Rising Solar Prices – Where is the Shakeout?

18 months ago I did an article on rising solar prices threatening the industry, and I think it’s time to revisit some of those thoughts.

“One of the most disturbing things about the solar industry, the rising star of cleantech, has been its recent rising prices. According to the SolarBuzz.com survey, module prices are up close to 7% in the US this last year, after years of falling.

The main culprits according to most solar watchers are a combination of:

  • High demand driven in large part by the US state and German subsidy programs
  • Tight supply on module capacity
  • Tight supply on silicon capacity

The first issue here is that rising solar module prices threaten the viability of the industry, at a time when it is gaining momentum and trying to reach critical mass. Worse, almost every manufacturer of solar modules is increasing capacity trying to take advantage of the industry growth. As a result, we think the industry may be in for a rude awakening if that capacity increase begins to outstrip demand, or if key subsidy programs underpinning growth falter for political reasons.

The businesses most at risk are the young technology developers, who are spending significant equity dollars on technology development and building to a critical manufacturing and sales base. These are the businesses that the VC community is funding at a tremendous rate. These aren’t businesses that are throwing off tremendous amounts of cashflow to weather a storm.

One concern, if the market does turn down, the major Japanese, European, and oil company solar manufacturers are likely to lower prices to keep their factories full, and really hurt the smaller businesses. Keep in mind, if you launched a solar business 5-10 years ago, reaching a 20 MW plant would put you in the top 20 manufacturers. With that same launch today, looking ahead five years to when your technology is commercialized, you will have to hit perhaps 50-100 MW of capacity to be an elite player. That’s a big difference that I don’t think the investment community has understood yet. “

I thought now was a good time to rethink some of those conclusions, given all the recent news in the solar energy sector, and add a few new thoughts:

  • I still believe a silicon price reversion to the mean is coming, and a shakeout with it whose winners are the lowest cost and highest capacity providers.
  • Young technology developers are still the most at risk from this.
  • We have since written about Applied Material’s (NYSE:AMAT) entry into solar and the potential for the double junction tandem cells – which are really hybrid thin film/advanced silicon cells. I think this technology, along with dramatically increased industry capacity, and First Solar’s low cost advance into the sector, is moving the bar for new entrants.
  • So perhaps I was off on my expected timing. And perhaps a coming shakeout will be even more drastic. Or maybe I’m dead wrong and the whole industry will keep growing with no business cycles to worry about. You decide what you want to believe.

Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is founding contributor of Cleantech Blog, a Contributing Author for Inside Greentech, and a Contributing Editor to Alt Energy Stocks.

6 replies
  1. lj
    lj says:

    If you look at gross margins throughout the supply chain, polysilicon prices are where prices are inflated (70% or so) – profits at wafer and cell makers are high, but not unreasonably (30%). The lead time for expansion at these parts is quick, less than 6-months as well so they will adjust quickly to new poly capacity.So when poly capacity opens up, poly margins will be pushed down first, so even though end module prices are falling fast, the costs for wafers and cells are falling as well and they should be able to maintain their margins.If poly prices were to come down to more reasonable, say 30% gross margins, then we're looking at about $0.50/W reduction in polysilicon costs alone, which will be amplified thru the supply chain (assuming they hold constant 30% margins) so the net effect is more around $0.80/W reduction in module price – while wafer and cell makers are still maintaining the same profits.$0.80/W off of $3.75/W or so today is over 20% reduction and will open up a decent amount of demand, so I think wafer and cell guys have a good buffer before they get squeezed.Of course with talk of poly supply multiplying some 4-6 times over the next several years, oversupply is still indeed a big risk but I don't think it will happen in the next year or two.

  2. SolarBlog
    SolarBlog says:

    We have begun the long slow process of introducing solar PV finally into the Sunshine state of Florida. Companies mid state and like mine in south Florida are beginning to populate the roofs of homes with PV technology. Gov. Charlie Crist has introduced some plans for solar and alternative energy production offsets and that is a good thing with some caveats. Neal makes the point (email) that subsidies tend to cause some unusual ripples in the inummutable supply and demand formula. With IBM, Nanosolar backed by Google and all of the other enormous capital flooding the market I think we see a major sea change sooner rather than later. Greedy or tight fisted material suppliers will see their margins evaportate when they are forced to compete because of the market influx. Thats my take on it anyway. Entrepreneurism is willfully myopic to political winds and I hope this cycle remains the same. Great blog Neal.

  3. luis
    luis says:

    Great post!If the economics don't work, recycling efforts won't either. As our little contribution to make this economics of recycling more appealing, http://LivePaths.com blogs about people and companies that make money selling recycled or reused items, provide green services or help us reduce our dependency on non renewable resources.

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply