The Commoditization of the Solar Industry

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by Paula Mints
 

Philosopher, essayist, poet and novelist George Santayana said: Those who cannot re-member the past are condemned to repeat it.
The solar industry is expert at repeating its behavior and justifying the often devastating results by referring to them as the solar rollercoaster or, the solar coaster.

To be clear, the industry’s behavior is closer to a Shakespearean tragedy than it is to a carnival or theme park ride. People choose to ride rollercoasters because once the ride begins they lose control for a brief period. They can enjoy the feeling of being safely out-of-control for a brief time. On a rollercoaster the thrills and chills are temporary.

In the solar industry a downward swoop typically means lost money, lost jobs as well as the lost dreams of the solar workforce from one end of the value chain to the other. On the manufacturing side most participants have been in low to negative margin territory for far too long and this situation is not going to right itself in the current pricing climate.

Polysilicon manufacturers, under pressure for years, are unlikely to get relief. Manufacturer components and materials outside of China such as backsheets and EVA are giving up and exiting. Cell manufacturers and module assemblers are pressured to exit or cut corners.
The downward slope of the solar rollercoaster is not a fun ride.

Problems with margin squeeze and poor quality components are not new. When prices for modules began crashing years ago the industry as a whole had an opportunity to point out the effect this margin squeeze would eventually have on quality and competition. Instead, crashing prices were celebrated as progress.

To correct a situation wherein low margins affect buying decisions – polysilicon, consumables, backsheets, etc. – buyers need to be aware that their choices will eventually affect the quality of the modules and Balance of Systems (BoS) they buy and install.

Whether it is demand side participants buying components at prices that are too good to be true or it is supply side participants choosing to sell product at prices with razor thin or negative margins, choices are being made. Solar participants are not giving up control of their future, they have abdicated it.

The Commoditization of the Solar Industry

Solar panels are widely considered commodities these days. This is a misunderstanding of what a commodity is and is linked to a misunderstanding of the time, effort, science and engineering required to develop photovoltaic thin film and crystalline cells. It also misunderstands the nuance of module assembly.

In general, a commodity is a product that is produced and sold by many companies and that has no differentiating features. Electricity is a commodity. Copper and aluminum are com-modities. Ammonia is a commodity. Oil is a commodity. Shoes, purses, jeans and solar panels are not commodities.

Unfortunately as CdTe, CIS, CIGS, n-type monocrystalline and p-type multi and monocrystalline solar panels may or may not look different from each other the assumption is that there is no differentiation and they are thus commodities. The belief that the solar panel is a commodity is what led Applied Materials (AMAT), Oerlikon and others to assume that solar cells could be rapidly mass produced just like any other diode and panels churned out like so many LED television screens. Note again that those who believed this are no longer selling the concept of turnkey solar cell manufacturing lines.

Again, the assumption that solar cells – thin film or crystalline – are commodities ignores the science and the nuance and the decades of effort as well as the decades of experience re-quired to produce a commercial product.

The industry has effectively, though not correctly, commoditized itself by agreeing by virtue of its behavior to compete almost solely on price and by celebrating unreasonably low prices as progress. Industry participants have created the myth that the solar panel is a commodity simply by repeating that it is one and assuming that repetition alone renders something a fact.

Repeating something ensures that it will become repetitive, it does not confer legitimacy on the statement that is being repeated.

The Current Module Pricing Situation – Abandon All Hope, Those Who Manufacture Here

The reasons for the rapid decline in module prices globally are very clear and they are not based on progress in either cost reduction or conversion efficiency increases.

  1. China’s market out performed all estimates and manufacturers in China and Taiwan planned production around a 30-GWp market instead of a 15-GWp market. It is worth noting that the FiT had been paid slowly if at all and curtailment in China is high and thus PV deployment is not profitable.
  2. China’s government effectively slammed the door shut (as have other governments) to slow out-of-control building.
  3. As a result, between 3-GWp and 5-GWp of cell and module production was stranded in manufacturer and developer inventory.
  4. As a result a flood of low priced cells and modules are available.
  5. As a result of what is now overproduction prices are highly competitive and margin pressure is extreme.

Unlike the mid-to-late 2000s current low prices are not the result of an aggressive pricing strategy to capture share. The current low prices are the result of production to meet China’s ballooning market, the government abruptly let the air out of the balloon, and the cell and module inventory stranded in the wake of high levels of production and government actions to slow the domestic market.

Prices are falling daily and will continue to fall until the production that was meant to be in-stalled in China is worked down. Meanwhile, manufacturer capacity expansion plans are being pulled back and layoffs have begun.

The only manufacturers for whom this is good news are those who were not yet commercial. These manufacturers have been offered a face-saving way to shutter capacity. For commercial manufacturers – even in China – the pricing slide is akin to being a passenger in a plane that hits a never ending air pocket. Prices are plummeting, taking jobs, quality and future plans with them.

Forgetting high efficiency manufacturers such as SunPower (SPWR) and LG – though make no mistake these manufacturers are also feeling price pressure – the current average price for modules in the US is $0.48/Wp. The range, including high efficiency monocrystalline modules, is $0.35/Wp to $2.25/Wp.

The figure below offers price and shipment history from 2006 through a 2016 estimate. The global average is a weighted average all prices in a market throughout the year and is based on a representative global sample. Concerning the average price estimate for full 2016, it is the estimate based on the current situation and given the pressures could be $0.02/Wp to $0.04/Wp lower. Remember, price and costs are different beasts.

module prices and shipments 2006-16Meanwhile, Back on Planet Margin

Many people are working overtime to tie the current situation of low pricing and strained margins to the early 2000s. The situation today is, as previously discussed, different.

In 2004, the global PV industry entered a period of prolonged accelerated growth stimulated by the European feed in tariff incentive which spread quickly from Germany to other countries. In its early iterations, this incentive was simple and profitable and as such invited investors to take risks on non-commercial technologies. The utility scale (multi-megawatt) application was an outgrowth of investor int
erest in seemingly stable FiT returns.

During the early 2000s capacities to produce technology increased significantly while prices decreased significantly; for example, prices decreased by 42% in 2009 over the previous year, by 16% in 2010, by 23% in 2011 and by 45% in 2012.

Unfortunately, these price decreases were misunderstood as a sign of economies of scale and it was widely assumed that the industry had reached grid parity. This assumption was largely based the misunderstanding that price was closely correlated with cost and that price decreases represented progress. During this period of strong activity, manufacturers in China entered with aggressive pricing strategies that rapidly drove PV manufacturers into a pro-longed period of negative margins, company failures and consolidation.

As a result of this long period of price declines tariffs, domestic content requirements and minimum import prices were established in the EU, the US, India and Canada. These measures were unsuccessful in that these methods misunderstood the marketplace for solar PV cells and modules and did not take under consideration grey market activity.

Currently, module buyers are able to buy product at ever lower prices and enjoy some (probably brief) margin relief. This is particularly important for developers bidding into the highly competitive PPA market. The downside will be – again – loss of manufacturers who cannot withstand the current period and all the expertise that goes with them. Product quality may also suffer as manufacturers look to preserve what margin they can.

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 in the October31st issue of  SolarFlare, a bimonthly executive report on the solar industry, and is republished with permission.

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