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Photovoltaic Industry Price Behavior 1975 through 2015, Drivers, Patterns and Outcomes Paula Mints SPV Market Research, San Jose, California, USA, 95118 Abstract — During its over 40-year history as a terrestrial source of electricity the global photovoltaic industry has existed in an energy ecosystem in which demand for grid connected installations is driven by incentives, while demand for off grid installations operates under close to free market conditions. As incentives are inherently unreliable the effect has been to form an industry personality profile (behavior) that engages in available demand whether it is profitable or not. This paper observes photovoltaic industry pricing behavior from 1975 through 2015, establishing the behavioral trends and themes that have arisen and perpetuate. Index Terms — PV, Photovoltaic, Thin Film, Crystalline Price, ASP, Cost, Shipments, Incentives, Feed-In-Tariff, Behavior, CAGR
I. INTRODUCTION Behavioral economic theory holds that human interactions are complex and that economic motivations include nuance beyond that of maximizing utility. This is certainly true of the global solar industry as throughout its history it has interacted within a context of here-one-day-gone-the-next incentives and subsidies, expectations of significant price drops, competition with well-subsidized conventional energy technologies as well as a continuing perception among many that solar remains a science experiment. During its over 40-year history as a terrestrial source of electricity, the global photovoltaic industry has existed in an energy ecosystem in which demand for grid connected installations is driven by incentives, while demand for off grid installations operates almost entire under free market conditions. As PV industry incentives are inherently unreliable, the effect has been to form an industry personality profile that will engage in available demand even when this demand is not profitable. In general, the PV industry has a specific behavior. This behavior is attributable to the fact that demand for the industry is primarily incentive driven, that is, demand into the grid connected application represents 98% of industry activity and 100% of demand into the grid connected application is driven by incentives. During the early years of PV industry history, the 1970s through the mid-2000s, demand was sporadic at best, even
with incentives, and primarily limited to demonstration projects and early adopters for the grid connected applications as well as rural electrification. In the early days, low pricing strategies were a matter of survival and most PV manufacturers were unprofitable until 2004. In the late 1990s driven by incentives in the US state California, Germany and Japan, demand for grid-connected solar systems began accelerating. The extraordinarily strong growth of the grid connected application officially began in 1997, when the German 100,000 Solar Roof Program and zero interest financing, Japan’s residential rooftop rebate and subsidy and California’s rebate drove industry drove 234% growth over 1996 to >39-MWp. In the mid-2000s, the feed in tariff incentive model (where utilities are mandated to pay a tariff for solar electricity that is fed into the electricity grid), began to change the demand paradigm from push (into the market) to pull (into the market). From 2005 through 2010, PV industry demand grew by a compound annual rate of 65% (over the five-year period). Unfortunately, the availability of profitable incentives with few demand-limiting constraints led to overheated markets, which led to abrupt changes in the programs, decreases in the rates and, in some cases, cessation of the programs. Multi-gigawatt demand for grid connected installations over the past 10 years (2004 – 2014) is a direct result of the EU feed-in-tariff model and subsequent FiT-like incentives. The FiT incentive model is also directly responsible for driving the success of the multi-megawatt (utility scale in the US, solar farms in Europe) sub-segment of the commercial application. Without large investor interest, the multimegawatt installation segment would not have proliferated to the point that the industry is dominated by it. 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 in systems and technologies and new manufacturers to enter. The utility scale (multi-megawatt) application was an outgrowth of investor interest in seemingly stable FiT returns. At one point, Europe accounted for >80% of demand. Capacities to produce technology increased significantly during this period, and 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. These assumptions were largely based the misunderstanding that price is be closely correlated with cost. In fact, price is a market function and driven by a variety of macro and micro economic factors. During this period of strong activity, manufacturers in China entered with aggressive pricing strategies that rapidly drove PV manufacturers into a prolonged period of negative margins, company failures and consolidation. It should be noted that aggressive pricing is a common strategy. PV industry pricing began recovering in 2013 for many reasons including recovering economies and government price intervention in Europe, the US and other countries. Table 4.1 provides data on annual cell and module revenues (to the first buyer), shipments, average selling prices for PV technology and the annual change for each category. With the considerable amount of confusing pricing information currently being repeated in the market, it is important to remember that prices for re-sold manufacturer and demand side inventory should not be confused with the average price of technology to the first buyer, nor should they be taken to represent progress. The secondary market is the buying and selling of PV modules through distributors and retailers. The distributors and retailers may buy at the large quantity rate and resell this product on the secondary market to smaller participants. Distributors and retailers also resell inventory. This group takes a margin based on the current market situation. Manufacturer inventory is sold at a lower rate than the hoped for ASP of the manufacturer, based on market conditions including a) the level of inventory carried by the demand side and b) the cost of carrying in house inventory. Inventory is a cost to a manufacturer and, depending on market conditions; it may be cost effective and efficient to sell this inventory below the original cost to manufacture it. When sold, this category is factored into the price point to the first point of sale in the market (first buyer). Historically, PV industry pricing has not been cost-based. In fact, there have been long stretches of PV industry history during which manufacturers priced technology at or below the cost of production. The current situation of low ASPs for PV technology is an example of aggressive pricing strategy, also serving as an example of how destructive this strategy can be when practiced in an industry where demand is incentive driven. The primary reason for an aggressive pricing strategy is to capture share. Typically, industry capacity has been low enough so that manufacturers could survive. Unfortunately, the recent example of aggressive pricing strategy coincided with decreasing incentives (thus fewer profitable markets), increasing capacity and high levels of inventory.
