by Paula Mints
Economic theory holds that when a good is provided it must be paid for and that the value for that good will be set by a dance between the sellers and buyers in a market. It is assumed that when the price is too high buyers will back away and the price will adjust. When the price is too low sellers will fail to make sufficient margin to continue producing the good and the price will adjust. And finally, when the price is just right, equilibrium will be achieved and buyers and sellers will be content. This economic theory has chugged along since way back to, and even before, Adam Smith wrote The Wealth of Nations.
The economic theories found in The Wealth of Nations, specifically the invisible hand theory, have been used and misused for decades to prove countless points. This has essentially resulted in breathtaking economic roller coasters that all assume some version of the-market-knows-best and that rational behavior will arise from what is a market free-for-all.
In the PV industry, equilibrium price is not the goal. Instead, prices for cells and modules are never low enough and the need for sellers to make a profit sufficient to support their business is often ignored. The global PV industry has long been haunted by expectations of rapid and consistent price declines as well as the belief that progress in terms of efficiency increases and stringent quality control can co-exist with low to negative margins.
Misunderstandings concerning the variable nature of inputs (raw materials and consumables) as well as the cost of labor are the basis of most learning curves. The celebration of low prices for cells, modules and systems are the basis of most company failures. The hourly cost of labor decreases only when you use less of it, while wages should and do rise so that the people producing and eventually buying products are afforded the opportunity to engage in the buying/selling dance.
Historically PV industry pricing has not been cost-based. In fact, there have been long stretches of PV industry history during which manufacturers priced technology at or below the cost of production. The current situation of low ASPs for PV technology is an example of aggressive pricing strategy, also serving as an example of how destructive this strategy can be when practiced in an industry where demand is incentive-driven.
Figure 1 details PV module costs, prices, shipments and the ASP/cost delta from 1974 through 2014.
Figure 1: PV Costs, ASPs and Shipments, 1974-2014.
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.
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.
Figure 2 offers PV cell/module revenues and ASPs from 2002 through 2014.
Figure 2: PV Cell/Module APS and Revenues 2002-2014
The Invasion of Free Solar
Marketing slogans catch phrases developed to sieze the buying public’s imagination should not be mistaken for truth, wisdom or anything other than the means to sell a product or service.
Currently popular among residential solar lease providers, the term “free solar” refers to the ability to have a PV system installed at a homeowner’s domicile without the homeowner paying for the installation. This means that the installation charge is avoided up front and applied to the back end. That is, the installation cost is recouped over time by the lease provider via the monthly rental of the installation and the annual escalation of the initial monthly lease payment. Typically ~3 percent, the escalation charge means that eventually the lifetime cost of leasing the PV system will be greater than the cost of buying the installation at a reasonable (and static) interest rate.
All buyers of all economic strata seek the best deal and the best deal is free. That “free” is an illusion is not the point. A free good can come at the cost of quality meaning that a poorly functioning free good will likely cost more in repairs and eventual replacement than a good that is acquired at a price that approaches its true value. A price set at free obscures the cost of developing the good or service and creates the illusion that the research, development, manufacturing and selling of the good was, in the worst case, free itself.
An offer of free solar commoditizes the residential installation, shores up the assumption that the cost of manufacturing a PV panel is approaching zero and undermines the true value of owning a residential PV system.
The true value of owning a residential PV system, aside from the benefits to the environment, is energy independence on a personal level. Never mind (for a moment) the ongoing attacks directed at net metering from utilities, an appropriately sized PV system gives the electricity consumer control over how much electricity is bought from the utility at retail rates. Pardon the pun, but there is a power switch from the utility as electricity landlord to the end user and this is where it should be. Leasing a residential PV system does not imbue the lessee with the same power; simply put, it means that the electricity lessee potentially serves two masters, the utility and the solar lease company.
The true value of independence is obscured and the value of the product (PV generated electricity) is undervalued. This is not what Adam Smith meant by the invisible hand. In the case of the solar lease, the invisible hand would seem to be implying that the value of the PV installation is zero.
The marketing phrase “free solar” undermines the true value of personal energy independence, obscures the true costs and benefits of PV system ownership, shores up false expectations of
ever cheaper PV modules and installations, and undercuts the need of an innovative industry to continue innovating by eviscerating the revenue stream that pays for research and development, not to mention, strategic planning, marketing and sales.
Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry. You can find her on Twitter @PaulaMints1 and read her blog here.
This article was originally published on RenewableEnergyWorld.com, and is republished with permission.