PALO ALTO, CA - The photovoltaic industry is at the beginning of a painful change in the way incentives (driving force for the grid-connected application) are designed and administrated. Instead of generous feed in tariffs, the future likely holds tradable certificates and tenders (auctions) to set power purchase agreement (PPA) rates that will then be referred to as FiTs. Auction based incentive rates are the trend leading to margin declines for entities along the solar value chain from manufacturing to projects.

Industries are made up of people reacting for market forces and pressures, and as such exhibit behaviors specific to these pressures. Reliance on incentives to drive demand has led to specific behaviors, including frantic buying when prices are low, and frantic installing into any available market. The industry continues to behave erratically, and can be difficult to size accurately. One reason for the sizing difficult are the different metrics that are available for measuring, and the lack of definition of what is being measured and how it is being measured.

Paula Mints, Director,
Navigant (NYSE: NCI)

For example, in some cases industry size is defined by announcements of projects, or by non-transparent state or country databases, or, by installations, manufacturer capacity or shipments to the first point of sale in the market.

In the 2005 through 2010 five-year period, shipments to the first point of sale in the market, increased by a compound annual growth rate (CAGR) of 65%. The first point of sale in the market can be an end user, a distributor, an installer or another manufacturer.

Installations tend to lag demand, however, in recent years with growing levels of inventory on the demand side, installations have in some cases exceeded annual demand levels. In general, the calendar year begins with some level of inventory from the previous year. This excess inventory is then absorbed, typically. In the 2005 through 2010 five-year period, installations (for all applications) increased by a compound annual rate of 73%.

In 2010 installations exceeded demand by 109.2-MWp, indicating that most of the inventory from 2009 was absorbed. During the end of 2010 there was significant buying, again leading to inventory, much of which was resold during the beginning of 2011.

On an annual basis, accelerated growth in the photovoltaic industry continued in 2010 at 120% over the previous year, from 7.9-GWp to 17.4-GWp. In 2011, despite a flat first half, growth is expected from 4% (conservative) to 27% for the accelerated forecast.

The grid-connected application, in the aggregate, grew by a compound annual rate of 71% during the 2005-2010 fiveyear period. This strong growth is entirely due to the feed in tariff incentive model. Now that this model is undergoing changes that a) make it a less profitable investment (lower IRR) and b) insert instability, strong growth going forward should not be assumed.

Nor can the solar industry be considered mature, at which slower growth is normal. The grid-connected application continues to require incentives in order to grow profitably. Without support, and likely even with it, prices will be artificially low, and there will be little incentive and costs will be cut in areas such as installation practices. Cutting costs in this regard will lead to substandard installations along with mind-share damage to a young industry that can ill afford it.

In addition, high levels of inventory will continue to obscure the true market picture as these data high levels of shipments that are at odds with installation data.

Finally, as some held inventory is actually manufacture owned, the market picture is further obscured rendering planning difficult. Bluntly, it is difficult to plan for a volatile market with little transparency and much obfuscation.

Figure 1 (see page 21) provides a picture of grid-connected application growth through 2015, under the reduced incentives, conservative and accelerated growth scenarios. In mid-2011, demand remains slow in Germany (though it is expected to increase August, September, October and November), while demand in Italy remains strong. Mid-year, demand side inventory is between 3-GWp and 5- GWp, that is, there is at least 3-GWp of demand side inventory at mid-2011.

Table 1 (see page 21) provides an overview of regional growth and share of total demand from 2005 to 2010, along with the five-year compound annual growth rate for this period and installations for 2010. Demand for solar systems continues to be dominated by the photovoltaic technologies. For the several years, there has been significant inventory build-up on the demand side of the industry. Holding module inventory on the demand side is not new, however, the significant degree of held inventory is a recent phenomenon, and an unfortunate one.

The solar industry grew from megawatt level to multi-gigawatts of demand because of the feed in tariff incentive model.

Unfortunately, some versions of the FiT were overly generous and lacked sufficient controls leading to overheated markets. Overheated markets along with aggressive pricing for share led to the development of high levels (~36-GWp) of manufacturing capacity, artificially low prices, low margins for manufacturers and high levels of inventory.

Keeping these factors in mind, the industry now finds itself with price levels that cannot increase and incentive levels that will also not increase. This means that the industry will need to change to survive.

It will need to develop price elastic customers that do not require incentives, it will need to adjust to power purchase agreement types of incentives where the price is set by bid, and it will, unfortunately, have to adjust to lower margins.

About the Author:
Paula Mints is the Principal Analyst for the Solar Market Research Program, and a Director in Navigant’s Energy Division, located at Navigant Consulting, Inc.’s Palo Alto, CA, office. Ms. Mints also serves as executive editor of the Solar Outlook Bimonthly Newsletter The PV Service Market Research program is a 37 year old, globally recognized market research practice. Ms. Mints began her work with this program in 1998.

Ms. Mints is widely recognized as an industry expert on photovoltaic (PV) technologies and markets. In 2011, she spoke at over 40 conferences and published over 30 times in industry journals, magazines and newsletters. She serves on several conference committees. Ms. Mints has a monthly column in the print and on-line Photovoltaics World magazine. Ms. Mints provides clients with objective, comprehensive PV industry analysis based on extensive primary research, including her forward-looking understanding of market and technology trends.

Professional Expertise
• Photovoltaic Value Chain Analysis, from raw material to end user
• Technology Sales (shipments) from Manufacturer to first point of sale in the market (the photovoltaic selling channel)
• Thin film and crystalline technology analysis • Analysis of Photovoltaic Application Segments
• Photovoltaic Average Module and System Pricing over time and ten year ASP forecast
• Solar market trend analysis backed up by 37 years of hard data

Paula Mints
Director, Energy Division
Principle Analyst Solar Market Research Program
Executive Editor Solar Outlook Newsletter
Navigant Consulting
3000 El Camino Real
5 Palo Alto Square
Palo Alto, California 94306
Tel 650-849-1142
Fax 650-849-1160

Professional Solar Industry History
• Navigant Consulting, Inc. 2005 - Present
• Strategies Unlimted
• 1998 - 2005 Education
• San Jose State, BS – Business Concentration
• San Jose State, MBA, Market Research Focus