Alternative Energy: Will the Sun Ever Shine on the Solar Industry?
The challenges facing the solar industry continue to be daunting, the victim of oversupply and falling prices. As the industry’s ranks thin out, however, new opportunities will arise for companies with a well thought out business and regulatory plan. In this article we report on some recent developments that seem to give shape to the evolution of the solar photovoltaic (PV) industry and, we believe, foretell where it is headed.
Economies of scale, technological breakthroughs, and government incentives are causing solar PV energy prices to decline. While dumping complaints against Chinese manufacturers have succeeded before the International Trade Administration, the size of the countervailing tariffs is not expected to have dramatic impacts favoring domestic manufacturers. In order to improve margins in an increasingly competitive PV industry, successful solar component manufacturers are starting to develop projects rather than just manufacture silicon wafers or film or solar panels. In the end, additional manufacturing breakthroughs, adequate capitalization and economies of scale should make the PV industry more vibrant. As global climate change initiatives are reflected in pricing either through tax policy, cap and trade or other forms of offsets, the relative price of solar energy is likely to decline. 
Price of Solar Continues to Decline
The price of solar PV energy in residential-, commercial- and utility-scale installations has fallen dramatically in recent years. Already in certain areas, residential solar PV is able to generate electricity at a cost equal to or less than the price of purchasing it from the grid, businesses are looking to rooftop solar to cut power bills, and utility-scale solar has become increasingly competitive. Many industry experts project that solar will continue its march toward grid parity – solar-generated electricity that is no more expensive than electricity purchased from the grid.
In 2008, solar PV modules – exclusive of the cost of installation and required equipment such as inverters – cost approximately $4.80 per watt. Experts hoped that in the coming years modules would cost half that much. By the first quarter of 2012, however, solar PV modules were selling for only $.90/W  – and prices have dropped considerably since then.
In a recent report, the Solar Energy Industries Association and GTM Research analyzed pricing trends across the solar PV industry. As of the first quarter of 2013, the price of solar PV modules was only $0.64/W. Installed prices, which take into consideration the cost of everything from permitting to inverters to labor, were down as well. Across all installation types (residential, commercial, and utility), the average installed price of solar PV fell from $4.45/W in the first quarter of 2012 to $3.37/W in the first quarter of 2013 – a decline of nearly 25%. The average residential system cost $4.93/W in the first quarter of 2013, compared to $5.86/W the previous year.  Utility-scale installations were even cheaper: just $2.14/W in Q1 2013, as opposed to $2.90/W in Q1 2012.
The results have been impressive. In Hawaii, for example, residential solar PV energy has already reached true grid parity; PV systems in that state can provide power at or below the cost of power from the grid, subsidies or not. In many other parts of the country, solar is cost-effective for residential consumers when tax incentives are taken into account. The success – perhaps even existence – of domestic companies such as SolarCity, now the nation’s second largest solar company, is also testament to the increasing competitiveness of solar PV. SolarCity does not manufacture solar panels or produce related components, but instead focuses on installing and leasing PV systems to homeowners via long-term contracts, generally at little or no upfront cost to the consumer. Responding to a surging demand from homeowners and businesses – and backed in part by a recent $500 million financing agreement from Goldman Sachs – the company has steadily increased spending to install more systems.  Even with its focus on costly projects designed to provide not short term gain, but long term revenue, SolarCity recently reported that its losses have narrowed for the second quarter of 2013.
Solar PV has also become increasingly popular with businesses, non-profits and governments. Walmart, for example, has already installed 65,000 kW of solar energy. The National Renewable Energy Laboratory (NREL) reports that under current market and policy conditions, up to 53 percent of supermarkets in the nation are located in areas where solar energy is no more expensive than electricity from the grid.
