by Paula Mints, principal analyst, PC services program, Navigant Consulting
Feb. 20, 2009 – All industries function through basic demand and supply economics. The two terms are intertwined, complex, and vague, and always in a power struggle — supply cannot exist without demand (at least not for long), and demand only exists if there is a good that is valued. Sometimes supply marries demand (vertical integration) and takes the struggle behind closed doors. But Darwinian though it may be, in the battle for profit often only the strong survive.
Manufacturers in a region with strong demand can, and often do, control the global price for a good, and sometimes also its availability. A lopsided demand picture (one region with >50% for example) can starve product availability for other regions, creating an unbalanced fragile marketplace in which one change in the major market can lead to an unprofitable situation for an entire industry. When the power (demand or supply) is unbalanced, the weakest link suffers.
In the photovoltaic industry, at this moment, the US has the lowest share in terms of supply. And its market, though it has significant potential, is still developing.
In general, supply follows the market (demand) and/or low-cost areas of manufacturing. A strong domestic manufacturing sector offers positive attributes that ripple up and down the domestic value chain. Basically, the value chain for any industry is complex and intertwined with the two terms amorphous at best. Every company, and everyone, is a customer at some point.
The US was the manufacturing (supply) leader for photovoltaic technologies until 1999 and the rise of Japan, which had instituted a strong capacity based subsidy program along with providing manufacturing incentives. Japan was, and essentially still is, a closed market to outside suppliers. From 1999 through 2006 Japan remained the global supply leader for photovoltaic modules, enabling the country’s manufacturers to develop significant manufacturing efficiencies. Table 1 provides a history of regional photovoltaic industry supply from 1998 through 2008, along with cumulative regional totals. Global supply is divided into four regions: the US, Japan, Europe and the ROW. For supply the ROW is essentially China, though Malaysia (First Solar) and the Philippines (SunPower) are strong contributors. For demand, the regions are the same.
Figure 1. Regional supply, 1998-2008 (in MWp). (Source: Navigant Consulting)
In the late 1990s Germany introduced a capacity-based incentive (100,000 solar roofs), which, along with a zero-interest loan program, proved extremely popular. The country’s EEG (feed-in tariff) introduced in 2000 and amended in 2004 turned Europe into the leading market for solar electric systems, and was the launching pad for large-scale (multi-megawatt) installations. In 2000, Europe had a 29% share of the global market for photovoltaic modules and systems; by 2004 its share had increased to 45%, to 55% in 2006, 71% share in 2007, and 78% in 2008. By 2006, the market in Europe was setting global pricing for modules. Strong demand in Europe had created an elastic market — meaning that manufacturers could increase price without paying a demand penalty — and since demand seemed bottomless (never true), manufacturers had no incentive to sell at a lower price in any other regional market.
The US, with no competitive market or sufficient manufacturing incentives to invite development of a strong manufacturing sector, had little control over price or availability of module products. Figure 2 offers a picture of demand and supply in 2008 — it is an unbalanced picture, with one regional market (Europe) holding sway over all others.
Figure 2. 2008 regional supply and demand (estimated). (Source: Navigant Consulting)
As Europe was cementing its market and growing ever stronger in terms of supply, the ROW region (for supply, basically China) was developing a strong photovoltaic manufacturing sector, without developing an accompanying market, and was able to offer lower manufacturing costs than other regions. As a result, manufacturers from other areas began locating facilities in the ROW region. In 2007, the ROW region had a 31% share of global supply; in 2008 that increased to 40% of global supply, while still maintaining a minor demand presence.
The global recession, along with changes to major markets in Europe, are creating anxiety among photovoltaic manufacturers. US PV manufacturing and its still-developing market (9% share in 2008) continue to lag, exerting little control over pricing and availability of product. (As a caveat to this, current high levels of inventory worldwide are sending module prices spiraling downward, while product availability on the secondary market is high.)
It’s too early to judge how the government’s stimulus efforts will affect the US solar industry — after all, both market development (incentive) and manufacturing incentives are needed. Research and development in the US should not be ignored, but moving technologies from pilot stage to commercial production is crucial, and the domestic market needs to have sufficient support to develop its potential. For the US PV manufacturing sector it is a long climb up from 7% of global supply to a share that has a real impact. — P.M.
Paula Mints is principal analyst, PV Services Program, and associate director in the energy practice at Navigant Consulting. E-mail: [email protected].>