Solar Perspectives:The Day the Music Stops

By Al Velosa 
2010-04-19

Have you ever had a book that you hated, yet you could not put it down? I have felt this way reading fictions books such as  Gabriel Garcia Marquez’s “Chronicle of a Death Foretold” or non-fiction books such as John Cassidy’s “How Markets Fail: The Logic of Economic Calamities.” and feeling that way. I did not want to read more about the impeding disasters but I kept on reading.  I wanted the protagonist to run away or change course – but of course that did not happen. 

Cassidy’s story about the market is particularly poignant. He discusses the development of economic theory and its role in the economic crash of 2008. His story about how companies and individuals made individually rational moves that damaged the overall economy had me cringing in my seat.


Solar Market – 2008 All Over Again
And this reminds me of what I am seeing right now in solar industry. Let us look at some of the overall trends:

  • Germany – The largest market is in the process of revising its incentives in the midst of a PV construction boom
  • Shipments – PV demand is at an all time high, with vendors boosting guidance for first quarter shipments and even for the 2010 calendar year
  • Capacity – PV cell and module vendors  are adding manufacturing capacity at an unprecedented rate
  • Market – No other market offers the demand or scale to absorb a slowdown from Germany

To some extent it feels like a repeat of the trends we saw in early 2008 – with none of the lessons being learned.

Now that is not completely true.  Folks up and down the supply chain understand the issue and are concerned about what will happen in the second half of the year.  Several solar firms have highlighted to me their work on business development efforts outside of Germany, including setting up distribution, EPC, finance and sales capabilities or partners.

Yet this totally reminds me of my history in the semiconductor industry. The vendors would see similarly complex markets and proceed with well laid out strategies. Yet when you added up the market share they professed to be set to win – it would add up to multiples of the market.  And we have the same dynamic here with the solar market.  A good starting point is the market opportunity seen in Figure 1.

Figure 1: 2010 Worldwide PV Installations (Megawatt basis)

Source: Gartner (April 2010)
Source: Gartner (April 2010)

Looking at the market being a bit over 8 GW in 2010, you can see the load towards the first half of the year. This is driven by the assumption that Germany – at about 4 GW for 2010 – will change its incentives and lower the feed-in-tariff. This requires another PV module price change in order to meet the project profitability requirements, and leading firms to explore the Italian, French, Czech and U.S. markets. 


Yet none of those markets is big enough to replace demand in Germany. And if German installations go to a high scenario of 5 or 6 GW – there will definitely be no equivalent market to take up the slack.


So what is the point here?
PV vendors are smart. Just because they are all drinking from the same cool aid and trying to sell as much into each market, does not mean that all of them have missed the market warnings. Expect to see the winners in the market to exhibit some of the following characteristics:

  • Inventory – clear control of their supply chain – preferably in partnership with an EMS firm who can minimize the impact on plant and assets to the PV firm
  • Costs – we are about to go into a mid-year price reduction cycle.  Leaders are taking apart their supply chain to extract any and all costs. This of course starts with silicon.
  • Technology – this goes hand in hand with costs.  Expect to see more announcements of improved efficiency panels ready for high volume manufacturing. We’ll also start to see rumbles of improved test conditions.
  • Quality – A huge number of systems have been and are being put up too quickly. I expect we will start to see similar quality issues as we saw in Spain in 2008 – with systems that underperform due to design or hardware problems. We can also expect bankability to get restricted again.
  • EPC arms – The smart vendors will have increased their consulting support in this market or have their own EPC arms working on the showcase projects due to the above quality concerns.
  • Cash – the time to stock pile it is now. This is particularly so for the firms with EPC arms – since those consume huge amounts of working capital.
  • Diversification – expect the winners to be playing in Germany – but to have teams and sales infrastructures in the other core markets.

Conclusion
I want the solar firms to succeed while not committing the same mistakes of over-ramped markets that we saw before – but of course that is not going to happen. These PV companies and individuals are making individually rational moves that will collectively damage the PV market. So I cringe when I think about the PV market right now.

Yet we can all benefit from this. After all, we will have higher capacity and lower prices in the market. But be prepared for higher bankability concerns in the second half of the year as projects start to underperform. And finally, start looking now at the vendors in the market for those who have retooled all parts of their business – to be more competitive in a leaner environment.

In the meantime, I will just wait for the music to stop and see who ends up with the good seats.


Alfonso Velosa is a Research Director at Gartner Inc. focused on the photovoltaic solar market