Time Is Energy

Solar market scenarios in 2011

While we will not have the all the numbers for 2010 until about March 2011, let us assume that in 2010 the solar industry will install 15GW at an average cost of $5.50/watt. This compares with 7.5GW at $6.50/watt in 2009, and 5GW at $7.50/watt in 2008. (Rough round figures, maybe a little on the high side.) Of that $5.50/watt about $2 pays for the panel and $3.5 everything else.

Solar Business as Ususal

Germany accounts for close to half the world market and their FIT rate will drop by 13% Jan. 1 2011. There are indications that they may add a supplemental 10% (?) FIT reduction mid-year like they did in 2010. The already planned 13% FIT reduction leads me to believe the installed price of solar will fall to $5/watt as 2011 begins ($1.75 for the panel, $3.25 for everything else). If they implement an additional 10% drop mid-year, one might assume prices in the 2nd half drop to $4.50/watt (panels at $1.50).

It is important to recall that as 2010 began analysts expected panel prices to fall from $2 to $1.75 per watt. There was a lot of sound and fury from analysts about a huge impending supply glut, the uncertainty from big impending German FIT cuts, etc., sound familiar? It should, because the same analysts are repeating themselves again this year. But stronger than expected demand in Germany (& elsewhere) meant there was no glut and the panel price drop never materialized. Perhaps this year is different, and for the first time in a decade lower installed costs will not lead to increased demand. More likely the same dynamic will occur again in 2011 where a proposed mid-year FIT reduction sends the German solar industry into overdrive in the 1st half (ahead of the decrease) and then again before planned 2012 decrease, leading to robust demand that supports panel prices above “rock bottom”.

Given the scenario above, I expect 10-12GW to be installed in Germany in 2011 (half the world market) at an average cost of $4.50/watt. 2012 would likely be 15GW German market (30GW world) at a cost under $4/watt.

Solar Business w/ German Cap

The harder the Germans clamp down on their solar market (using pricing alone) the faster more solar gets jammed into it, increasing the risk of a discontinuity. The 25% price reduction in 2010 led to the market doubling in size. I don’t know is where the political breaking point is, aka how much pain Germany will accept, but the pressure is surely increasing. If a further 25% price reduction leads to another doubling (15GW German market in 2011) that would surely break the FIT. If Germany decides to cap its solar market at something substantially below 10GW, it will dramatically alter the world market. I doubt Germany will/can act quickly enough to cap 2011 installations, but even the prospect of a cap that didn’t begin until 2012 could pull a couple GWs worth of demand forward into 2011.

Almost any level of cap in Germany would cause serious pain to the entire solar industry. A 10GW cap would pressure margins across the board but could probably be managed. A 7GW cap would be very painful, implying no growth for a world market expecting about 50%+/yr growth—some panel manufacturers would fail, nearly all would lose money. If Germany pulls a Spain (and sets a cap very low, aka under 4GW) I expect a brutal pricing dynamic that leads a majority of panel manufactures and many suppliers to fail. It might take multiple quarters as other European countries get swamped and enact their own caps as their FITs break under the strain of several GWs of excess global capacity looking for a home.

We are getting to a price range where the benefits of solar begin to balance out its extra (up front) cost. The benefits of solar include its environmental benefits, its modularity (and rapidly deployable), its low O&M costs, its ability to supply power at times of peak demand, and its highly predictable performance (over long time scales). At the $4.50/watt I expect will be the average installed cost in 2011, utilities in the US only pay $3.15/watt after the federal tax credit/grant but before depreciation/accounting or state benefits. Using overly simple math, $3.15/20yrs leads to sub $0.16/kwh for peak power assuming 1000 hours/year (most locations in the US get substantially more hours/yr). Peak power costs more to produce than baseline (even for utilities that charge flat rates) so this results in rather competitive costs based solely on the 30% federal tax credit/grant not even counting the benefits of solar over fossil fuels.

In a “bad” market installed costs might drop to $4/watt (that is the lowest solar will get in 2011) which translates to $2.80/watt for a utility after the federal grant. Some states offer additional incentives and/or mandates which will support a robust growing US solar market.

posted by Daniel @ 5:12 PM