Catching rays Five success factors in an explosive …...Catching rays Five success factors in an explosive solar market © The Economist Intelligence Unit Limited 2010 Mr Stokes

Catching raysFive success factors in an explosive solar market

A report from the Economist Intelligence Unit Sponsored by SAP


© The Economist Intelligence Unit Limited 20101

Introduction—abrupt decline, sharper rebound

For nearly the entire first decade since its founding in Arizona in 1999, First Solar, like many companies in the solar sector, rode a wave of soaring growth. Through 2008 it was expanding at a

rate of 144% and continued to capture market share from competitors with its innovative “thin film” technology, which can produce electricity from sunlight in a wider range of light conditions than more traditional silicon-based technology.

Last year, however, First Solar lost 43% of its market value as investors fled. There were two consolations for the company in the midst of such a steep decline. First, the slump was widespread. Most renewable energy companies—not only in the solar sector—shrunk in value during the same period, and others fared much worse than First Solar. Q-Cells of Germany, for example, lost 73% of its market value and its CEO resigned as a result. Second, at the end of the shakeup, First Solar retained the highest market value among solar module makers, at US$9.4bn according to Nomura Securities’ renewable energy companies’ valuations list in May 2010.

Today First Solar is at the forefront of an industry that appears to be rebounding. After unprecedented difficulties in the last two years, analysts predict a bright future. Clean Edge, a research company, forecasts that revenues for the solar photovoltaics (PV) industry—the largest by far of the three main solar technologies (see sidebox on the next page)—will increase more than three-fold by 2019, to US$116.5bn.

Even as it grows, the sector retains a “pioneering spirit”, says Jerry Stokes, vice president for strategy for Suntech Power of China, which is number two on Nomura’s valuations ranking, at US$1.6bn. There are an estimated 1,000 new technologies being researched, any one of which could become the next big thing and potentially sideline current sector leaders. The industry rankings have already seen plenty of reshuffles in recent years and more could be on the horizon. In order to survive and prosper, solar companies must successfully adapt to evolving government policy, reduce production costs, drive innovation, and scale up quickly or find a lucrative niche—all the while staying abreast of the fast-changing technologies in the sector.



Solar technology—photovoltaics light the way

The world market for photovoltaics (PV), which directly converts sunlight into electricity in PV cells, is the largest of the three main solar technologies. The others are concentrating solar power (CSP) and solar thermal collectors for heating and

cooling (SHC). Solar PV has grown by an average of 40% a year for the past decade, with cumulative installed capacity standing at 14 gigawatts (GW) at the end of 2008, up 6 GW on the previous year, according to the International Energy Agency (IEA). As of early 2010, PV provided just 0.1% of global electricity generation; but PV’s share of global power generation will rise to 5% by 2030, the IEA forecasts.



Government subsidies, which determine the level of demand for the modules that solar companies sell, drove growth before the slump. Now, in the aftermath of the downturn, government policy

remains the single most important factor sustaining the industry. In Canada and Europe subsidies primarily take the form of “feed-in tariffs”—for every kilowatt hour of electricity fed into the grid, the provider receives a taxpayer-funded subsidy that is substantially higher than the market price. In the US, rather than providing a feed-in tariff, the government gives a direct cash grant or a tax credit for 30% of the solar power installation cost. Asian countries, including China, have approved subsidies and forecasters expect them to increase as governments attempt to meet ambitious renewable energy targets. For the moment though, Asia is mainly a location for production and export rather than a source of domestic demand for solar power.

The IEA believes such incentives will be phased out eventually as prices for electricity generated from solar become competitive with other sources of electricity—a condition known as “grid parity”. The IEA reckons this will happen in some countries for residential and commercial systems as early as 2015. “The support mechanisms from governments will over time become more passive, probably linked to granting access to the grid and selling electricity back into the grid, but the premiums for doing that will be going away,” says Mr Stokes of Suntech.