A. 1975-1985 GOVERNMENT AND UTILITY DEMONSTRATION PROJECTS AND OFF GRID The 1975-1985 timeframe represents the beginning of terrestrial PV deployment and was dominated by off grid applications as well as consumer indoor (calculators, watches, etc.). In particular, government demonstration projects into grid connected applications as well as consumer indoor growth dominated PV deployment. During this period, grid connected application growth was 100% driven by one-off utility and government demonstration projects. Figure 1 presents PV shipments, costs and prices from 1975 through 1985. During this period shipments grew by a compound annual rate of 71%, costs declined by a compound annual rate of 18% and average module prices declined by a compound annual rate of 16%. Figure 1: Photovoltaic Shipments and Average Module Prices 19751985 $100.00
25.00
$80.00
20.00
$60.00 $ / $40.00 W p $20.00
15.00
M W 10.00 p
5.00
$0.00 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 -$20.00
Cost Constant $ CAGR -18%
ASP Constant $ CAGR -16%
ASP/Cost Delta
Shipments MWp CAGR 71%
0.00
B. 1985-1995Fewer Demonstration Projects and Slower Growth From 1985-1995 there were relatively few government and utility demonstration projects and few incentives. As a result, photovoltaic crystalline and thin film manufacturers (primarily a-Si) priced modules below cost and showed a willingness to continue producing and shipping at negative margins. Amorphous silicon made its commercial market entry in 1982 and from 1982 through 1992 grew at a compound annual rate of 30%. During this same period, the market for all photovoltaic technologies grew by a compound annual rate of 22%. Timing is often everything, and a-Si’s commercial debut coincided with the early success of the consumer indoor application (solar powered calculators, watches and other small typically handheld devices). The use of a-Si with its reasonably good performance in low light conditions and liquid crystal displays displaced the former LED (lightemitting diode) displays on early calculator models.
Figure 2 presents PV shipments, costs and prices from 1985 through 1995. During this period shipments grew by a compound annual rate of 14%), costs declined by a compound annual rate of 6% and average module prices declined by a compound annual rate of 6%.
