Archives for posts with tag: PV

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In January, SunPower announced a $220-million loan from Bank of America Merrill Lynch to support expansion of its solar lease program.  In December, Bank of America Merrill Lynch was the lead, and one of six lenders, involved in increasing SolarCity’s credit facility to $200-million.  

Residential solar leases are increasingly looking like a trend and not a fad.  Why?  This model enables homeowners to install PV systems without the high upfront cost of installation thus emulating the traditional utility model of renting electricity.  For solar businesses committed to this particular model the initial hardware investment should be more than offset by the eventual high margins. For investors, there are those eventual high margins to look forward to ensuring (maybe) either a profitable exit or repayment at a profit. 

Though this model looks as if it is a winner for both parties (lessor and lessee) it is too early to make a judgment in this regard.  In the future, lessees may not appreciate the escalation charge that is a part of all the lease structure. Also, in the future the difference between financing a PV system and leasing a PV system may make cost of leasing (as time goes on) seem less and less like a good deal.  

For businesses engaged in the solar lease model, it is too early to assess the costs of unimaginable outcomes such as another US housing crash – foreclosures and abandoned homes and solar leases, or, continued strong growth in the housing market that encourages homeowners to trade up (an owned PV system may be an asset, a leased one may not be an asset). Legislated and thus enforced standardization of escalation charges (among other things) could take a hunk out of margins.  New connection charges from utilities could annoy lessees.  Direct competition from utilities with their own lease models could well make this model less attractive (hint, partner with local utilities now before they figure out how to capitalize on this potential revenue stream). 

Finally, remember that everything changes – everything – and sometimes the changes are swift. The example in this regard is the feed in tariff model in Europe – back in the day (and this day is relatively recent) practically everyone thought that this was the incentive model of the future and investors believed FiT systems provided a safe and reliable investment. Now every investment in a FiT installation is one retroactive change away from going bust.

About six/seven years ago crystalline was dead. As low pricing (below cost) forced manufacturers into failure, thin films were dead.  Both announcements were too early and too dramatic. 

A few years ago the market in Europe was >80% of global demand — in 2013, amid continuing changes to FiTs (some retroactive) the market in Europe was ~20% of global demand.  Lesson: Diversify your market strategy. 

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Blast from the Past: The Global Solar Industry in 1994

Look how far we’ve come …

1994 global shipments: 61-MWp

Shipment leaders:

Siemens Solar, 21% share 12.6-MWp in shipments

Solarex, 13% share, 8.1-MWp in shipments

BP Solar, 10% share, 6-MWp in shipments

Kyocera, 7% share, 5.3-MWp in shipments

Sanyo, 6% share, 3.8-MWp in shipments

Manufacturer Revenues in 1994: $445-million

US: 40% share of global shipments

ROW (Rest of the World): 15% share of global shipments

Europe: 24% share of global shipments

Japan: 21% share of global shipments

Crystalline:  86% share of global shipments

Thin Films: 14% share of global shipments

Cumulative shipments all years including 1994: 444.9-MWp

Cell (including thin film) capacity in 1994:  99-MWp, capacity utilization 62%

Total demand in Latin America: 4-MWp

Total demand in the US: 14-MWp

Total Demand in Canada: 600-kWp

Total Demand in Europe: 15.6-MWp

Total Demand in the Middle East/North Africa: 3.2-MWp

Total Demand in Central and Southern Africa: 3.4-MWp

Total Demand in India: 7.9-MWp

Total Demand in other West Asia Countries (aside from India): 600-kWp

Total Demand in Japan: 5.6-MWp

Total Demand in China: 1-MWp

Total demand in South Korea/Taiwan: 300-kWp

Total demand in Southeast Asia: 1.8-MWp

Total demand in Oceania: 3-MWp

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Traditionally the solar industry has tracked its progress along the learning curve by observing price behavior. 
This methodology has led to premature announcements of success under the headings of grid parity and the PV industry’s version of Moore’s Law. The price function is more complex and as it is market based, assumptions of success in this regard were not only premature, these assumptions led to the unfortunate conclusion that price declines were indicative of true learning. 

Price strategy is the result of various considerations such as, entry pricing (typically aggressive), the availability of substitutes (defensive pricing), inventory (shedding), and premium pricing to name a few.  Aggressive pricing strategies typically count on the ability to make a U-turn at some point to profitable pricing (once competitors are trounced).  The PV industry with its many substitutes (including entrenched conventional energy), the perception of being too expensive and promises of grid parity is a bad choice for an aggressive pricing strategy.  The illusion of success via rapid price declines led governments (the bodies that legislate incentives) to assume that PV was becoming inexpensive enough so that support (subsidies and incentives) could be removed.  A better way to represent PV industry progress is by using costs either instead of prices or along with prices. 