Indeed, subsidies in the leading solar countries have recently come under pressure. This is mainly because the cost of crystalline silicon modules fell 30-50% in the last year, which in turn led to much lower installed costs for solar plants. These prices fell from an average of US$7 per peak watt in 2008 to just above US$5 in 2009, and as low as US$3 for some utility-scale projects (defined as providing peak power of 200 kilowatt peak hours or more), according to Clean Edge. As a result, the subsidies, set at a time when prices were higher, suddenly looked over-generous. In Germany, which has led the industry for the past decade, the government plans to reduce feed-in tariffs by 16%. In Spain, module demand fell 87% after the country put a cap on feed-in tariffs; the government is also proposing a further 30% cut in subsidies for existing solar power plants.

Solar company executives acknowledge that reducing feed-in tariffs is a logical response to price declines, and a trend which is likely to continue. Clean Edge forecasts another 60% decline in average installed solar PV prices, to US$2.11, by 2019. “Governments have been reacting very rationally,” says

Success factor 1: Adapting to changes in government policy


© The Economist Intelligence Unit Limited 2010�

Mr Stokes. He adds that, by and large, governments have been transparent about their plans, which is key to strategic planning. “There is a predictable outlook for the way in which they are enabling markets to start moving forward,” he says.

The road to grid parity may well be bumpy, as governments gradually extricate themselves from the market, but when it arrives, demand will rise significantly, according to a spring 2010 report, The New Solar Market, written by Pike Research, a clean-tech research company. “As the solar power price approaches that of fossil fuel power… an enormous amount of worldwide power demand becomes available to drive the production of solar cells/modules,” the report says. Until then, however, the industry will need continued government support, including R&D incentives and well-managed, if somewhat depleted, subsidy programmes.



As the industry emerges from the slump, the “primary differentiator” for solar companies is the individual module’s cost per watt ratio ($/W), according to Pike Research. A number of factors

contribute to ever lower ratios, chief among them are moving manufacturing operations to low-cost countries such as China, Taiwan, Malaysia and the Philippines, using low-cost materials (or driving down prices through negotiations with suppliers), engineering breakthroughs, and the advantages of scale.

First Solar leads the industry at 81 cents per watt, through its “thin film” cells, which use cadmium telluride rather than silicon. Its ratio is projected to drop to 75 cents per watt by the end of 2010 and the company plans to reduce it to 60 cents within the next five years. About two-thirds of First Solar’s production in is Malaysia, according to Pike. Elsewhere in the industry Q-Cells is shifting manufacturing to Malaysia with a planned 500 MW of capacity, to put it back in contention on cost. Others plan capacity increases and/or large-scale shifts in production to Asia. Solar World, based in Germany, wants to reduce its costs 10% per year for the next three years. As a result of the laser-like focus on cost, Pike concludes, “The market for solar modules looks much more like a commodity market than it did just 12 to 18 months ago.”

Success factor 2: Slashing production costs



In addition to lowering production costs, solar companies are putting a heavy emphasis on R&D. First Solar doubled its R&D spend from 2008 to 2009, from US$33.5 million to US$78.2 million, bringing

R&D spend to a ratio of 3.8% of sales. Suntech has research partnerships with the University of New South Wales and Swinburne University in Australia.

The IEA keeps tabs on about 1,000 different solar technologies and is “neutral” about any particular one’s prospects. Currently, crystalline silicon (c-Si) modules still account for about 80% of sales, with thin films making up the rest, although thin film is expected to make rapid inroads in the next few years. Emerging technologies include advanced thin films and organic cells. The Economist reported last year that Nanosolar in the US is developing cells produced from copper, indium, gallium and selenium, which could be cheaper. Researchers at the University of California are trying to develop cells made from organic chemicals. Solar thermal power, which uses solar power to produce steam, is currently the poor cousin to PV because of more complicated permitting and infrastructure, but it could make a comeback if its shortcomings were resolved.

