&D funds necessary to continue innovating.
No one ever said that getting out of bed in the morning was fair, and few worthwhile causes are ever achieved without a fight. But, sadly, a growing list of companies have not been able to compete in a climate of artificial pricing for PV technology along with expectations that prices will fall. That in many cases these expectations come from the very companies that could not compete in the current climate is also ironic.
Manufacturers and demand-side players alike have all participated in the rush-to-the-bottom pricing strategy. As if low margins and company failures were not enough, in March the U.S. imposed preliminary duties on cells and modules imported from China. In May more significant duties were imposed with the final ruling expected in October. Aside from the infighting this action engendered among already beleaguered PV industry participants, it appears that the importers of the technology will be responsible, at least temporarily, for paying the duties outright, or, in the best case, putting up a bond with collateral. In sum, an unexpected outcome of the trade dispute is the financial pressure brought to bear on U.S. system integrators and installers. These small business people are the backbone of the U.S. solar industry.
A tale of two quarters
To highlight the highly competitive environment in which PV manufacturers currently operate, Q4 2011 and Q1 2012 revenue and shipment results were observed for seven manufacturers — First Solar (FSLR), Suntech (STP), SunPower (SPWR), Trina (TSL), Yingli (YGE), JA Solar (JASO) and REC Solar (RNWEF) — providing a representative sample of the pressures currently faced by manufacturers. During this period only Yingli Solar showed an increase in quarterly revenues from Q4 2011 to Q1 2012.
Shipments for the seven manufacturers for the two quarters were flat, at 2.7 GWp in Q4 2011, and 2.6 GWp in Q1 2012, with revenues decreasing by 16 per cent from $3.2 billion in Q4 2011 to $2.7 billion in Q1 2012. In good news for grid parity, but desperately bad news for six of the seven manufacturers observed, continued low average selling prices indicate that 2012 will be a difficult year for solar manufacturers. Cell manufacturer JA Solar's average price in Q4 2011 was $0.78/Wp, falling 10% to $0.70/Wp in Q1 2012. Average prices for the other six manufacturers, considered together, was $1.29/Wp in Q4 2011, falling by 16% to $1.09/Wp in Q1 2012. Removing SunPower's premier product, the five remaining manufacturers had an average price of $1.17/Wp in Q4 2011, falling by 15 per cent to $1.00/Wp in Q1 2012.
Only Yingli and SunPower showed an increase in shipments for Q4 2011 to Q1 2012.
Where is it going and what is it costing?
At the end of 2012, when the gigawatts are counted, it is likely to be a strong year for shipments and installations and a poor year for profitability. There is a strong likelihood of further failures and consolidations. At the end of the year there will likely be fewer manufacturers and slightly higher prices leading to a flat overall average price in 2012 over 2011.
Average prices from 2001 through a 2012 estimate reflect averages for all buyer categories to the first point of sale in the market. Currently, manufacturers are selling inventory at extremely low prices, as noted earlier. Demand-side inventory is also being resold. In the U.S., some demand participants may need to sell inventory to meet the obligations of the Commerce Department. Inventory is almost always sold at a lower rate than the original price point. For 2012, as indicated by current quarterly pricing, high inventory and expectations for lower prices along with lower incentive rates are holding prices down, and prices will go down further before they tick up. In market conditions where demand-side participants sell inventory, while manufacturers continue selling new product, manufacturers are essentially competing with themselves. This is not a healthy market situation.
The always promising U.S. market for solar installations may suffer in 2012 as installers and system integrators struggle with the previously mentioned cash flow problems. China has announced a plan to install ~5 GWp and, given that the country's manufacturers had 16 GWp of manufacturing capacity in 2011 (46 per cent of the global total), along with continuing losses for most of its manufacturers, installing some of the excess capacity domestically makes sense. There have already been failures among the lower tier manufacturers in China, and it is highly likely that moving forward there will be consolidation among the remaining manufacturers, even first tier participants.
Germany installed 2.3 GWp from January through April and, despite new complexity in its incentive program and more frequent decreases in its tariff, it is on track to install 6-7 GWp in 2012, likely signalling the end to its FiT program. Regarding its FiT, the pioneering efforts of Germany moved the PV industry significantly forward in terms of understanding how to efficiently deploy the technology. That the original FiTs were too generous and have proved unmanageable is not the point. Now the industry needs to catch up with its learning curve and mature some of its hard won knowledge.