During the period beginning in 2002 and ending in 2012, PV cell/module ASPs declined by compound average 14% while costs declined by compound average 10%.  The 10% decline in costs represents significant progress.  Unfortunately, when the true progress represented by the 10% cost decline is compared with the compound average 14% decline in ASPs, the reason for the current consolidation becomes clear.  Moreover, too low prices cannot be explained away as the result of over capacity.  The solar industry has historically been in an over capacity situation.  Critical among the factors that led to the current state-of-the-industry is a period of aggressive pricing that led the industry down a slippery slope from which it was impossible to make a U-Turn and recover.  Aggressive pricing is not new to the solar industry, but the recent period has had a pernicious effect on it in that a higher degree of progress was assumed and expectations for continued significant decreases in price were set.

Current low prices for polysilicon are giving c-Si PV cell/module manufactures a bit of a break currently, but true recovery will take time and will require prices to hover in holding pattern as costs continue to decline.  Since polysilicon prices will not stay low forever, strategies with this expectation are bound to fail eventually and perhaps spectacularly.  Currently, too low prices are threatening participants all along the PV value chain as well as participants in the CSP and CPV industries.

 The goal should be a situation where costs decrease at a faster rate than prices leaving enough margin for a healthy industry to continue progressing. 

 

An object lesson is a concrete example of a negative outcome and though sometimes overused, is almost always worth paying attention to.

When governments tinker with markets the end result depends on more than the specific market, it depends on the level of support provided to competitors and other actors important to the industry as well as the economic climate and the approval or disapproval of potential customers.  When support is added the level of generosity of this support can accelerate the market to an unsupportable level and invite actors whose self-interest is counter that of the market.  When support is removed, be it abruptly or slowly, this removal can accelerate the market abruptly, leading eventually to a crash.  When controlling, retroactive measures are put in place, stability is almost never restored and participants are punished.  When punitive measures such as price setting and taxes are imposed it can complete the destruction of the market’s fragile ecosystem. 

The most telling comment that can be made about the market in Europe in 2013 is to recall the region’s historical demand shares:  In 2004, Europe had a 45% share of global demand.  BY 2006 Europe’s share of global demand had increased to 55%.  In 2007, Europe’s share of demand was 71%, in 2009 83% and in 2013 Europe’s expected share of the global market for photovoltaic installations is 23%.

 Though the global PV industry is healthier with a diversified portfolio of markets, none of these markets are as easy to traverse as the early European Feed in Tariff markets, nor are these new markets necessarily profitable.  Rapid and often retroactive changes to feed in tariff programs in Europe have left installers, distributors and other PV industry participants in Europe unprepared and struggling.  The current price setting agreement between the EU and China has not righted the situation for Europe’s cell and module manufacturers, and it has strained the resources of demand side participants.

During the 2004 through 2011 time frame accelerated growth into this region was driven by the feed in tariff incentive.  Originally, this incentive, which was pioneered by Germany, was a transparent mechanism with efficient rules regarding interconnection and easy permitting. The German FiT was an orderly market instrument.  Unfortunately, as the incentive spread among other European countries transparency and efficiency gave way to overly generous tariffs that encouraged speculation and led to over stimulated markets, broken rules, poorly installed systems and the development and deployment of less than robust technology. To be blunt, the generous FiT landscape did not bring out the best in new entrants, nor did it often stimulate the best behavior in long time participants.

 In the period before the global recession banks and other investors did not require performance guarantees with the result, again of poorly designed systems and poorly assembled module product.  Countries in Europe with FiTs underwent abrupt changes to the rules and the tariff rates.  These abrupt changes shook investor confidence and drove down IRRs, specifically, with retroactive changes returns that were assumed to be stable abruptly became unstable.  For example, a retroactive tax established in the Czech Republic led to a market crash with no expectations for recovery, while changes to the amount of electricity that would be reimbursed in Spain (as well as other countries) along with the abrupt cessation of that country’s incentive in 2011 has shown clearly that the feed in tariff is an unreliable instrument – as are all artificial market supports. 

The global PV (solar in general) industry competes against heavily subsidized conventional energy that is delivered in some regions at the cost (or below the cost) of production.  The supports that conventional energy enjoys are deep, historic and multi-faceted it.  The supports that solar has received were temporary.  These supports when applied to an industry with so many constraints and a well-supported competitor did nothing to encourage the industry to prepare for the time when a low incentive environment would return. Nor did punitive measures, particularly those applied after the fact, heal the wounds of government interference.

The fact is that the global health of the climate and the health of current and future generations require a switch to renewables and away from polluting sources of energy. At the very least a level playing field – removing supports for conventional energy (including fracking) would let the participants battle it out somewhere in the vicinity of fairly.

