PV Price Shifts and Painful Consolidation

November 2011

Summary

2011 presented photovoltaic (PV) companies with some of the toughest market challenges to date. Subsidy cuts, freefalling prices, weak demand, overcapacities, financial uncertainty, insolvencies: these factors, and many more, have conspired to test companies’ mettle. However, what has led the industry to this situation, and what is in store for 2012? According to the analysts, intensified consolidation and falling component prices; and a situation where only the vertically integrated will survive.

Body

It can be argued that Chinese PV manufacturers are egging module price erosion on. And it may be said that the country is competing unfairly in the global solar arena. However, many in the industry, including the analysts, disagree. As those at global investment bank Jefferies wrote at the end of the 12th Forum Solarpraxis, “There were accusations of ‘dumping’ and ‘unfair competition’ against Chinese companies by German executives. Our opinion is different. We believe without Chinese competition, we would still have prices of €3 per watt. Our view is that much of the German solar industry have failed to understand the competitive forces within solar and as a result have wrongly positioned themselves.”

Module prices

In a new report issued by Bank Sarasin, titled ‘Solar industry: Survival of the fittest in a fiercely competitive marketplace’, it is said that crystalline module prices have fallen by an average of 25% for European and Japanese manufacturers, and 29% for Chinese manufacturers over the past 3 years. For thin film modules, the average price drop has been 24%.

The module price saga is said to have been triggered by the collapse of the Spanish solar market in 2009. At this time, state Bank Sarasin’s analysts, crystalline prices fells by 35% for European and Japanese modules, and 45% for Chinese modules.

The 2009 price drop, as one would expect, drove demand upwards. This consequently led to the boom year of 2010, where installed PV capacity grew by 127%. It also, however, significantly slowed further crystalline module price reductions, so much so that last year saw module prices falling by just 15% for European and Japanese manufacturers, and 5% for Chinese manufacturers.

Enter 2011 and the feed-in tariff (FIT) uncertainty (among other factors, which are discussed further down) in such countries as Italy, the Czech Republic, Germany, France, Slovakia, and cue freefalling module prices. As Bank Sarasin’s report states, these regulatory changes helped to reduce the growth of the PV market to around 3%. As such, says the bank, in the first 3 quarters of 2011, crystalline module prices fell by 22% in Europe and Japan, and by 30% in China. It adds that module prices appear to have dropped by another 15% in the fourth quarter of 2011, on the back of surplus capacities and further FIT cuts.

In terms of thin film, Jefferies adds that by mid-2011, prices of crystalline modules from China equalled thin film module prices, thus leading to thin film technologies losing a “significant advantage” over crystalline technologies.

Abnormal demand elasticity

What has been most curious about 2011 is that falling module prices have not triggered higher demand for installations. In fact, quite the opposite has occurred, with the market having grown relatively sluggishly. According to Bank Sarasin, elasticity of demand is functioning abnormally for 2 specific reasons.

Firstly, it says project financing is much more costly than it was 2 years ago; and secondly, buyers appear to be waiting for further price drops. As evidence, the analysts cite pvXchange’s spot market prices for September and October 2011. “In September,” states the report, “German crystalline modules were being offered on the spot market of ‘pvXchange’ for 1.33 EUR/W and Chinese modules for 0.98 EUR/W. Prices for amorphous thin film modules were around 0.77 EUR/W. At the end of October German modules were available for 1.15 to 1.20 EUR/W, and Chinese modules for 0.9 EUR/W.”

Shifting cost-cutting focus

The module price drops may well be dominating industry discussion at present. However, Bank Sarasin believes the topic will lose relevance over the next 2 years, as modules begin to contribute less to total PV system costs. Currently, it says, modules account for between 50 to 60% of a total system. However, this is set to decrease to between 35 and 45%; the key will then be to focus cost reduction efforts on inverters, balance of system components and installation.

This does not mean falling module prices are redundant. As Bank Sarasin writes, the spiralling prices have caused “painful consolidation” this year, turned up the heat for more mergers over the coming year, and forced companies to evaluate their survival probabilities.

Are you a survivor?

