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More sunny days ahead
for consumers?

Surplus Chinese solar panels create a price-drop ripple effect from Asia to Europe. Who benefits most from this?

London, February 2012

Solar panel array soaks up the light

Solar panel array soaks up the light. Chinese production surplus has brought prices crashing.

SOLAR panel prices have collapsed. Industry value as measured by the stock market has shrunk. Country after country in Europe’s key solar photovoltaic (PV) market – three-quarters of the world’s total – has reduced or withdrawn its subsidies for solar output. Are you suffering from a solar surplus? That depends on where you stand – in the industry and on the globe.

If you’re upstream, making and selling panels, you’re probably not very happy – even if you’re in solar boomtown China. The Bloomberg Global Leaders Solar Index of 37 companies, which includes a clutch of Chinese companies, is down 58 percent in the last year, and 65 percent from its peak in June 2009. Solar PV’s value destruction is clear to all: why would you ever play the game if you weren’t already in it?

But if you’re downstream, installing panels and managing projects, life in most markets isn’t bad. Solar panels make up about 65 percent of the cost of a PV installation, so the collapse in panel prices has compensated for the reduction in downstream subsidies. Carefully structured projects in Europe and the US still give returns of 10 percent or more where feed-in tariffs (FITs) still exist; and in many markets where subsidies have been withdrawn, panel prices are approaching the Grail of grid parity anyway. So why worry?

Bill Barnes

Bill Barnes

A decade ago overflowing Broadband capacity bankrupted some major telecoms players, but laid the foundation for the the explosive growth of the Internet culture that binds us all

The withdrawal of subsidies for European PV may be setting the stage for the next scene in the solar power revolution. A decade ago overflowing Broadband capacity bankrupted some major telecoms players, but laid the foundation for the the explosive growth of the Internet culture that binds us all; and in the 1950s and 1960s a surplus of crude oil encouraged the car culture worldwide. Something similar may be happening to solar PV.

Just as telecoms costs plunged in the early 2000s, making it attractive for telecoms companies to market – and for us all to buy – ever-faster Broadband connections, so solar PV costs have plummeted since 2007. Then, PV capacity in Europe cost about €5,500 per installed Watt peak (Wp), meaning a normal 3.5-kilowatt household installation cost around €19,000 – my neighbour even paid €30,000 for a discreet, upmarket one on an Italian hillside house. Today, the same installations are available for €6,000. Even in rich Europe, where the median salary is €1,225 a month according to statistical institute Eurostat, €19,000 is a lot of money. But €6,000 is as cheap as a used car – and lots of us can afford one of those.

So despite the FIT reductions and withdrawals since 2007, Europe still dominates the consumer end of the solar PV market, and high delivered power prices mean Europeans will continue to install PV. Meanwhile, China’s push into solar PV panel manufacturing – its panel makers now produce around half of the world’s supply, and export more than 95 percent of that at the world’s lowest prices – means that downward pressure on prices will continue.

Solar PV is yet another industry where China has made nearly everyone mad – except consumers. Despite the current slump in solar stocks, its producers may soon be laughing all the way to the bank. Chinese PV panels have come a long way since 2007, when quality was erratic and the only thing they really had to recommend them was price. Manufacturers in the Middle Kingdom haven’t just expanded output a hundredfold since 2005. They’ve shrewdly targeted the middle of the market: their panels aren’t generally the most efficient, or the most aesthetically pleasing. But they’ve got all the requisite guarantees and warranties, and now most of them work. So people buy them.

Meanwhile, on the other side of the world, European panel producers are going to the wall – in December 2011, onetime industry leader BP Solar left the market, and Solon Se became the first German solar energy firm to go bankrupt – and the European Union (EU) and the United States (US) push local content legislation and anti-dumping suits to defend domestic producers from the Chinese manufacturing tide. Even dependable solar panel makers from Asia’s other putative superpower, India, who shouldn’t suffer from cost disadvantages, reportedly use Chinese panels on some European projects.

China’s concentration on solar panel production means that world production capacity will remain higher than likely demand growth. Trade journal Photon International predicts that world demand for solar panels in 2012 will be around 24 gigawatts (GW), equivalent to Germany’s entire installed PV capacity, while annual solar cell production capacity could be as high as 50GW. Panels are nearly undifferentiated commodities – there’s not enough difference between brands for real pricing power to emerge – so the output overhang means that in the short term, prices have only one way to go: down.

Meanwhile, electricity prices in Europe are likely also only going one way: up. Since 2009, average household power prices in the EU have risen by 4.6 percent a year, according to the EU Commission’s statistical service Eurostat. Household prices in USA have risen by a slower 1.25 percent annually, according to the Energy Information Administration (EIA). And average delivered power prices in both areas are closing in on the Grid Parity point, at which the cost of production with solar PV matches the cost of buying the same power from the grid. This whirl of falling solar PV installation costs, and power prices rising beyond Grid Parity, means that solar PV will become increasingly justified in all markets where sunlight is pervasive – including all of Southern Europe and the Sun Belt of the US – never mind the government-encouraged markets in Asia, where China’s Golden Sun FIT programme alone is expected to yield two gigawatts or more of newly installed solar PV capacity each year for the next two decades, according to consultants A T Kearney.

