Best stock to invest in – The Commoditization of the Solar Industry



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by Paula Mints
 

Philosopher, essayist, poet and novelist George Santayana said:
Those who cannot re-member the past are condemned to repeat it.
The solar industry is expert at repeating its behavior and
justifying the often devastating results by referring to them as the
solar rollercoaster or, the solar coaster.

To be clear, the industry’s behavior is closer to a Shakespearean
tragedy than it is to a carnival or theme park ride. People choose
to ride rollercoasters because once the ride begins they lose
control for a brief period. They can enjoy the feeling of being
safely out-of-control for a brief time. On a rollercoaster the
thrills and chills are temporary.

In the solar industry a downward swoop typically means lost money,
lost jobs as well as the lost dreams of the solar workforce from one
end of the value chain to the other. On the manufacturing side most
participants have been in low to negative margin territory for far
too long and this situation is not going to right itself in the
current pricing climate.

Polysilicon manufacturers, under pressure for years, are unlikely to
get relief. Manufacturer components and materials outside of China
such as backsheets and EVA are giving up and exiting. Cell
manufacturers and module assemblers are pressured to exit or cut
corners.
The downward slope of the solar rollercoaster is not a fun ride.

Problems with margin squeeze and poor quality components are not
new. When prices for modules began crashing years ago the industry
as a whole had an opportunity to point out the effect this margin
squeeze would eventually have on quality and competition. Instead,
crashing prices were celebrated as progress.

To correct a situation wherein low margins affect buying decisions –
polysilicon, consumables, backsheets, etc. – buyers need to be aware
that their choices will eventually affect the quality of the modules
and Balance of Systems (BoS) they buy and install.


Whether it is demand side participants buying components at prices
that are too good to be true or it is supply side participants
choosing to sell product at prices with razor thin or negative
margins, choices are being made. Solar participants are not giving
up control of their future, they have abdicated it.

The Commoditization of the Solar Industry

Solar panels are widely considered commodities these days. This is a
misunderstanding of what a commodity is and is linked to a
misunderstanding of the time, effort, science and engineering
required to develop photovoltaic thin film and crystalline cells. It
also misunderstands the nuance of module assembly.

In general, a commodity is a product that is produced and sold by
many companies and that has no differentiating features. Electricity
is a commodity. Copper and aluminum are com-modities. Ammonia is a
commodity. Oil is a commodity. Shoes, purses, jeans and solar panels
are not commodities.

Unfortunately as CdTe, CIS, CIGS, n-type monocrystalline and p-type
multi and monocrystalline solar panels may or may not look different
from each other the assumption is that there is no differentiation
and they are thus commodities. The belief that the solar panel is a
commodity is what led Applied Materials (AMAT),
Oerlikon and others to assume that solar cells could be rapidly mass
produced just like any other diode and panels churned out like so
many LED television screens. Note again that those who believed this
are no longer selling the concept of turnkey solar cell
manufacturing lines.

Again, the assumption that solar cells – thin film or crystalline –
are commodities ignores the science and the nuance and the decades
of effort as well as the decades of experience re-quired to produce
a commercial product.

The industry has effectively, though not correctly, commoditized
itself by agreeing by virtue of its behavior to compete almost
solely on price and by celebrating unreasonably low prices as
progress. Industry participants have created the myth that the solar
panel is a commodity simply by repeating that it is one and assuming
that repetition alone renders something a fact.

Repeating something ensures that it will become repetitive, it does
not confer legitimacy on the statement that is being repeated.

The Current Module Pricing Situation – Abandon All Hope, Those
Who Manufacture Here

The reasons for the rapid decline in module prices globally are very
clear and they are not based on progress in either cost reduction or
conversion efficiency increases.