Utility-scale solar has made great strides as well. The city of Palo Alto, for example, recently entered into a 30-year power purchase agreement for 80 megawatts (mW) of solar PV electricity for only 6.9 cents per kilowatt-hour (kWh). This price, which includes the 30% federal investment tax credit, compares favorably to power produced by conventional means. Palo Alto’s PPA even rivals the expected cost of energy from a new natural gas facility (6.7 cents / kWh), despite historically low natural gas prices. In New Mexico, the manufacturer and developer First Solar recently agreed to sell 50 mW of solar PV energy to El Paso Electric for only 5.7 cents/kWh – similar to the price of electricity from an existing coal plant. Even without the subsidy of 2.7 cents/kWh from New Mexico’s production tax credit, the resulting 8.4 cents/kWh cost would be less than the estimated cost of power from a new coal project.  Moreover, these costs are substantially less than previously approved solar purchase agreements for the El Paso system.
All told, more than 65 gigawatts (gW) of solar has now been installed worldwide – compared to only 4.5 gW in 2005.
Worldwide Oversupply and Trade Disputes
While lower raw material prices, technological innovation, and economies of scale have helped reduce the price of solar PV, much is simply due to the fact that production of solar PV systems has far exceeded demand in recent years. While current worldwide module production capacity has been estimated at between 60 and 70 gW, experts expect only 30 gW of demand in 2013.
Many industry experts have blamed heavily state-subsidized Chinese manufacturers for flooding the market with solar PV modules and components at prices well below the cost of production. In 2012, after determining that “an industry in the United States is materially injured as a result of subsidized imports from the PRC,” the Department Of Commerce issued a final order imposing tariffs and countervailing duties on crystalline silicon PV modules and cells from China. While this ruling may have validated the concerns certain domestic manufacturers raised about their Chinese counterparts, the efficacy and wisdom of the penalties has been questioned from the beginning. Some noted, for example, that Chinese manufacturers could easily circumvent the tariffs with relatively inexpensive supply-chain modifications. Others worried that even if the tariffs were effective in stemming the influx of low-price Chinese solar modules, China would respond with tariffs of its own on the sizeable American solar export industry. These fears are proving to have been well-founded. First, the U.S. tariffs have not posed a significant obstacle; as one executive explained, Chinese manufacturers simply avoid them by using solar cells from Taiwan for U.S.-bound panels. In fact, Chinese solar manufacturers recently set a record for PV panel shipments, with five Chinese firms accounting for a third of global shipments. Second, China has moved to impose tariffs of up to 57% on US polysilicon exports, a decision that is widely expected to hurt US producers. While U.S. producers supplied 24 percent of the world’s polysilicon in 2012, these tariffs could shift the advantage to major manufacturers based elsewhere.
A similar trade dispute continues to play out between the European Union and China over Chinese solar panels. Earlier this year, the European Commission imposed provisional tariffs on Chinese solar panels, citing heavy subsidies that permitted Chinese firms to sell PV products below the actual cost of production.  In response, China moved to impose tariffs not only on European polysilicon, but even European wine. The European Union, however, ultimately decided against finalizing the Chinese import tariffs; instead, the EU and China agreed to a minimum price of 74 cents per watt for Chinese-made solar panels. Some expect the EU-China settlement to impact the ongoing dispute between China and the U.S.
Solar Manufacturers Facing Challenges
While more affordable solar PV products have benefitted consumers and led to far more installed solar PV than experts would have thought possible a decade ago, solar manufacturers have struggled as prices have fallen. The failure of U.S.-based Solyndra proved particularly newsworthy,  but Solyndra is only one of many sizeable solar PV companies to falter in recent years. Evergreen Solar, a Massachusetts-based solar panel manufacturer, filed a Chapter 11 petition in 2011. SpectraWatt, an Intel spinoff with facilities in Oregon, also shut down that year. Siemens closed its solar panel division in 2013 after suffering almost $1 billion in losses in recent years. Bosch, after suffering losses up to $3.1 billion, did the same in March of 2013. SoloPower recently closed its Portland, Oregon manufacturing facility, and announced restructuring. German-based SolarWorld recently laid off workers at its Hillsboro, Oregon plant, and announced restructuring that has been described as “a last-ditch effort to save Germany’s biggest solar-panel maker.” The list goes on, and it continues to grow.