It may be hard to swallow, but as Bank Sarasin matter of factly states: firstly, consolidation will have an ultimately positive impact on the global solar industry, despite the fact some companies are “bound to fail”; and secondly, it is inevitable given the current discrepancy between module capacities (estimated at around 50 gigawatts (GW) by year-end) and market demand (sales worth around 21 GW are predicted by year-end). Furthermore, it says that roughly a third of the predicted demand for modules – between 18 and 22 GW – is “supposedly locked into inventories and distribution channels.”

The prosperity witnessed in 2010 also, says Bank Sarasin, allowed some companies, small in size and with “unfavorable” cost structures, to survive. However, a myriad of factors came together in 2011, which started the consolidation, and insolvency, ball rolling.

For example, the volatility of solar share prices has been demonstrated this year, after they spiked post Fukushima, in March, and then nosedived again in April. This, believes Bank Sarasin, points to the dependence solar has on both political and public sentiment, and the imbalance between capacities and demand.

And while many countries like Germany and Italy revised their nuclear plans in the face of Japan’s disaster, support was not transferred to solar, as many had expected. Instead subsidy uncertainties and a renewed economic crisis reared their ugly heads, making it increasingly difficult for companies to obtain financing for their PV plans.

M&A activity

According to Bloomberg, the first 8 months of 2011 saw solar merger and acquisition (M&A) activity hit US$3.3 billion, which represents a 33% increase on the whole of 2010. It was also remarked that the speed of takeovers was extremely fast. Some of the most noteworthy transactions this year to date have included: Total’s 60% stake in SunPower; and Meyer Burger’s purchase of the majority of Roth & Rau’s shares.

In addition to M&A activity, 2011 has been blighted with insolvency announcements – Evergreen Solar, SpectraWatt and Solyndra, for example – and production cutbacks and redundancies, including at Solon, SolarWorld, PV Crystalox, Day4 Energy, SunLink, Conergy and REC.

“More companies are bound to fail in view of the enormous surplus capacities,” says Bank Sarasin. “This is not particularly surprising given a solar value chain that includes roughly 250 wafer producers, just as many cell manufacturers, and more than 400 module producers. As demand continues to fall, the main victims will be small and uncompetitive companies which are inadequately financed.”

Jefferies is also of the opinion that many companies face the axe in the next year. It further indicates that the industry can expect to see acquisitions from such electronic giants as Siemens, Samsung and LG. “However,” write the analysts, “we do note the difficulties in entering the solar industry, having already seen Bosch make two over-priced acquisitions (Ersol and aleo) as well as Siemens’ recent write-down ($276m) on its 2009 acquisition ($418m) of Solel Solar Systems.”

They add that companies like Siemens are not likely to “make the mistake again of betting on technology”, but will rather focus their efforts on downstream acquisitions, for example, with development companies, engineering, procurement and construction contractors, and inverter manufacturers, like Power One, SMA Technology, Phoenix Solar and Centrosolar.

Realigning long-term strategies

Faced with consolidation, solar companies must rethink their business models and strategically plan for the future. As Bank Sarasin says, those that cannot compete on cost will either face insolvency or acquisition. Furthermore, capacities need to be “drastically” reduced.

The bank believes many CEO’s will be unable to cope with the challenge of rethinking their long-term business strategies. It offers the advice that a strong management team is essential and says that the following questions will be pertinent to correctly answer:

1. “How does supply and demand develop along the value chain from raw materials procurement through to the finished modules?
2. What degree of vertical integration produces the right margin mix to ensure that a company can survive in the fiercely competitive solar energy market?
3. How is the company positioned internationally in terms of its production and distribution?
4. How strong is the company’s ability to grow, so that it does not lose market share?
5. How environmentally friendly and socially responsible is the company’s own production and also that of its suppliers?”

As published earlier in the week, China’s Suntech Power, Trina Solar and Yingli Solar are expected to emerge triumphant from the market shakeout, as are U.S.-based First Solar and SunPower, and Germany’s SolarWorld. Their strength, says Bank Sarasin lies in the “superiority” of their vertically integrated business models. It adds that companies with a solid balance sheet are likely to be favoured by banks. “Here, large Western and low-cost Chinese companies – especially those in close contact with state-controlled lenders – have an advantage,” it explains.

Sustainability is also playing an increasingly crucial role. “Systems for using solar energy are supported and promoted because they provide a substitute for fossil and nuclear fuels, thereby helping climate protection. But this is only the case if they really have an acceptable life cycle analysis,” concludes the bank.

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Image Credit: Thomas Beetz Photography

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