High debt levels in Spain (formerly a strong market) and Italy (a strong through wavering market) continue to shake confidence. Though the pro-bailout party won the recent Greek election by a small margin, this does not ensure that austerity measures will succeed in that country. In the U.S., the effects of a slow and bumpy recovery may result in a version of austerity — and election year politics and innovative government spending programs are generally not mutually compatible.
Continued low pricing for crystalline technologies is stressing the competitiveness of thin films, particularly amorphous silicon (a-Si) and tandem junction amorphous. Closures of a-Si manufacturing pioneers such as Uni-Solar have raised questions in the minds of investors and other observers. Cadmium telluride (CdTe) manufacturer First Solar has shuttered plans to increase capacity and announced plans to focus on stable markets without incentives. Other CdTe manufacturers such as Calyxo, Abound and PrimeStar are apparently struggling to remain competitive in the current hostile market environment.
Investors remain interested in CIGS/CIS technology, with Manz acquiring Wurth Solar, and Nanosolar continuing to garner investment. U.S.-based Stion has licensed its CIGS technology to TSMC, which expects to profitably manufacture the technology at the same capacity level as Japan's Solar Frontier. Good intentions aside, execution will remain difficult while crystalline prices remain low. CIGS players are not immune to failure, with German manufacturer Solecture filing for bankruptcy in May 2012, while an empty parking lot and large company sign and logo remind those driving on Fremont, California's 880 freeway, that Solyndra made a noise beyond its market footprint when it failed in 2011. Manufacturers of CIGS technology that can withstand a two to three year correction may emerge stronger, but it will take a significant effort to survive.
Though it would seem that market-dominating crystalline technology manufacturers have the easy road, low technology prices and slim margins will force consolidation and may bring failure for manufacturers in all regions, including China. Surviving companies will need to make hard choices, and lower margins going forward are likely to become a necessary, though unwelcome, reality.
Securing a market
PV manufacturers are on track to ship ~26 GWp in 2012, most of it at a loss. As the industry is at the beginning of a potentially long correction, longer if global economies slip back into recession, a return to strong margins is unlikely in the near term. Indeed, moving forward the industry may have to adjust to a low margin reality given its promises of grid parity and low pricing.
For much of solar's terrestrial history technology manufacturers have suffered low to negative margins. The most profitable period for PV manufacturers began in 2004, after the German FiT began to stimulate strong demand and this incentive model spread throughout Europe and beyond. During this period, which included a shortage in polysilicon, prices for all technologies increased significantly. Constrained supplies of crystalline technology coincided with an unprepared thin-film sector.
Demand-side participants, system integrators and installers struggled to find affordable technology - or any technology at all. High prices for crystalline encouraged investors to look towards thin films as the future of PV, despite lower efficiencies for thin-film technologies. Equipment manufacturers such as Oerlikon and Applied Materials (AMAT) envisioned a changing industry that included a global landscape dotted with amorphous/micromorph manufacturing facilities. Lost amongst the noise and enthusiasm for low-efficiency and, assumed, low-cost technologies was the fact that increasing efficiency while lowering manufacturing costs remains the crucial twin goal of all manufacturers. These goals are not interchangeable.
Viewing supply and demand in the classic sense, they must be equal: that is, if someone sold it, someone else bought it.
The PV industry has an opportunity now to change the story that it tells its potential customers and supporters. Instead of selling solar as cheap and ever cheaper along with the moving target and nebulously defined goal of grid parity, the high quality of solar electricity should be the primary attribute that marketing professionals use when developing their strategies.
As an energy generating technology, solar electricity is clean, reliable and long lived (with a lifespan of more than 25 years). The fuel is free. Once the means of production — the system — is installed, maintenance is low. All energy generating technologies require maintenance — so solar does not have to be maintenance free in order to be a high-value energy choice.
There are many competing energy substitutes and, as conventional energy will likely continue to enjoy subsidies for many years, it will not be easy for renewables to displace fossil fuels as the primary energy source globally. However, as with all technology revolutions - such as, for example, the railroads, machinery replacing hand work, the telegraph, the telephone, penicillin and personal computers — older technologies are displaced by newer ones, often at a higher cost. It is as a result of this long, painful displacement that lives improve.
The PV industry and its population of technology and business experts has struggled, survived and briefly thrived for almost 40 years. During these years it has continued learning and improving through both good times and bad. The current period of correction, though painful, is simply a brief period on the way to a successful future.
The remaining months of 2012 will be most likely typified by continued low margins as well as macroeconomic risks that should not be ignored. Overselling in Germany this year — which is almost a certainty — may well lead to the end of that country's feed-in tariff, or at least to a cap. Solar professionals will have to learn to work in a low-incentive environment, and this will take time.
The time is now. Seize it.
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