Peering through the fog

For the global photovoltaic industry, 2008 was the most successful in a string of record years since 2004. The seed for this explosive growth was planted in Germany, where in late 2003 a new law raised the feed-in-tariff (FiT) to above 50 euro cents, guaranteed for 20 years. For the first time there was a solid legal and economic foundation for attractive investment in PV systems, without any restrictions on energy volumes.

What followed was one of the most impressive growth spurts of all time. The German market for PV systems more than tripled in 2004 and triggered an enormous global investment boom. Billions of euros were invested in capacity increases throughout the supply chain, from new polysilicon plants to thin-film start-ups. This investment was financed through prepayments from would-be customers, private-equity money, such as Good Energies with REC + Q-Cells, and a good number of IPOs (initial public offerings), including those of Sunpower, Suntech and Firstsolar.

The period between 2004 and 2008 was also good for the world economy in general. Many countries in the world saw healthy growth, energy prices – for oil, gas and electricity – went up, which made investments in alternative energy sources more attractive, and cheap credit was abundant. At the same time, the increasing awareness of the dramatic impact of climate change made some governments create incentive schemes for renewable energy, including solar. Probably influenced by the German example, FiTs were soon introduced in countries as diverse as Spain, Italy, France, Korea, Greece, Belgium, the Czech Republic and even India.

The most successful of these programmes was the Spanish Decreto Real (royal decree), a FiT with higher rates than in Germany, indexed to inflation and for a longer period of 25 years. This triggered a flood of project developers intent on securing returns well into the double digits for as many projects as possible. The most popular investments were in free-field installations. In 2008, nearly all PV markets worldwide felt a strong demand from Spain, which caused PV module scarcity and accelerated price increases throughout the supply chain. At the pinnacle, silicon spot prices were 15 times higher in 2008 than in 2004.

The Spanish regulatory commission established that total system volumes of 3500 megawatt peak (MWp) were installed in Spain in 2008. This was more than half of the total 5000 megawatt peak (MWp) installed worldwide that year. Worldwide, volumes rose with an average annual rate of 56% between 2003 and 2008. Prices for modules and systems rose. The result was fabulous profitability for the manufacturers of PV products with an exceptionally huge windfall for the silicon producers.

However, some companies that had been in the solar business for years were caught off guard and did not survive the sudden and fierce competition. The fact that the listing of the top production companies kept changing several times within the period of a year also illustrates the rapid developments.

Disappointing stocks

Surprisingly, publicly listed shares of PV companies on the stock market were down by almost 70% by the end of 2008 (stock markets in general fell, but by less – around 50% in 2008). Despite the solar boom, the sector seriously underperformed. Why?

First of all, the Spanish government, which ultimately has to pay for the FiT, imposed a 500 MWp nationwide cap on solar energy for which it would provide incentives in 2009. This created a big hole in the sales plans of the global industry. The German government similarly wanted to cut back on rising programme costs and substantially decreased the rates of the FiT for 2009 and beyond to between 32 and 43 cents. In other words, these very successful programmes had become too expensive for the governments who initiated them.

Second, the financial crisis that set in after the demise of Lehmann Brothers in September 2008, has led to much scarcer credit availability for PV projects, and at higher prices. This is even more true for the financing of capacity expansions that many players had planned. From October 2008 to February 2009, spot prices for silicon, cells and PV modules came down by about 20% for modules and 70% for silicon. Many smaller players in China have had to close shop and a couple of larger ones have idled at least part of their capacity. In recent weeks, a number of long-term contracts had been either suspended or amended with postponed volumes or reduced prices.

New challenges

The solar industry is now faced with the urgent question of which markets can replace Spain.

Several markets with similar characteristics to Spain – among them Italy, France and Greece – should in principle be able to support PV module prices similar to those in Spain. These countries share high insolation (amount of solar radiation received), high FiTs, and a soft or zero cap. However, bureaucratic hurdles to getting contracts and permits have so far slowed down growth.

Then there is Germany, where growth had been limited during the lucrative Spanish bonanza, simply because there were insufficient modules available in the global market. The solar market there is still uncapped, and its distribution and installation companies are plentiful and experienced. Nearly every manufacturer in the world has Germany in its calculations as a back-stop market. Anything that cannot be sold at a higher price elsewhere can be ‘dumped’ in Germany.

The solar incentive scheme in the US was much improved by the Bush administration’s October bail-out package. The Investment Tax Credit (ITC) for solar PV was extended for eight years, and President Obama even turned the ITC into a grant. With high insolation, high electricity prices and still strong economic power, the US is likely to become the world’s largest solar market. Intensive discussions taking place behind the scenes between utility companies and PV producers indeed suggest that we can expect big US investments in solar. If things really start moving this could soon be a gigawatt-size market.

Before the rise of Germany, Japan used to be the world’s largest solar market. But when the domestic incentive scheme expired, and markets abroad became much more attractive to Japanese manufacturers, Japan’s solar market started to decline. With the recent strength of the yen and a reintroduced incentive scheme this trend may well reverse.

Finally, there are signs that emerging markets such as India and China may soon grow to a meaningful scale. The Chinese government may be tempted to aid its domestic industry through supporting local solar projects. A couple of high-profile projects are already underway in China, and remarks by Zhengrong Shi, head of Suntech, suggest that things are moving quickly.

NB Just as this issue of the Broker went to press, the Chinese government announced a solar incentive scheme. This appeared on renewableenergyworld.com on 26 March 2009: The Chinese Finance Ministry will provide ¥20 (US $2.93) per watt for projects of 50 kW and above. The move could potentially kick-start the PV industry in China, which up until this point has been almost non-existent. While many solar manufacturers are based in the country, there has been little domestic demand for their products. Solar stocks rallied on Wall Street today because of the announcement. Suntech Power saw its stock climb 49 percent, while Yingli Green Energy was up 47 percent and JA Solar got a boost of 34 percent.“

It is quite possible that one or more of the above-mentioned countries will display meteoric growth in their solar markets starting this year. Remember that nobody expected Spain to develop as strongly as it eventually did.

Bearing the costs of incentives

One thing cannot be stressed enough: all incentive programmes cost money. The more volume is installed under these schemes, the higher the total cost. And there is a limit to what societies are willing to bear. Big-figure calculations show that, for the electricity production of 1 GW solar capacity, the FiT paid for 20 years is 7.2 billion euro. Total volumes installed in Germany are about 5 GW. Opponents sum up their criticism of the FiT programmes with the term ‘solar debt’.

There are, however, key flaws in this calculation. It does not take into account the cost of the electricity that has to be generated anyway, whether through solar or conventional means, or the environmental benefits of solar, which clearly have their own price tag.

In the long term solar energy must become competitive without government incentives. It will have to approach the cost point of a natural gas plant, currently around 9 euro cents per kWh. With FiTs today still above 30 euro cents, PV still has a long way to go.

The feasibility of commercial competitiveness depends heavily on external factors: inflation, interest rates and electricity prices. System prices have to come down to below €2 per watt peak. With silicon costs possibly approaching US$40/kg in the long term, and continued savings in the system integration area, this seems ambitious but plausible. The solar market volume can then become gigantic.

Footnotes