Even Chinese solar manufacturers, after years of torrid and arguably unsustainable growth, are proving not to be immune from the economic realities forcing so many American and European firms out of the market. As China demonstrates a growing reluctance artificially to prop up struggling solar firms, Chinese banks have been pushing consolidation, and many manufacturers have already shut their doors. Far and away the most significant example of a failed Chinese solar manufacturer is Suntech Power Holdings Ltd. A startup in 2001, by the end of the decade Suntech had become the world’s biggest solar panel producer. In a stunning turn, its primary unit filed for bankruptcy in March, 2013. SImilarly, up to 75 percent of China’s polysilicon manufacturers are expected to disappear – this despite new tariffs on American polysilicon.
Manufacturers Turning to Project Development
Though solar bankruptcies have and will no doubt continue to capture headlines, the outlook for manufacturers is not uniformly bleak. In particular, faced with worldwide oversupply and low prices, several solar manufacturers have turned towards project development to earn larger margins and to assure the use of their own manufactured components, finding some success in the process.
First Solar, the United States’ largest solar company, has seemed to revamp its business model, leading this charge. At a time when many solar manufacturers have faltered, First Solar’s increasing emphasis on developing solar projects – for which it supplies its own solar panels – has helped it remain successful. And although First Solar’s stock fell recently after it missed quarterly revenue and profit estimates, it is still showing a profit and many investors remain confident the firm’s model will remain successful. First Solar recently announced its acquisition of a 1.5 gW project pipeline, and is set to build the largest solar plant in Australia in conjunction with another developer. In 2013 alone, the company plans to install 1 gW of solar.
SunPower is another example of a major player that “built its business on solar-panel manufacturing, but has increasingly expanded into development of large solar-power plants and smaller home rooftop-solar systems.” Helped in part by steady demand for its particularly efficient products, SunPower is now “selling panels as fast as it can make them.” The company recently posted quarterly profits that considerably exceeded expectations.
Canadian Solar, the Chinese PV manufacturer, has also begun to focus its efforts on developing projects that utilize its own solar panels. The company hopes that by targeting 50 percent of its 2013 revenue from its “total solutions business,” it will return to profitability for the year. Toward this end, the company recently announced the sale of several utility-scale plants valued at nearly $280 million for which it will provide turnkey construction and operations services.
If solar PV production continues to far outpace demand, manufacturers that provide turnkey projects, whether utility, commercial or residential, will be better positioned to survive in an increasingly competitive market. In other words, “value has migrated downstream to players that develop and finance solar projects and install capacity.”
Solar Industry Outlook
In coming years, we expect the trends of global oversupply and manufacturer bankruptcies to continue. As a McKinsey and Company report put it, however, “these are natural growing pains, not death throes. The industry is entering a period of maturation that is likely to set conditions for more stable and expansive growth after 2015.” Market forecasts remain strong. GTM Research anticipates 4.4 gW of PV to be installed in the United States in 2013, and estimates that an additional 100 gW will be installed worldwide by 2015. McKinsey estimates that by 2020, total worldwide installed capacity will likely be between 400 and 600 gW, with figures in excess of a terawatt possible. Deutsche Bank analysts predict we are starting to see the “beginning of the grid parity era.” Solar, in other words, is not going away. Though the details are beyond the scope of this article, we believe the following issues are worthy of particular attention moving forward.
While utility-scale solar PV installations have been responsible for the majority of installed capacity to date, many experts anticipate the next wave of growth to occur primarily in residential and commercial markets. Some expect to see a distributed solar generation market worth over $100 billion by 2018. As mentioned above, grid parity has already been reached in certain areas, and as the installed cost of solar continues to fall, more and more consumers and businesses will be able to generate their own electricity for less than the cost of purchasing it from traditional utilities.
