Solar power industry looks on the bright side
By Jeremy Lemer and Ed Crooks in New York
Published: June 8 2011 22:35 | Last updated: June 8 2011 22:35
Provided by FT.com
Solar industry executives have talked for years of the day when their energy would be able to compete effectively with other forms of power generation, a point called “grid parity”.
Now that day may finally be at hand. In parts of the US, the cost of solar power is nearing that of other types of energy at peak times, and analysts and executives expect global demand for it to take off.
GTM Research, an analysis group, predicts global solar installations will rise from about 17,400 megawatts last year, to 20,900MW this year, and increase to 35,500MW in 2015. Yet those figures disguise a paradox for the industry. While interest in solar has never been higher, for the manufacturing companies trying to turn a profit, the outlook is tough. Demand has slowed just as production capacity has ramped up.
Shares in the world’s leading solar manufacturers, First Solar of the US, and Suntech Power, Yingli Green Energy and Trina Solar of China, have fallen by about 10 per cent this year at least in part because of concerns about over-supply and falling prices.
Since the start of the year, the solar industry has been preoccupied with Italy. For about six months starting last September, the Italian market boomed, driven by a feed-in tariff guaranteeing a minimum price for solar electricity for 20 years. It offered internal rates of return to generators of up to 17 per cent, compared with 7-8 per cent for similar German projects.
As a flood of projects came forward, making Italy the world’s second-biggest country for solar installations last year, after Germany, it rapidly became clear that the support mechanism was too generous and would have to be scaled down. Although the new rules released last month proved slightly less severe than had been feared, the total quantity of utility scale plants added each year will be capped, and support ratcheted down by as much as 35 per cent in some cases.
Analysts expect the Italian market to peak at about 6,000MW of installations this year, then drop back.
John Segrich, who manages the Gabelli SRI Green Fund, which invests in renewable energy, says: “The bubble is popping, and simultaneously you have lots of new supply coming in. That means that prices will collapse. You are starting to see it already.”
After pulling back from module manufacturers, last year, Mr Segrich recently sold the Gabelli SRI Green Fund’s holdings in makers of polysilicon and has built short positions in many companies in the solar supply chain.
GTM estimates that total industry production capacity for solar modules will grow 115 per cent in 2011 and 134 per cent in 2012, as Chinese manufacturers and other makers expand.
The result has been a glut of components, and tumbling prices. Over the past five months alone, prices for solar panels have dropped about 17 per cent, according to analysts at Credit Suisse.
Executives at module manufacturers such as Trina and JA Solar have talked of continuing pressure on margins.
Prices for the inverters that connect the panels to the grid have also slipped, and inverter companies such as Power-One and Satcon Technology Corporation issued warnings about their first-quarter results.
Of course, as Rob Stone, an analyst at Cowen, points out, the flipside of falling prices and squeezed margins for manufacturers is that lower costs may create a larger market for developers. “There is a bright side to what is going on right now: it is hastening the progress towards grid parity,” he says.
As Europe slows, producers are looking to new markets such as the US, India and Japan to take over as the engines of growth, and are hoping to succeed there with lower subsidies.
Rob Gillette, chief executive of First Solar, says that as solar costs fall “we can move from the existing market, which is largely mandated by government regulation, to a much larger global market that does not rely on mandates or subsidies. At that point, we move from a 65,000 megawatt market to a 1.7m megawatt market opportunity”.
Still, the much-discussed “grid parity” is not a single point, but varies according to time, place and market position.
Industry executives accept that for the foreseeable future solar power will not be able to replace fossil and nuclear energy for baseload generation, kept running at all times.
But there will be more market niches, such as competing with Japan’s pricey retail electricity, where solar will be attractive.
Shayle Kann of GTM argues that the industry is diverging. Large-scale, low-cost module makers that are strong enough for banks to be willing to finance their projects, such as First Solar, will outperform.
Meanwhile, higher-cost producers, or ones that struggle to meet the bank lending requirements, will be fighting for the remaining market share after the successful producers’ capacity gets used up, he adds.
As a result, many executives and analysts believe that the sector is ripe for consolidation. “Is everybody going to be successful? Probably not,” says Sanjay Shrestha, an analyst at Lazard Capital Markets. “But is solar power here to stay? Absolutely.”