 

 Many a demand/supply PV industry participant has met their Waterloo/Alamo – choose your dramatic historical analogy – on the issue of pricing strategy.  During this ten year period ASPs declined by a compound annual rate of -12%, with demand increasing by CAGR of 48%.  Compound annual growth and decline rates smooth over the natural bumpiness in a market; for example, in 2006 over 2005, ASPs increased by 12% and increased by 3% in 2007 over 2006 before beginning several years of often dramatic decreases.  The price/demand crossover point was ~2009, the equilibrium price for modules (theoretically the point at which seller and buyer maximize value) would have been ~$1.50 — the market price was about a nickel lower than the assumed equilibrium price.  Of course, there is theory, and there is the real market.  The real market will almost never behave according to theory, thus spawning many new theories.

 Aggressive pricing for market share has come and gone in the PV industry since its inception.  Traditionally, buyers of PV cells and modules have had the most control over the price function. This is because sales of PV systems, particularly into the grid connected application, have relied close to 100% on government and utility demonstration projects and on incentives – that is, demand was ‘push’ not ‘pull’ market. 

During the early days of the feed in tariff in Europe (which coincided with a shortage of polysilicon) demand pull was artificially created by the profitable FiT instrument.  Manufacturers of cells and modules were then able to charge a premium.  Unfortunately, this also coincided with a disastrous period of aggressive pricing as well as capacity building.  Currently, with buyer expectations set as to price (meaning low prices for modules and for systems), the best the industry can hope for on the cell and module side of the supply/demand equation, is stability – that is, for prices to settle and stay flat until cost improvements can catch up.

Supply: One day you’re on top and One day you are not

 As any PV manufacturer of cells and modules knows, even costs are not 100% controllable, so, the cost curve is also bumpy though less bumpy than the price curve.  Costs for inputs, including consumables, increase and decrease given market dynamics; and currency adjustments for global buyers and sellers can be, well, difficult.

One method of lowering costs that has a historical (though not necessarily successful) basis, is to attempt to leapfrog over the traditional time (years and years and years) from R&D through pilot scale to commercial production by developing champion (or lab) cell technology on commercial manufacturing lines.  Typically manufacturers discover that instant gratification in PV manufacturing is almost always (leaving room for miracles) unachievable.  However, cost reduction is a vital and necessary manufacturing function – in PV, higher efficiency and lower cost are twin goals. Quality is a goal that should never be shortchanged for demand and supply side participants.

 As with the top ten lists of manufacturers, overtime, regionals shifts are common.  The US was the shipment leader in 1997, Japan the shipment leader from 1999 through 2006 and Europe the shipment leader in 2007 and 2008.  Manufacturers in China have dominated shipments since 2009.  It is worth noting that despite regional dominance, PV manufacturers have traditionally battled constrained margins.  Currently margins for c-Si manufacturers are less constrained because raw material prices (polysilicon) are low — this is not a miraculous recovery, it is simply the availability of lower cost raw materials.

Demand, Off Grid, Grid Connected and Regional shifts

  It has not been easy for the demand side of the PV industry to maintain healthy margins or regional dominance.   Europe dominated demand from 2004 through 2012. Despite dominating demand, Europe’s manufacturers only enjoyed two years of a controlling market share.

A significant demand side presence (installers, system integrators, distributors) grew up in Europe along with the FiT-driven demand.  At one point Europe accounted for over 80% of all global demand.  As the FiTs have declined, disappeared and changed (often retroactively), both demand and supply side participant have been forced to seek new markets for PV modules and systems.  These new markets are less profitable, nor are they easy to penetrate.

 Currently, and likely for the long term, PPA, tender and tariff rates are set by bid. Bidding in a vehicle that, other than art auctions and the like, tends to hold prices and margins down (low bidders may lose, but so will high bidders and the mid-range is not always the winner). PV industry participants had several years to develop new markets, however, a tantalizingly (albeit briefly) profitable FiT market was difficult to ignore and it was hard for many to justify expending effort on developing emerging markets

And now …

The PV industry has successfully commoditized its product and is now maturing business models that will, hopefully, allow for more reasonable and sustainable margins.  The lease model is one that, in its various iterations, is being pursued by solar firms as well as investors.  Third party ownership, however, is unlikely to be a panacea for everything that ails – and has historically ailed – the PV industry.  Vertical integration (typically, manufacturing owning a system business) will also not ameliorate decades worth of strategic missteps.  Neither vertical integration nor leasing is new to solar. These strategic tools have been in the industry toolbox for decades.  So has educating the system buyer as to the true value of independence from utility rate volatility.  Now that margin recovery APPEARS (note that this is in caps) to be returning, it’s time for a long term strategy to refocus and plan for the future. 

 

 

             

A good argument can be made that sophisticated investors should have been more wary about FiT returns and built into models the potential of financially punishing retroactive changes to the rules.  It is likely that most investor groups did assume the possibility of these outcomes but unfortunately ranked changes to FiT programs so low (on a percentage basis) that the potential of a negative financial outcome did not weigh enough to effect the go/no go decision making model. This would indicate that the high potential of confirmation bias (the subconscious need to seek supporting evidence) was ignored.