What Does The Future Hold?
Following a successful year, what can the PV industry expect to see in 2011? pv magazine analyzes the trends, prices and markets likely to make an impact.
Flying in the face of the financial crisis, mounting overcapacity, intensifying competition and feed-in tariff (FIT) reductions, the photovoltaics (PV) industry has displayed extraordinary resilience, with 2010 witnessing impressive growth in terms of new installations. Having bettered the 24% increase in global PV demand in 2009, the market is predicted to grow by between 80 and 90% this year. Bank Sarasin calculates worldwide capacities will reach in excess of 13 gigawatts (GW) by the end of December. Maintaining pole position, Germany was once again the clear leader, with EuPD Research stating that 7.2 GW of capacity has been installed there to date. The rest of the world, thus far, makes up 6.2 GW. Italy, the Czech Republic, Japan, the U.S and France were identified as the main drivers. “Growth was tremendous, despite all the FIT cuts,” Bank Sarasin’s Senior Sustainability Analyst, Matthias Fawer told pv magazine. “It’s amazing how elastic and flexible the industry can react to these cuts and how the prices could adapt to the situation.”
Both IMS Research and Bank Sarasin confirmed that 2011 will get off to a weak start, however, due to further FIT cuts. Impacting most significantly will be the expected 13% degression in Germany, which is likely to come into effect on January 1; other markets like the Czech Republic will also play a role. Consequently, both price and margin pressures for suppliers and buyers will intensify, and it is forecast that overall worldwide growth will reach just 10% next year. As Fawer explains, “Our estimate is that we will see slow growth in the first quarter, in a way that buyers and sellers will have to find and arrange new prices. Then it’s really an open question as to whether module producers are still able and willing to adapt to the new situation of the FITs – we believe it will be hard for them. They had really seen some margin squeeze in 2010 and there will be growing pressure on all the other players, the so-called balance of systems (BOS), such as inverters, cables and mounting systems.” He says that if the 13% cut were introduced in Germany, system prices would need to come down by circa 10 to 15%.
Does he see movement from the BOS industries to reduce prices? “Not really,” he states. “There is not that much pressure from overcapacities, and module producers like to say ‘We’re not taking the burden’, but on the other hand what speaks against them is the growing overcapacity in module production and the fact that some big Chinese producers might just say ‘Ok, I don’t want to have a big inventory of modules, so I’d rather give them for a low price’ – that’s the struggle for the module producers.”
Steep drop off
Ash Sharma, Research Director at IMS Research believes the industry may well see rapid price reductions, similar to the start of 2009. For example, he says modules could hit around 1.55 U.S. dollars (USD), which would represent “quite a steep drop off”, while inverter prices could decline by up to 15%. Meanwhile, speaking on behalf of EuPD Research at this year’s 11th Forum Solarpraxis in Berlin, Germany, CEO Markus Hoehner said that if internal rates of return (IRRs) are to be kept stable, module prices would have to be reduced by between 13 and 19% next year, depending on the reduction of BOS costs.
For German module brands, this would imply installer purchase prices of between 1.47 and 1.57 euros per watt peak (2010: 1.80 €/Wp), while Chinese Tier 1 brands would be purchased at between 1.35 and 1.44 €/Wp (2010: 1.66 €/Wp). Hoehner explained that if prices don’t decrease then IRRs will be very unattractive. “A stable system price would drive down IRRs significantly across all segments. For a five kilowatt-peak roof system, the current IRR of 6.75% would drop to 4.64% in 2011, and as low as 1.44% in 2012. At this point, investing in a PV system would become unprofitable and the market would collapse.”
He added that a system price reduction of 15% would lead to higher IRRs in 2011 (7.12%), as the price decrease would exceed the actual FIT degression. In comparison, a drop in system prices of 10% year on year would lead to IRRs of 6.22% in 2011 and 4.28% in 2012. “The consequences would mean stable demand in 2011, but in 2012, IRRs would be too low for investors, but enough for ‘regular’ residential customers.”
Germany still on top?
With the changes that have taken place over the last year, which markets are expected to lead in terms of installed capacity? “A lot depends on what happens in Germany – whether that remains attractive,” Sharma tells pv magazine. He says there are two scenarios for Germany in 2011: firstly, the country could completely slow down, and install between 5 and 6 GW – something Günther Cramer, President of the German Solar Industry Association, said would be positive during his presentation at the Forum Solarpraxis; or secondly, “if a cap starts to be seriously discussed by the government (…) it could have another explosive year.” Hoehner, for instance, believes it could reach as high as 9.8 GW.