Sector leaders are always on the lookout for new technologies that they can add to their portfolio or identify as potential competitive threats. Mr Sohn of First Solar outlined the company’s three tests for any new solar technology to be considered competitive. First it must cost less than $1 per watt in order to make it worthwhile to produce on a wide scale and meet return on assets targets. Second, the cost of capital in putting the technology in place must be attractive for potential financing. The third test requires that “energy payback time” must be at least less than a year. In other words, the module produced with the new technology must “pay back” the energy it took to produce it within 12 months, or else it isn’t considered cost effective.

Mr Stokes of Suntech compared innovation to a running race. “The people who are in a chasing pack actually have to put in some incredibly fast lap times in order to catch up in terms of scale and reliability.” He adds, “If new technologies can compete and get into the leading pack, it will mean that costs have come down and it will be truly global, and there will be space for several companies.”

Success factor 3: Innovating in a commodity market



B ig players can spend more on R&D, negotiate more favourable terms with suppliers, and drive cost reductions through economies of scale. Customers also gravitate to larger companies. “Especially

for large commercial and utility-scale projects, end customers increasingly prefer one-stop shopping,” the Pike report says. “They prefer companies that provide project development, engineering, permitting services, financing and other services instead of just modules.”

A recent spike in the price of silicon left lasting memories, and so large companies are moving to control, through acquisitions and partnerships, their entire “value chain”—from the raw materials that make up the modules right through to the end product. From 2004 through 2008, as production couldn’t keep up with demand for polysilicon, prices soared from about US$30 a kilogram to a peak above US$400 a kilogram. As the silicon shortage eased, prices dropped through 2009 and were at about US$50/kilogram in spring 2010. As a result Suntech has made investments in Asia Silicon in China and Nitol in Russia, and others have made similar moves.

Consolidation will become increasingly important and acquisitions and mergers will increase. As First Solar’s acquisition of NextLight takes it further into the large-scale plant market, so MEMC Electronic Materials’ US$200m acquisition of SunEdison last year moved it from pure wafer manufacturing into solar project ownership. SunPower’s US$277 million acquisition of SunRay expanded its solar development business beyond the US to Europe, while Spain’s Fotowatio gained a US foothold buying MMA Renewable Ventures.

Success factor 4: Scaling up through mergers and partnerships



Large, utility-scale solar PV power plants began to mushroom in 2008 and their number and capacities are expanding rapidly; consequently, the share of PV accounted for by larger-scale

projects will increase substantially. Currently, the Olmedilla de Alarcón plant in Spain, completed at the end of 2008 by Nobesol, is the world’s largest solar PV plant with capacity of 60 MW, according to Denis Lenardic, an independent researcher who tracks PV power plants (See Top ten table on page 14). Since 2008, approximately 2,000 PV power plants with output above 200 kilowatt hours (kWh) were built, of which more than 1,000 solar parks had output capacity above 1 MWh. The scale of building in 2008 represented a breakthrough for large solar PV plants, as they accounted for more than half the total capacity of PV plants installed worldwide, according to Mr Lenardic’s data. Utility-scale plant projects are on the drawing board or in development throughout Europe, China, India, Japan and the United States, and they’re growing not only in number but in scale.

First Solar is developing the 550 MW Topaz Solar Farm in San Luis Obispo County, about 250km north of Los Angeles, California—currently, the largest solar PV project that is at the advanced planning phase. The project is part of First Solar’s wider move into utility-scale development, which included a deal earlier this year to acquire NextLight, a utility-scale PV specialist, for about US$250m.

On an even grander scale, First Solar signed a memorandum of understanding with the Chinese government last year to build a solar development at Ordos City in Outer Mongolia; planned ultimately to have capacity of 2 GW by 2019, it is starting with a demonstration plant of 30 MW to be built this year. Also, First Solar has joined the ambitious North African Desertec project that aims, amongst other things, to supply 15% of Europe’s electricity by 2050 via solar and wind power generated in the Sahara desert.

