Expect manufacturer revenues for 2016 and throughout 2017 to have little relationship to current prices as manufacturers continue selling tomorrow’s production today. Moreover, the ability for manufacturers to raise prices in the near, medium and long term has likely been permanently eroded. For most manufacturers current prices do not reflect costs and as margin expectations – that is, the gross margin necessary to run a thriving business – are little understood by analysts, observers, academics, researchers and even industry participants there is little possibility that the dire consequences of continued underpricing will be addressed.
The global solar PV industry is a bastion of price manipulation with significant government support in some countries and punitive tariffs on imports in others. As neither the governments providing support nor the countries imposing tariffs understand the intricacies of the market for solar panels and other components the result is an artificial marketplace where outcomes are never as intended or expected.
In markets where import tariffs have been imposed in order to offer support for domestic manufacturing recovery, no recovery was forthcoming and the tariffs had little effect on the price paid for modules.
Governments offering significant support for manufacturers find that the robust manufacturing sector that relies on the support cannot raise prices and jobs are only stable while support continues.
For example, though manufacturers of cells and modules based in China control the market, the expectation of lower prices on the part of buyer’s means that they cannot exercise their market control – that is, they cannot raise prices. Thus, the unintended consequence of market control for manufacturers based in China is the opposite of what is theoretically expected – the ability to control the price function when market control has been established.
In their 2012 paper, Market Failure and Government Failure, William Keech and Michael Munger, Duke University, and Carl Simon, University of Michigan wrote “Market failure is the standard justification for government action in neoclassical welfare economics.” The two assumptions discussed by the authors in their paper are:
- The presumption that market processes are the default for allocating scarce resources, essentially, perfect competition, where price information will direct self-interested market participates to correct mistakes or Pareto dominated allocations, in resource use.
- When competition is imperfect, the consequent market failures can and should be corrected by government. This claim amounts to an assumption that political actors have both appropriate incentives and accurate information so that Pareto optimal allocations of resources can be achieved.
Welfare economics is the theory that individuals make rational buying and selling decisions. Pareto dominated allocations refer to Vilfredo Pareto’s 80/20 rule that 20% of the effort is responsible for 80% of the resulting output.
Concerning the PV industry a much longer discussion could be had as to whether rational decision making is possible in a market where the price of inputs and the cost of manufacturing are manipulated by governments.
On the supply side sellers of modules cannot raise prices and increase margins.
On the demand side buyers of modules, though enjoying low prices, lack control over quality and do not realize that the negotiating power is also out of their control.
The buyers of electricity from the utility grid, aka the end users, have only illusory control over the price they pay for electricity as the price of this commodity and necessity is set by utilities and governments. When comparing the value of owning or leasing a solar system the point of comparison is government controlled and not an example of free market value (price) setting.
Meanwhile, market observers assuming logical supply and demand forces to be the primary factors in establishing incorrectly describe the market thus exacerbating the problem.
Assumption 2 is of particular interest when observing government intervention in the supply/demand PV industry behavior in that political actors are acting on insufficient and often incorrect information and so are unable to correct imbalances in the market. Simply put, in decision making if the input is a fallacy the output will be a fallacy and the result a mess.
Price pressure to fulfill the low price expectations of the market has pushed PV manufacturers into a situation where margin must be preserved at any cost including quality. One way in which manufacturers preserve margin is to shift manufacturing to developing countries where jobs are needed, wages and other costs are low and regulations are generous to the manufacturer – that is, regulations, quality control, and worker and community protections are far more lax. One example of poor manufacturer behavior is the 2011 contamination of a river in Zhejiang province, China, by PV cell and module manufacturer Jinko Solar.
In the beginning workers are thrilled at the increase in available jobs. Overtime, safety, wages and quality of life become important to workers and they begin to demand change. Wages increase and manufacturers look for new ways to save money.
One way to save money is to source lower cost components such as backsheets, glass, EVA, aluminum and junction boxes among other components and raw materials. Quality problems arising from the sourcing of low cost inputs – and all manufacturers do this – are often not discovered in testing, not apparent visually and are discovered in the field thus increasing O&M costs for developers and installers.
When manufacturing shifts to low cost countries buyers benefit from lower prices but hidden behind those lower prices are lower quality, increased pollution, low wages and unsafe working conditions for labors. As production shifts to low cost countries manufacturing slows in areas with higher costs, jobs are lost and the country shouldering the job losses also shoulders higher medical and other costs for the unemployed.
The unintended costs of government support and punitive measures and ongoing low margin manufacturing are eventually felt by all industry participants. These costs are the slippery slope down which the global solar industry has been sliding for decades.