The increasing popularity of distributed generation, however, will be accompanied by unique challenges. Disputes over net metering, a practice whereby individuals and businesses are compensated by utilities for feeding their excess solar energy into the grid, paying only for their net energy use, have already begun. For the vast majority of residential- and commercial-scale solar installations, which lack storage capabilities, net metering is currently indispensable. The Energy Policy Act of 2005 encourages utilities to “make available upon request net metering service to any electric consumer that the electric utility serves,” and 43 states along with the District of Columbia have adopted net metering in some form. As rooftop solar becomes more commonplace, however, utilities are voicing concerns about net metering rules. Though the details are beyond the scope of this article, utilities argue that requiring them effectively to pay premium rates for excess solar electricity generated by customers who still rely heavily on the grid results in losses that the utility in turn must pass to other rate payers. Utilities in California, for example, estimate that net metering may mean as much as $1.4 billion a year in lost revenue. The California Public Utilities Commission is set to release a report on net metering this year that is likely to influence this increasingly significant debate.
While innovations across the solar PV industry can be expected to reduce costs and increase efficiency, developments in energy storage should prove particularly important to the future of solar. Because the amount of power generated by a PV system depends on the strength of the sun’s rays, the power generated by solar facilities fluctuates considerably, whether between night and day, summer and winter, or cloudy and sunny weather. This inconsistency in turn requires solar PV systems to be backed up by more reliable power sources – increasingly, natural gas generating facilities that can quickly ramp up and down to meet demand. Cost-effective energy storage – which does not yet exist – could allow solar to strike out on its own. The energy storage field is currently seeing increased attention and investment, spurred in part by an aggressive California renewables target calling for 1.3 gW of storage by 2020. Some in the PV industry expect storage significantly to boost the industry’s revenue. Affordable storage could also obviate – at least from the perspective of solar companies – impending challenges relating to net metering, by allowing consumer-generators to deliver electric capacity as well as energy.
While the installed price of solar has declined sharply in recent years, much of the drop – at least in the United States – has been the result of falling module costs. Soft costs, which include labor, permitting, and interconnection, are responsible for up to 50 percent of the cost of small-scale PV systems and have remained relatively unchanged. Permitting, for example, can be very costly and time-consuming. This process takes an average of 8 weeks, and can involve up to five distinct agencies. Permitting is so cumbersome in certain markets that many installers avoid them altogether. With experts now pointing to stubborn soft costs as the primary reason that solar PV is more expensive in the U.S. than many other parts of the world, it is becoming clear that these costs must be reduced if unsubsidized solar PV is to become competitive with traditional energy sources. Analysts, however, see significant potential for soft cost reduction. Regional permitting standards, for example, could serve to eliminate inconsistencies across jurisdictions that are currently keeping installation prices high.
Despite the falling cost of solar PV electricity, in most markets it is currently only cost-effective when government incentives are taken into account. The most significant of these incentives, the 30 percent federal energy investment tax credit (ITC), extends only through 2016. While many in the solar industry agree that subsidies such as the ITC should eventually be phased out, few believe that time has come. In addition to tax incentives, other government initiatives may prove to have a significant impact on the development of the solar PV industry. By way of example, the Department of Energy’s SunShot initiative, which aims to make solar competitive with other power sources by the end of the decade, is investing in efforts to reduce the soft costs that are currently preventing solar from becoming even more competitive.
The worldwide solar PV industry is in a period of consolidation, and many companies seem to be redirecting their business models. While rapidly falling prices have driven solar installations at previously difficult-to-imagine rates, those falling prices also have driven and will no doubt continue to drive many solar manufacturers out of business. Still, several solar manufacturers have demonstrated that good margins are to be found in project development, and that trend seems likely to continue. Though a variety of factors will influence the industry greatly in years to come, the rise of distributed generation, innovation and economies of scale, improved storage, reduced soft costs, and government initiatives seem likely to improve the prospects for diversified solar energy companies.
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