The blend of cheap PV and IT is an attractive one. Install a solar panel on your rooftop and you can access your power production statistics over your smartphone, tablet, or PC from anywhere. As smart metering and smart appliances become the norm, consumers will be able to manage their home or small business energy (production and demand) 24/7. Where local utilities are close and reliable, they’ll be there for backup; where they aren’t, onsite power production, and connected storage, will take up much of today’s surplus PV capacity. How long did it take for Indian firms to dominate outsourced telecoms – and Internet-based customer relations? It won’t take that much longer for panel producers – with China leading the way – to compete for new electricity connections everywhere, especially if they can also provide cheap and cheerful financing.

The blend of cheap PV and IT is an attractive one. Install a solar panel on your rooftop and you can access
all your power production statistics over a smartphone, tablet, or PC from just about anywhere

There’s been much talk about the value of utility-scale electricity storage for renewable power generation, but for households and many business installations this is already a reality – a bank of batteries can modulate PV power production to the array’s host and store energy for consumption at night. As battery technology improves, so will the ability of individual homeowners and businesses to supply their own energy at costs equivalent to buying it from the grid, and to monitor it via their Broadband connection, from another era of surplus technology that led to corporate collapse.

So where does this leave all the parties in the solar debate? Who loses and who wins?

The winners: Chinese panel producers win. Their government should be able to navigate the anti-dumping suits and local-content provisions that the US and EU are slinging in their direction. Chinese companies are tightening their grip on their European distribution channels; and lobbying against the US industry’s complaint against Chinese “dumping” of panels in the US market is intensifying, so the overall picture isn’t too unfavourable. But the inevitable price increases that countervailing tariffs cause in the markets erecting them may slow the adoption of solar PV.

European inverter manufacturers win (for now). They still defend their turf against the Chinese. Over 85 percent of world production of inverters – which take the direct current (DC) produced by solar PV arrays and convert it to AC or alternating current for export to the grid or to most household appliances – are produced in Europe. While China has begun to market its own inverters, reviews so far are only middling, and European companies such as Fronius and SMA look set to dominate the market. At less than 15 percent of the total cost of a solar array, a shift in the price of inverters has less effect on total installation cost than that of panels, and production overcapacity is less than for panels. But this may change as the quality of China’s inverters improves.

The losers: Utilities in mature markets. Where FITs have created an active investor base by encouraging armies of household and commercial solar PV installations, the electric utilities will see their share of future demand increases eroded by production from cheap distributed solar PV generation. And in countries where grid connection and system stability is weaker, and the customer base is relatively poorly serviced – most of the BRICS and pretty much everyone else outside of the OECD – will see their electrification improved without dependance on local behemoths. Ironically, in mature markets utilities have spent much time lobbying behind the scenes to eliminate FITs from the energy and pricing mix. In so doing, they’ve helped create the price pressure that’s making solar PV ever more economical.

Western panel producers. China’s manufacturers will continue to undercut their production costs and expand their market share. Chinese producers’ status as a “priority” industry in the context of the country’s attempt to improve its energy efficiency – another way to minimise CO2 emissions – will give them an advantage. But in addition to government support, they’ll be driven by the need to recoup some revenue, however little, in the current slump from the investments they’ve made in panel production capacity. Much of the inevitable consolidation in the industry will now take the form of Chinese manufacturers acquiring European (and the few American) ones, making them branded marketing outlets.

The Solar CSP industry loses. This offshoot of the solar power industry, in which the sun’s heat is captured by mirrors and used to heat a heat transfer fluid, which produces steam to drive steam turbines, is already beating a hasty retreat. Several projects in the US have been converted to solar PV; and future projects are in doubt.

Finally, consumers everywhere win. They’ll have an alternative to expand their ability to supply themselves with energy at competitive prices. As these become ever more competitive with electricity supplied by the grid, consumers will earn more independence and choice. The solar surplus will build on the Broadband surplus. Fast Internet on your solar-powered tablet computer, anyone?

Bill Barnes is a consultant in the power generation and oil and gas sectors, based in London. He advises on the development of large-scale conventional and solar power generation projects and natural gas contracting. Bill holds degrees from London Business School and from Davidson College in the USA.

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teddinghammer (1 October, 2013)
A good solar panel installer can be very hard to find. Luckily I found Solar Panels for a good price and with quick and easy installation.
Toquir (14 June, 2013) – PakistAn
Dear Sir/Madam,
Will u let me know that you also install solar house system in pakistan. I shall b thankful for ur reply.
David Chan (19 February, 2012) – Hong Kong
If solar PV prices keep dropping maybe we can all have solar arrays in our homes. Is this feasible? In China there are cities planned to run mainly on solar power. Does anyone know this experiment is successful?
Jon Bledsoe (14 February, 2012) – Singapore
The solar energy business has been around for so many years it's surprising we have not yet managed a cost-benefit balance. Nor have we managed to turn solar power into a viable broad use option. It's is clean, renewable, abundant...

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