compound annual rate of 7%. Strong demand encouraged photovoltaic manufacturers to increase price and begin enjoying positive margins. Figure 3: Photovoltaic Shipments and Average Prices, 1995-2005
Figure 2: Photovoltaic Shipments and Average Prices, 1985-1995
1600.00
$7.00
1400.00
$16.00
80.00
$6.00
$14.00
70.00
$5.00
$12.00
60.00
$10.00 $ / W p
$8.00
$8.00
50.00
$6.00
40.00 M 30.00 W p 20.00
$4.00 $2.00 $0.00 -$2.00
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-$4.00
1200.00 1000.00
$ $4.00 / $3.00 W $2.00 p $1.00
M 800.00 W p 600.00 400.00
$0.00 -$1.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-$2.00
10.00
200.00 0.00
Cost Constant $ CAGR -7%
ASP Constant $ CAGR -7%
ASP/Cost Delta
Shipments MWp CAGR 35%
0.00 Cost Constant $ CAGR -6%
ASP Constant $ CAGR -6%
ASP/Cost Delta
Shipments MWp CAGR 14%
. C. 1995-2005 Capacity Based Incentives in Germany, Japan and California and the First Feed-In Tariff Incentives The 1995 through 2005 period saw an increase in government legislated incentives beginning with capacity based incentives and culminating with the beginning of the feed in tariff incentive in Europe. In the late 1990s capacity based (primarily rebates) incentives in California, USA, Germany (100,000 roofs) and Japan (residential rooftop program) drove accelerated demand for photovoltaic installations. Germany’s program was accompanied by zero interest financing. In Germany, the offer of zero interest financing encouraged demand for residential installations to surge. During the mid to late 2000s, the European Feed in Tariff incentive drove demand to gigawatt levels and did it fast; too fast for an industry used to start/stop incentives to do more than react to a suddenly strong market. This period did not afford PV industry participants time for planning or attention to quality and those who had available capacity benefited while the rest played catch up. Prices for all technologies increased and long-term contract prices for polysilicon, wafers, cells and modules increased significantly. Profitability was a new experience for PV industry participants and with crystalline modules in short supply thin films became the hope for future under the simple assumption that a-Si, CdTe and CIGS/CIS technologies would be less expensive to manufacture. The turnkey manufacturing model, primarily for tandem junction amorphous silicon, gained popularity during this period under the, again simple, assumption that it would allow new entrants with little to no PV manufacturing experience to rapidly commercialize their products. Figure 3 offers PV shipments, costs and prices from 1985 through 1995. During this period shipments grew by a compound annual rate of 35%, costs declined by a compound annual rate of 7% and average module prices declined by a
D. 2005-2015, Feed-In-Tariff Programs Peak and Begin Collapsing, Bidding and Curtailment Emerge From 2005 through 2009, the European feed in tariffs drove global demand with Europe’s share of deployment rising to over 80% of the global total. The FiT incentive proved expensive to support and governments eventually began instituting retroactive changes and rapid reductions. The retroactive changes disappointed investors while the rapid reductions in FiT rates cemented industry participant behavior, that is, once a reduction was announced, participants would deploy at an even more rapid rate, accepting lower margins as a necessary cost of continued deployment. During this period the global photovoltaic industry settled into a frenetic and often unprofitable behavior pattern. Figure 4 presents PV shipments, costs and prices from 2005through 2015. During this period shipments grew by a compound annual rate of 43% costs declined by a compound annual rate of 14%) while module ASPs declined faster at at CAGR of 15% Unreliable incentives as well as a prolonged period of aggressive pricing from 2008 through 2012, led PV manufacturers to accept low to negative margins. This period was accompanied by a significant industry consolidation of manufacturers. Figure 4: Photovoltaic Shipments and Average Prices, 2005-2015 $4.50
60000.00
$4.00 50000.00
$3.50 $3.00 $ / W p
40000.00
$2.50 $2.00
30000.00
M W 20000.00 p
$1.50 $1.00
$0.50 $0.00 -$0.50
10000.00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-$1.00
0.00 Cost Constant $ CAGR -14%
ASP Constant $ CAGR -15%
ASP/Cost Delta
Shipments MWp CAGR 43%
E. Conclusion It is worth noting that the grid connected application continues to require incentives. For the residential application in the US, the no-money-down solar lease deploys a marketing come-on similar to used car sales to attract customers. The point is that an economic stimulus of some sort, even an illusory one, is still necessary to stimulate the market for PV installations. The PV industry’s reliance on incentives has created and fomented a specific behavior among the demand and supply participants (manufacturers and those who buy and install modules). When an incentive such as the ITC is set to time out or decrease installation activity increases significantly. In the specific case of ITC-driven projects that have a long development timeline deployment of systems >50-MWp are stalling while deployment into the residential and small to mid-commercial application, that is, systems that can be installed by the end of 2016, is accelerating. The acceleration of smaller system deployment gives the false impression that demand is organically increasing. Concerning pricing, PV industry participants have made promises of rapidly decreasing prices for modules and systems that cannot always be profitably kept. Forecasts in unstable and vulnerable industries such as solar are highly uncertain and are prone to unexpected upsets and manipulated outcomes via government action. Expectations for escalating deployment have become so engrained that envisioning slower, healthier and potentially more profitable growth has become an anathema to industry participants and stakeholders – though privately the industry’s traditionally low margins are not celebrated. Government market and price manipulation, addiction to incentives and optimistic forecasts aside, this last characteristic of the global solar industry is not an illusion. REFERENCES [1] P. Mints, SPV Market Research, Global Markets for Photovoltaic Modules and Systems And Five Year Application Forecast 2014-2019, August 2015 [2] P. Mints, SPV Market Research, Photovoltaic Manufacturer Capacity, Shipments, Prices and Revenues, 2015/2016, April 2016