“Many large customers weren’t especially keen on buying modules from us,” Mr Sohn explains. “They were very interested in buying solar power plants that had hundreds of thousands of modules in them.” Sohn says that moving into utility-scale development hasn’t changed the fundamental business model of the company, which focusses on selling the modules. “The module technology is what differentiates the company,” he says. “These are enabling activities rather than changes in the business model.”

Not all solar companies have chosen to directly build plants. Suntech, for example, is involved through partnerships with construction companies, general contractors and engineering firms. “We

Success factor 5: Getting in the “utility-scale” game



have truly excellent partners,” says Mr Stokes. “It doesn’t make sense to roll out a strategy that goes around what those guys are doing.”

And utility-scale projects are not without risks. Financing, for example, is becoming an even more challenging issue for companies as scale increases, according to Karl-Heinz Remmers, CEO of Solarpraxis, a German solar module manufacturer. “The financing volumes for [utility-scale] projects stretch to several hundred millions of euros. As a result, the financing volumes equal those of the traditional energy production segment,” he says.

Illustrating the point, an US$840m solar project saw its financing unravel in spring 2010 after the US Department of Energy declined loan guarantees. The plant was meant to begin construction this year under the leadership of Signet Solar, a California-based solar company, at a site called Rancho Cielo near Albequerque, New Mexico, with planned peak capacity of 600 MW, which would have made it the world’s largest.



O f the estimated 190 major cell and module manufacturers globally, the Pike report identifies 17 “top competitors” that are well placed to survive in the future: Canadian Solar, Yingli Green

Energy, Q-Cells, China Sunergy, Kyocera, SunPower, JA Solar, Sanyo, E-Ton, Solarfun, Sharp, Gintech, Suntech Power, First Solar, Motech, Trina Solar and Neo Solar. These top competitors have a capacity to produce all of the 10.1 gigawatts of solar demand globally in 2010. A further 80 manufacturers in “tier 2” will survive if they make adjustments to $/W ratios, and the third tier, about 90 companies, will find it increasingly difficult to compete.

It’s not a foregone conclusion that the biggest players will force out all of the smaller ones. There are factors other than scale at work—such as unique technology that could result in a step-change in efficiency levels, as well as factors like financial backing. If the market expands as predicted, there will be room for smaller players to find a technological niche and stay afloat by ruthlessly exploiting it. But, it seems inevitable that, as the Pike analysts conclude, “2010 could very well develop into a struggle to survive for the remaining solar manufacturers.”

Overall, it would be wrong to assume that the changes of the last few years have set a stable pattern for what is to come. Rather, they underline the influence of factors such as the pace of technological innovation, changing government policy and the volatility of pricing. “The leaders will be companies that are responsive to market opportunities and the routes to market,” Mr Stokes says. “Those who do not have that are going to fall off to the back of the race.”

Conclusion—struggle for survival



Emerging capacity: Demand grows across the world

While just four countries—Germany, Spain, Japan and the US—have dominated the industry, with a combined share of 80% of total capacity (and therefore demand) at the end 2008, several other countries are gaining momentum due to various government support schemes. Although subsidies are expected to be phased out at some point in the future when “grid parity” is achieved, government support remains the single biggest factor determining whether a particular country will foster growth in solar. Here is a summary of some of the market trends in Europe, Asia and North America, all of which, to varying degrees, are forecast to rise sharply in the next decade.

Europe—a maturing marketIn Europe, Italy’s subsidies could push solar installation demand above 1 GW this year, putting it ahead of the US. Pike Research expects Italy’s solar demand to grow by 20% a year through 2013, even as it plans to reduce subsidies in 2011. Growing solar demand also is coming from France, the Czech Republic and various other EU countries.