  1. China’s market out performed all estimates and manufacturers
    in China and Taiwan planned production around a 30-GWp market
    instead of a 15-GWp market. It is worth noting that the FiT had
    been paid slowly if at all and curtailment in China is high and
    thus PV deployment is not profitable.
  2. China’s government effectively slammed the door shut (as have
    other governments) to slow out-of-control building.
  3. As a result, between 3-GWp and 5-GWp of cell and module
    production was stranded in manufacturer and developer inventory.
  4. As a result a flood of low priced cells and modules are
    available.
  5. As a result of what is now overproduction prices are highly
    competitive and margin pressure is extreme.

Unlike the mid-to-late 2000s current low prices are not the
result of an aggressive pricing strategy to capture share. The
current low prices are the result of production to meet China’s
ballooning market, the government abruptly let the air out of the
balloon, and the cell and module inventory stranded in the wake of
high levels of production and government actions to slow the
domestic market.

Prices are falling daily and will continue to fall until the
production that was meant to be in-stalled in China is worked
down. Meanwhile, manufacturer capacity expansion plans are being
pulled back and layoffs have begun.

The only manufacturers for whom this is good news are those who
were not yet commercial. These manufacturers have been offered a
face-saving way to shutter capacity. For commercial manufacturers
– even in China – the pricing slide is akin to being a passenger
in a plane that hits a never ending air pocket. Prices are
plummeting, taking jobs, quality and future plans with them.

Forgetting high efficiency manufacturers such as SunPower (SPWR)
and LG – though make no mistake these manufacturers are also
feeling price pressure – the current average price for modules in
the US is $0.48/Wp. The range, including high efficiency
monocrystalline modules, is $0.35/Wp to $2.25/Wp.

The figure below offers price and shipment history from 2006
through a 2016 estimate. The global average is a weighted average
all prices in a market throughout the year and is based on a
representative global sample. Concerning the average price
estimate for full 2016, it is the estimate based on the current
situation and given the pressures could be $0.02/Wp to $0.04/Wp
lower. Remember, price and costs are different beasts.

Meanwhile, Back on Planet Margin

Many people are working overtime to tie the current situation of low
pricing and strained margins to the early 2000s. The situation today
is, as previously discussed, different.

In 2004, the global PV industry entered a period of prolonged
accelerated growth stimulated by the European feed in tariff
incentive which spread quickly from Germany to other countries. In
its early iterations, this incentive was simple and profitable and
as such invited investors to take risks on non-commercial
technologies. The utility scale (multi-megawatt) application was an
outgrowth of investor interest in seemingly stable FiT returns.

During the early 2000s capacities to produce technology increased
significantly while prices decreased significantly; for example,
prices decreased by 42% in 2009 over the previous year, by 16% in
2010, by 23% in 2011 and by 45% in 2012.

Unfortunately, these price decreases were misunderstood as a sign of
economies of scale and it was widely assumed that the industry had
reached grid parity. This assumption was largely based the
misunderstanding that price was closely correlated with cost and
that price decreases represented progress. During this period of
strong activity, manufacturers in China entered with aggressive
pricing strategies that rapidly drove PV manufacturers into a
pro-longed period of negative margins, company failures and
consolidation.

As a result of this long period of price declines tariffs, domestic
content requirements and minimum import prices were established in
the EU, the US, India and Canada. These measures were unsuccessful
in that these methods misunderstood the marketplace for solar PV
cells and modules and did not take under consideration grey market
activity.

Currently, module buyers are able to buy product at ever lower
prices and enjoy some (probably brief) margin relief. This is
particularly important for developers bidding into the highly
competitive PPA market. The downside will be – again – loss of
manufacturers who cannot withstand the current period and all the
expertise that goes with them. Product quality may also suffer as
manufacturers look to preserve what margin they can.

Paula Mints is founder of SPV Market Research, a
classic solar market research practice focused on gathering data
through primary research and providing analyses of the global
solar industry.  You can find her on T
witter @PaulaMints1
and read
her blog here.

This article was originally published in the October31st issue
of  SolarFlare,
a bimonthly executive report on the solar industry, and is
republished with permission.

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