In the midst of another period of a rapid expansion, there are major issues which must be addressed this time round if the PV market is to overcome its growing pains and reach maturity.
Paula Mints, Senior Photovoltaic Analyst, Strategies Unlimited, California, USA
ales of solar photovoltaic modules grew 54 per cent in 2004 – achieving an industry goal of 1 GW in sales. Indeed, sales growth in the solar PV industry has been enviably strong for the past eight years, driven primarily by the extraordinary escalation of its grid connected rooftop application. Along with strong growth in 2004 have come rumours of profits in a historically unprofitable industry, and even the investment community is experiencing an up tick in interest in solar investments. Does this mean that the solar electric industry has arrived at a point where it can overcome barriers of cost, marketing naiveté, and reliance on government subsidies to achieve its potential? There is, unfortunately, a long history of the industry failing to do just that, but industry history does not necessarily have to foretell the future.
Supply constraints and demand spurts continue to take the PV industry by surprise, despite historical context for both. The industry has typically not done a good job of supply chain management. For one thing, there are still too few dedicated suppliers of solar grade silicon. For another, even silicon suppliers who promise the PV industry a dedicated supply generally only commit to a fraction of the industry’s requirement.
Figure 1. Industry capacity increases by region and in total (1997-2004)
Meanwhile, PV’s demand for silicon continues to grow. In 2004, semiconductor industry and PV industry demand for silicon was on the order of 32 000 tonnes, of which approximately 41 per cent came from the PV industry. Assuming current industry growth, by 2006, PV industry demand for silicon should be equal to that of the semiconductor industry. Though an argument can be made for the maturing of the semiconductor industry (and thus the slowing in demand), when push comes to shove, silicon suppliers will continue to sell to the highest bidder putting a financial and supply strain on PV wafer and cell manufacturers. Case in point, in 2004, the PV industry was forced to pay close to $50/kg for its silicon feedstock, double the price paid in previous years. Historically, the semiconductor industry has understood and proved willing to pay a higher price for its starting material, while the PV industry has dragged its feet in this regard. Given the high probability of future price wars, the PV industry may need to consider competing with the semiconductor industry on its own terms – in other words, pay a higher price for higher grade silicon. Of course, the PV industry can also better control its silicon future by using half as much silicon (thinner wafers, higher efficiency cells).
The market direction
A problem that is not easy to solve for cell and module manufacturers as well as providers of silicon material is how to strategically manage manufacturing capacity increases based on government programmes. These programmes, both performance and capacity based, still drive PV industry demand, especially for the grid connected market. The market for remote PV applications, traditionally the backbone of the PV industry and still experiencing healthy growth (around 15 per cent per year), gets short shrift these days, even though it is generally independent of subsidies.
PV manufacturers face uneasy choices in terms of rapidly increasing manufacturing capacity to serve periods of high demand, or slowing building capacity to avoid an idle factory in case of slower demand and feedstock shortages. Take a conservative road and you miss out on high demand and the ability to price at a profitable margin. Take an aggressive road and you may be stuck with excess capacity and product, and face the choice of selling it at negative prices. Cell and module manufacturers must bet on continued government support, high demand, and a consistent supply of silicon in order to make the leap of faith (not to mention the capital investment) required to ramp up capacity.
In 2004 as demand soared, driven primarily by Germany’s hyper successful feed in tariff law, industry wide optimism coexisted with feedstock supply anxieties. Sales to the difficult US market took a back seat to Europe and even the US selling channel was guilty of avoiding domestic sales to take advantage of quick and easy sales to Germany – that is when module product could be found at all. Many in the sales channel, particularly in the US, found themselves waiting months to receive their supply from manufacturers. Profitable short term tactics proved more compelling than tackling traditional industry practices such as poor product development, naïve marketing strategy, inefficient supply chain planning, and overcoming dependence on government subsidies, practices typical to the industry.
Historically, the sales channel (dealers, distributors, system integrators and installers) has wielded a great deal of control in the PV industry. In terms of sales channel strategy, it continues to be time consuming and expensive for manufacturers to support. In the long term, this support remains necessary, even as the industry undergoes the necessary growing pains. In the short term, particularly in a high demand year, it becomes tempting to give short shrift to these relationships and focus on ready profits. This tactical view forgets that market development depends on maintaining relationships and perhaps passing up part of the value gained by serving the current high demand.