And, as he further pointed out, in order to compensate for the potential downsizing of the German market, and to ensure a stable global market volume in 2012, other markets would need to grow at rates of 100% or more, between now and then, in order to overtake Germany. This could prove challenging however, when such limiting factors as market caps (e.g. Spain, and Austria), bureaucratic factors and de facto caps (e.g. Italy and France), and strict local content requirements (e.g. Japan and Canada), have thus far “hindered stronger growth”.
According to Fawer, 8 new markets will emerge in 2011, which will make up at least 500 megawatts (MW) a year in installations: Italy, France, Spain, the U.S., Canada, China, India and Japan. Sharma expanded by saying the industry will start to diversify, with lots of the smaller markets becoming more important. For example, he believes the U.K., while it is “no Germany”, will install around 300 MW next year, thus helping to turn it into a “sizeable and stable” market. Thailand, which is due to connect its 44 MW PV ground-mounted system to the grid late next year, and Israel, which has recently renewed its small-scale FIT, are also expected to do well in 2011.
In terms of country attractiveness – defined as financial attractiveness, market maturity, growth potential and effective administration processes – Bank Sarasin’s latest research report, ‘Solar industry – Entering new dimensions’, says Italy, Germany and Japan will be the most attractive markets next year for small-scale rooftop PV systems up to 3 kilowatts in size. Canada, France and Spain follow in third, fourth and fifth place respectively. “Although Germany and Japan no longer have the high rates of return, their high level of market maturity and ambitious political targets account for their high rankings,” states the report. Large-scale PV systems, on the other hand, are most attractive in Italy, Germany and South Africa, with Belgium, Greece and Canada following just behind.
What about Eastern Europe? If the news reports are anything to go by, there are many who see this region as having big growth potential. “There’s lots of movement going on in places like Bulgaria and Romania, but its not that safe,” says Fawer. “There are talks about feed-in tariffs, also in Turkey, but it’s not set yet. Bulgaria, for instance, has a FIT, but it’s readjusted every year and you don’t know what’s going on. You have the additional risk of the exchange rate,” he adds.
In terms of production capacities, Bank Sarasin states they have been rising steadily over the past few years. Consequently, it estimates annual polysilicon production for both the solar and semiconductor industry will reach 180,000 tons in 2011, from the 145,000 tons seen in 2010, with the bulk coming from new Chinese market entrants, such as GCL Poly, and established manufacturers, like Hemlock, MEMC, Mitsubishi Materials, REC and Wacker Chemie.
In comparison, crystalline silicon wafer production capacity is projected to increase to 38 GW in 2011, from an expected 23 GW in 2010. Due to strong expansion rates in wafer production capacity, Bank Sarasin says it anticipates wafer prices to drop by around 20% in both 2011 and 2012, to reach USD 0.8 and USD 0.65 per watt respectively.
PV cells, on the other hand, saw strong growth in 2010, with global production reaching 12.3 GW peak; a 52% increase on the previous year. China, Malaysia and Taiwan were said to have enjoyed the biggest year-on-year growth, with their combined global market share having reached 66%. While Japan accounted for half of the world’s solar cell production 5 years ago, its market share has shrunk to just 12.5%. Germany, however, increased production by 22%. The Philippines, South Korea and India were all cited as up-and-coming cell production countries. In 2011, global production is projected to reach over 20 GW.
As mentioned, price pressure for modules is expected to rise significantly in the first quarter of next year. “The shift in production quotas among regions,” says Bank Sarasin’s report, “reflects the cost trap that companies currently face. Established European producers suffered heavy losses in 2009 and could not keep pace with the aggressive pricing policy and cost structure of Chinese manufacturers.” As a result, it believes non-silicon based costs are becoming increasingly important. It explained, “In the case of polysilicon, procurement prices are now more or less the same for both European and Chinese cell and module producers. When it comes to non-silicon-based costs, however, the top company in China can produce a module at a cost of USD 0.90 per watt, compared with around USD 1.50 per watt for European companies. This difference is split into 0.35 USD/watt material and energy-related costs, and 0.25 USD/watt labor costs.”
