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Solar Market Briefing

Posted November 14, 2008
By: Brad Meikle

The Solar industry is right now in total disarray. It is unwinding the bubble caused by Spain exceeding expectations by more than 4x in the past 12 months. In Q2 of 2008 close to 700MW of solar modules were shipped into Spain, reaching more than 50% of total demand on a global basis for Q2. Today, demand from Spain is down more than 80% and there is roughly 100-200MW of product on the ground waiting to be activated that missed the September 28th cutoff date. The main problem was that the Spanish feed-in tariff (FIT) did not differentiate between the FIT for ground-mounted vs roof-mounted systems. German FIT’s have always specified that the FIT for ground-mounted systems were lower because the cost of installation, tooling and housing is significantly higher for a roof-mounted system. This very generous Spanish FIT led to exceptionally high project IRR’s, which eventually led to a feeding frenzy to procure modules before the FIT cutoff date on September 28th. The result of this was that module prices for Spain rose significantly. Module prices in Germany were 2.80-3.00 Euros per watt in the first half of 2008 but the same module sold into Spain could be sold for 3.10-3.50 Euros. As a result, the majority of module makers increased their shipments to Spain in order to maximize profits. Silicon prices rose significantly as a result of the booming market. Spain started to accelerate dramatically in Q2 of 2007 and at the time silicon pricing was just $230. Just six months later the price was more than $400. Silicon was in extreme shortage and the module/cell manufacturers that had not locked in 10-year contracts lost significant market share. Silicon pricing has recently started to show signs of severe destabilization, along with the rest of the supply chain (cells & modules). There is now ample silicon, cell and module supply available in the market. Based on proprietary models, Renewable Analytics (RA) estimates that silicon pricing will be $250 or lower by the end of the first quarter of 2009.

The market has changed dramatically since PV-SEC in early September. At that time modules were still in short supply because the Germany market demand was quite strong due to seasonality and also because they had not gotten their allocated production in the first half of the year due to producers redirecting it to the Spanish market. In mid-September RA’s proprietary research started to see signs that the market was becoming more balanced and PV modules were not quite as difficult to obtain.

October was a unique month in history for the financial markets as well as the solar industry. The global financial crisis that led to the fall of financial titans such as AIG, Fannie Mae, Freddie Mac, and Lehman Brothers also had an impact on the capital available to finance solar projects. The financial crisis was not the cause of the disruption in solar pricing in and of itself, as the solar industry was already heading for a period of sustained oversupply and massive price correction.

Renewable Analytics estimates that in 2009 global solar PV demand will grow by 38%, however supply is planned to grow at more than 60%. For the last six quarters the industry has operated on the basis of an inherent assumption that demand will always meet whatever supply is available. This is never the case in a rapidly growing industry with massive capacity constraints.

Standardized product industries are cyclical. A boom period begins when pricing falls to a point where market acceptance is high (or also due to a generous FIT) and this drives a period of strong demand, which drives up product pricing. The boom period comes to an end when pricing gets to a level that is too high to support incremental demand, or when a particularly influential FIT expires. Typically what also corresponds with the peak of the market is record supply announcements without regard for whether the market could support so much new supply. This was true in all respects in Q2 of 2008.

What typically follows is the peak is the beginning of a downcycle where pricing corrects to a level that triggers new demand. In the early stages of the correction demand drops off sharply as producers realize that pricing is going down and inventory is cut to minimal levels. This is exactly what has started to happen last month. Module pricing in the spot market is at or below contract pricing and at RA we believe that in Q1 of 2009 pricing will correct more significantly. The reason for this is that Q1 09 demand will fall globally by at least 15% while supply grows by 15%.

On November 12th JA Solar announced their earnings and indicated that Q4 revenues would be 50% below prior expectations, with implied pricing down almost 30% vs the prior quarter. For the industry this is the first blatantly clear sign that the inventory correction has begun. Downturns typically manifest themselves more rapidly than boom periods, with the magnitude of the correction directly correlated to the duration of the prior boom period.

Clearly the long-term objective for the solar industry is to reach grid parity and the direction of pricing in 2008 has not helped in this regard. Pricing has to fall by 50-75% in order to reach grid prices. The good news is that pricing is going to fall rapidly between now and April of 2009. The bad news is that this will be severely disruptive for the margins of many companies in the industry.

The solar supply chain is one in which the further upstream you go, the fewer players there are. Every company has to commit more highly to their suppliers than their customers will commit to them. This is certainly the key issue that companies will have to manage actively in order to survive the downturns.

A key part of this process is having market intelligence that is accurate, objective, anticipatory and thorough, which is why Renewable Analytics was formed in June of 2008. The founders felt there was a lack of research that could be relied on for capacity planning purposes. Renewable analytics conducts a monthly Dealer Survey, Silicon Survey and does thorough analysis in order to accurately predict supply, demand and most importantly – pricing.

Certainly the extremely rapid growth of the solar industry makes it difficult to predict, but with thorough objective research its very feasible. The solar industry will grow over the next twenty years to become a major source of clean sustainable energy for the world, but it will do so in a cyclical manner. There will be boom and bust cycles and the key is to add capacity in a judicious manner so as to avoid downturns that are damaging to the long term sustainability of the R&D capacity and technology development of the industry.

Categories:
General Interest, Solar

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