Co-authored by Ernst & Young and Bloomberg New Energy Finance (BNEF)
Solar module manufacturers face intense price and margin pressures, with system prices still falling as competition intensifies between engineering, procurement and construction firms. We expect the next five years’ hot topics to include innovations in finance, the start of residential grid parity, and trading of large project portfolios.
Growth of the PV industry – in MW terms – has been spectacular over the last three years, from 7.7GW of installations in 2009 to approximately 29GW in 2011.
This was driven mainly by the FIT markets – Germany, Italy, the Czech Republic and the UK – which experienced unsustainable booms. Support is now being reined in by governments with severe incentive cuts.
There was also growth in many smaller markets. While a few are still heavily subsidized, such as Japan, the US, Ontario and Thailand, there are now dozens of small but more sustainable PV markets in Europe, South America and Asia.
While cuts in Germany and Italy will halt demand growth in 2012 and 2013, other new markets are expected to take off, driven by economics suddenly improved by the sharp and irreversible fall in module prices.
Solar modules prices have stabilized since the end of 2011, with multicrystalline silicon modules costing about a dollar per watt. This is unsustainable for many manufacturers, prompting a new wave of bankruptcies.
German thin-film pioneer Odersun and German crystalline silicon cell maker Q-Cells – the world's largest cell maker in 2007 – have declared insolvency. BNEF expects at least half today’s manufacturers to consolidate, either through bankruptcy or acquisition.
There are already some signs of merging in China, with Jiangsu Shenlong acquiring Hareon for US$368m (€276m), and Zhejiang Narada acquiring 51% of Chengdu Guojian New Energy for US$18.8m (€14.1m).
Thin-film manufacturers are some of the worst affected by the decline in crystalline silicon prices. Many were in the ramp-up stage, and now find it difficult to sell at all, even at a loss, as their warranties are considered unreliable. While thin-film leader First Solar struggles on at reduced capacity utilization and Japanese Solar Frontier, backed by oil firm Showa Shell Sekiyu, has secured new orders, US Department of Energy loan guarantee recipient Abound Solar has already shut its older manufacturing line.
These difficulties have stirred up trade tensions, and the US has introduced a preliminary duty of 2.9%-4.73% on Chinese crystalline silicon cells and modules. While this is only a symbolic tariff level, and Chinese manufacturers will find ways to get round it, it has led to some US project developers using Japanese or Taiwanese modules instead of Chinese, another reason for Chinese firms to buy small Western competitors.
While module makers are struggling, mainstream investors are looking to solar projects as a much less risky asset, almost independent of whether a supplier stands or falls. There is likely to be a lot more activity in buying, bundling and de-risking large portfolios of solar assets, to float as traded bonds and access pools of capital that can only make liquid investments. We expect plenty of interest for the 1GW Blythe project, under development by the insolvent Solar Trust of America and now to be sold to the highest bidder.
At German system prices householders in Denmark, Italy, Spain, Hawaii and parts of Australia can make over 6% real internal rate of return (IRR) investing in solar systems, provided they use every kWh generated. Technically this is grid parity at residential level, or “socket parity”, and this is happening not tomorrow, but today.
It will take longer to make unsubsidized large-scale solar projects work, because electricity costs to the consumer usually include a large proportion of transmission and distribution fees, overheads and taxes.
In a few places, such as Spain, Chile and Mexico, developers are seriously considering going ahead with large projects without subsidy because of high insolation and electricity prices. The economics here are tight, but the opportunity is only likely to grow as the experience of PV producers continues to push costs down.
EBIT margins of quoted PV companies, Q4 2011, by position in value chain