However, the report questions whether these Chinese advantages are permanent in nature, because the currently seen subsidies may not be in place indefinitely and labor costs are coming under increasing pressure. As Sarasin says, and Suntech confirms, despite the belief that human labor is cheap in China, the situation is changing and it is getting “tough” to find staff. “Many companies like ourselves couldn’t get enough labor here,” stated Shi Zhengrong, Suntech’s Founder and CEO.
Another factor is the exchange rate. Bank Sarasin points out the weakness of the euro currently puts European production locations in a more favorable position than China. As a result, Fawer tells pv magazine most of the big module manufactures will start to set up production bases in locations other than China. “It makes more and more sense to be close to your customers,” he says. “When we look at the really big players – and I guess this will be a kind of consolidation phase in the next coming two years – size matters in terms of mass production, so we believe they [the big manufacturers] are going to install production bases in at least two to three markets, i.e. Asia, Europe and the U.S.”
This view is backed up by several major companies, including: Sharp, whose philosophy, “local production for local consumption,” believes localized production bases allows it to avoid exchange rate disadvantages, and enjoy reduced transport routes and costs; SolarWorld, which has production sites in the U.S. and Korea; REC, which has just opened up an integrated manufacturing facility in Singapore; and Suntech, which in October established its first U.S. module manufacturing facility in Arizona.
IMS Research however, currently feels there is a continued shift towards Asia. Sharma says, “There are certain parts of the supply chain which will be located near the manufacturer, but in terms of modules it’s still going to be much cheaper to manufacture in Asia and have a global logistics network. So we see production going more and more towards Asia. China will be the main hub, although there is manufacturing in other regions.”
Who’s leading the module pack?
There have been a number of announcements throughout 2010 pertaining to capacity ramp ups, company mergers and takeovers, and increased investment. So who is going to be leading the module manufacturer pack, and are there any newcomers on the scene? According to Fawer, Yingli, Suntech and Trina Solar will continue to dominate, followed by First Solar. SunPower, although not in the same league, and REC, which has “really ramped up” this year, will also be important players, while SolarWorld will continue to do well as a fully integrated manufacturer. Sharma additionally believes companies with large pipelines will be particularly well placed. “If you look at most of the major module suppliers, they’ve all ramped production this year or are planning to do so next year, so I think those large suppliers are likely to capture a greater share of the market at the expense of some of the smaller tier two, tier three suppliers,” he explains. Looking at the capacity expansion announcements this year, companies like Solarfun, ReneSola, LDK, JA Solar and China Sunergy will also be major players to watch out for.
More significantly though, it seems as if thin film cell and module manufacturers are set to make quite an impact on the market in 2011. Bank Sarasin reports that thin film PV (TFPV) technologies, as a proportion of total solar cell output, rose by five percentage points in 2009 to 18%, or 2,300 MW. In 2010, it expects production volume to reach around 3,400 MW, while the latest estimates for 2011 stand at an impressive 5,325 MW. “Last year,” says Fawer, “we were rather pessimistic and took our figures down in terms of how thin films will gain market share, and we were proved right with the pull out of Applied Materials, and with Oerlikon Solar having problems. Nevertheless, we are more optimistic now for a few companies, especially for First Solar, which is really at the top for module producers overall.”
However, he states that new companies like Sharp, which works on amorphous silicon technology, will really ramp up, as will companies like Japan-based Kaneka and Chinese company Trony Solar. “There are a few that really seem to make the move now from pilot production to commercial production lines and it seems like they get the finance right.” And, despite worries that cadmium telluride would be banned under the European restriction of hazardous substances (RoHS) directive, companies like First Solar can now breathe easier, after the decision was made in November not to prohibit its usage.
In order for thin film to compete successfully though, Bank Sarasin identifies 5 factors, which must be present: (i) a low cost structure; (ii) low investment costs; (iii) low BOS costs; (iv) a low technology risk; and (v) new application areas.
Asked to sum up his impressions of what next year will bring, Fawer tells pv magazine, “The positive thing about the coming year is really the growing diversity in terms of countries that see a huge installation of PV systems.” However, he warns that the industry must not to be too dependent on individual changes in feed-in tariffs in single countries, in order to promote more stable growth. As always though, in such a constantly evolving industry, it is often the case of watching and waiting to see what the coming year will bring. While the analysts can predict many factors, there is always something lurking out of sight, ready to fundamentally change the industry’s direction or add some fire to the mix. Just look at Spain in 2008; just look at the Czech Republic now.