Asia—planning for domestic capacityChina and India have set specific industrial policy goals to become leading solar manufacturing countries. Right now, China and India are mainly exporters, with little domestic demand. However, the IEA also expects Chinese domestic demand to increase substantially in the coming decade from its low current base. The government is encouraging solar systems to be built into new buildings, and supporting large-scale PV installations in desert areas, such as First Solar’s Outer Mongolia project. To encourage this, the government began providing a subsidy of RMB 20 (US$2.93) per watt for building-integrated PV (BIPV) projects in early 2009. According to the IEA, the 2010-2020 national targets for solar PV (400 MW and 1,800 MW, respectively) are likely to be increased substantially, perhaps more than doubled for this year and by more than 20-fold for the 2020 target. India, too, already has a significant PV industry: ten vertically integrated manufacturers making solar cells, solar panels and full PV systems, plus dozens of other smaller companies. According to the IEA, this group supplies about 200 MW of new capacity each year, though PV capacity remains very low at

Solar capacity by geography 2008-2020 (MWe)

Sources: Historical data from IEA; Economist Intelligence Unit forecasts.Note. North America: US & Canada. Europe: 23 European countries plus Turkey. Asia: China, Japan, Philippines, South Korea, Taiwan, Australia, New Zealand.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

North America Asia Europe

2020201920182017201620152014201320122011201020092008



home at less than 5 MW.The government has set various targets to generate electricity from solar: up to 50 MW of capacity by 2012 via incentives for large solar power plants of INR 12 (US$0.25) per kWh for PV power (maximum 10 MW per state). The current five-year plan (through 2012) also includes financing aimed at research and development. The government has set ambitious aspirations of achieving 1 GW domestic capacity by 2017 and 20 GW by 2020, though something closer to 25% of those aims seems more realistic.

North America—growth in the absence of federal supportThe United States has the potential for very substantial growth, even in the absence of federal legislation in support of renewable energy. Several states—particularly California, which has mandated that 33% of electricity come from renewable sources by 2020, up from 20% in 2010—have encouraged demand. In Canada, Ontario has led the way with a 50% feed-in tariff for solar power installations. Pike Research says political and economic factors may increasingly direct some of the new solar production capacity away from Asia to the US and Canada.

Top ten utility-scale solar PV power plants

Abbreviations:

GM - Ground-mounted photovoltaic system

TRAC - Tracking system

POWER LOCATION DESCRIPTION CONSTRUCTED

60 MW

Spain,

Olmedilla

(Castilla-La Mancha)

Parque Fotovoltaico Olmedilla de

Alarcón

GM

Nobesol

2008

54 MW

Germany,

Straßkirchen

Solarpark Straßkirchen

GM

Q-Cells International

2009

53 MW

Germany,

Turnow-Preilack

Solarpark Lieberose

GM

juwi

2009

50 MW

Spain,

Puertollano

(Castila-La Mancha)

Parque Fotovoltaico Puertollano

GM

Iberdrola Renewables

2008

46 MW

Portugal,

Moura

(Alentejo)

Moura photovoltaic power plant

GM, TRAC

ACCIONA Energia

2008



45 MWGermany,

Köthen

Solarpark Köthen

GM

RGE Energy

2010

to be completed soon

42 MW

Germany,

Finsterwalde

Solarpark Finsterwalde

GM

Q-Cells International

2009

40 MW

Germany,

Brandis

Solarpark Waldpolenz

GM

juwi

2007

2008

34.5 MW

Spain,

Trujillo

(Cáceres)

Planta Solar La Magascona & La

Magasquila

GM, TRAC

2008

34 MW

Spain,

Arnedo

(La Rioja)

Planta Solar Arnedo

GM

T-Solar

2008

Source: Denis Lenardic, pvresources.com

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Catching rays Five success factors in an explosive …...Catching rays Five success factors in an explosive solar market © The Economist Intelligence Unit Limited 2010 Mr Stokes