This is not to state that all industry players think only tactically and for the short term. Some manufacturers continue to nurture their relationships with mid-size selling channel participants while also developing projects with, and designing products to serve, end-use customers. At the same time, some sales channel participants are focusing on partnerships with the building industry for the residential rooftop market, and on developing projects for the grid connected commercial application that make good business sense even without subsidies. A period of high demand, such as the one in which the industry now finds itself, offers an opportunity to begin responding to the market instead of reacting in knee jerk fashion to its every signal. This is a good time to remember what happens when demand subsides and to plan for the time when government support again becomes questionable.
Once the world-wide leader in regional manufacturing and shipment, the US position began to slip in 1999. Lower manufacturing costs and higher demand in other regions began to influence the location of manufacturing capacity. In terms of sales, the US lost the number one market share position as Japan’s rooftop programme enabled its regional manufacturers to build enough capacity and sales to become the market leader. Meanwhile, shipments from cell and module manufacturers in Europe began to increase with sales rising 93 per cent during 2000, surpassing that of the US in 2002. From 1997 through 2004, the compound growth rate for shipments from US manufacturers was the lowest of the four main regions, at 17 per cent.
As with those in Europe, Japan and US manufacturers began announcing capacity increases in 2004. But these increases are not necessarily to serve the US market. Instead a weakening US dollar along with the lure of easy sales to Germany, have led to most manufacturers devoting less attention to the difficulties of the US market. This is not just because Germany is clamouring for product. It simply is not easy to sell to the US market with its sometimes irrational interconnection schemes, varied incentive programmes, not always friendly renewable portfolio standards, and generally low electricity rates.
The US market should continue experiencing steady growth going forward, though nothing like the extraordinary growth experienced in Germany and Japan, and that predicted for China. Although it currently has little grid connected market, China’s incredible economic growth and the coinciding hunger for a stable electricity supply may soon change that situation. The country has at least one large, 8 MW, grid connected project in the works for 2005. Moreover, China’s need for rural electrification must be met in order for its economic growth to continue.
Figure 2. Global demand by region (2004). Germany alone was responsible for 36 per cent of total global demand.
Europe and Japan have higher energy prices, a real commitment to the environment, and a realization that solar is good business (meaning jobs and personal, corporate, and tax revenue). In these two areas, for many reasons, solar makes economic sense. When surveyed, US customers who bought solar electric systems listed ‘the environment’ as part of their buying decision, but importantly, it was not a key reason. In the US, if the economics work for the buyer, then any benefit to the environment is a perk, not a factor in purchase. Rational buying behaviour tends to err on the side of practicality. The successful German programme is an example of how well a profit motive can marry with environmentalist instincts. With the German system, a photovoltaic system owner can make money by selling electricity to the utility. This system has been likened to a twenty year annuity. In the US, in general, net metering rules also encourage system purchase by enabling system owners to watch their meters ‘spin backwards,’ thus offering the potential of zeroing out the owner’s electricity bill. The US system is fine, but Germany has proven that motivation to install can be taken to a higher level.
To sell into the vast, sleeping bear that is the US market a manufacturer needs courage, fortitude, and a very good long term strategic plan. It is little wonder then that a lot of cell and module manufacturers have been left pondering if it is all worthwhile. This does not mean that the US market is being ignored. BP Solar has announced a $25 million expansion of its Maryland facility; Sharp Solar remains committed to its MODCO in Tennessee, and system integrator PowerLight continues to pioneer the grid connected commercial market.
A bright future for solar PV?
In 2004, even given the limits of silicon feedstock supply availability, photovoltaic cell and module manufacturing capacity expanded and new companies prospered. As the battle for product grew intense, hard feelings began to surface in the sales channel. PV distributors (in this case referring to the supply chain in general) did not control price – an atypical situation for the PV industry. This situation, while good for cell and module manufacturers, and also for large distributors and system integrators, put a strain on the ability of smaller members of the selling channel to compete.
In the end, despite the accompanying pain, the industry needs a reassessment of the way it does business in order to continue towards a sustainable model and consistent profitability. It should succeed if manufacturers can use this period to develop strategies that serve the long term, including addressing industry goals of a lower cost structure, while also encouraging market demand that is independent of government subsidies. Doing so may require forgoing some easy profit, or, ploughing some of it back into marketing programmes. In the past, the industry has complained about the lack of funds available for an industry wide marketing programme. This excuse will not exist in 2005.
Despite industry optimism, yearly demands at levels of 40 per cent and up do not appear to be sustainable given the constraints of silicon material supply and the uncertainty of grid connected subsidies. Optimism should be encouraged, but as a necessary component of risk. Overlooking substitute products, customer objections, the world-wide economic situation, and a lack of control over the supply chain will not take the industry in the direction of steady demand. It should be a market that has been crafted, instead of one that reacts wildly to situations of excess demand and insufficient supply.