New solar photovoltaic (PV) capacity may rival or exceed the growth in wind energy for the first time in 2013, as growing demand and continuing industry consolidation begin to brighten prospects for solar manufacturers, industry analysts report.
Between 30 and 37 gigawatts (GW) of solar PV capacity will be connected to power grids worldwide, according to forecasts obtained by TheEnergyCollective.com from GTM Research and Bloomberg New Energy Finance (BNEF). The higher end of that forecast would outstrip BNEF's projections for 33.8 GW of wind capacity additions this year, marking the first time that solar has gone toe to toe with wind in terms of capacity growth.
BNEF projects a 20 percent increase in the annual rate of solar PV installations, while wind power growth will slow by 25 percent as markets in the United States and China cooled this year.
I caught up with Shyam Mehta, Senior Solar Analyst at GTM Research, to talk about what this year's forecast portends for the global solar industry. Is solar really set out pace wind? And what does the growth in solar demand mean for PV manufacturers, who have been struggling through a period of oversupply, razor-slim margins, and a raft of bankruptcies? What follows is a lightly edited transcript of our conversation.
Jesse Jenkins (TheEnergyCollective.com): BNEF projects that the annual rate of solar PV capacity installation will outstrip wind growth for the first time this year. Do you also foresee solar capacity additions passing wind?
Shyam Mehta (GTM Research): Our forecast for PV demand in 2013 is currently 30.8 GW. That's only 2 percent higher than our 2012 estimate of 30.0 GW.
Note that we define demand as grid-connected systems online in 2013, not panel shipments or simply constructed systems, so our numbers will naturally be lower than an installation-based estimate [Editor's note: e.g. BNEF's]. Right now, there is a significant (more than 5 GW) interconnection backlog in markets such as China and Japan, which means those projects won't come online until 2014. So the semantics drive a lot of the difference in analyst's estimates.
The bottom line tough is that the annual PV and wind markets are now in the same ballpark, and we expect PV to continue growing strongly to almost 60 GW by 2017. You can't call solar wind's little brother anymore!
What is behind the growth in solar PV this year?
In a word: Asia. Demand for PV in Asia is expected to grow this year at 73 percent.
In particular, China and Japan are expected to be the two largest solar markets in the world. You have very low-cost utility-scale solar going into China right now, at installed costs of below $1.30 per Watt, and those costs are made even more economical by old incentives under the "Golden Sun" program and new ones in the form of a feed-in tariff that went into effect in this October. Japan also has had a very generous feed-in tariff in place that has seen that market explode since mid-2012. And add to that the continued strong growth of the U.S. market to more than 4 GW.
Together, these three markets - China, Japan and the U.S. - have now replaced Europe as solar's bread-and-butter markets, accounting for 52 percent of demand in 2013, compared to only only 13 percent in 2008.
(Source: GTM Research)
Have new subsidies and markets in Japan and China been enough to offset subsidy reductions and cooling markets in the Europe? (Has India's market moved to the global stage yet?)
It's interesting: for 2013, our numbers show that the increased demand in the three core markets mentioned above - China, Japan and the US - is almost equal to the drop in European demand - around 6.5 GW. India continues to be a gigawatt-plus market, but is currently working through the usual teething troubles any nascent market faces - lack of low-cost finance, PPA underbidding, low-quality projects, incentive cutbacks, etc. But it is becoming more vibrant by the minute as an increasing number of states are introducing their own incentive schemes and solar-specific RFPs.
(Source: GTM Research)
Speaking of China, industry analysts have argued that one of the main reason for China's new subsidies for solar was to sop up demand for Chinese-built panels previously exported to European markets. Do you concur? And how much has China's new domestic market helped make up for declining exports?
China's rise as an end-market for PV came about the very same time that oversupply began to plague the manufacturing sector. It is difficult to see this purely as a coincidence, especially as the Chinese PV component market is almost entirely composed of domestic vendors. And we've seen that the Chinese market became very important for the lowest-cost component manufacturers - firms like Trina, Jinko, and Sunowe.
The Chinese market is very far from ideal in terms of doing business, however. Pricing is very low, payment terms are long, and counterparty risk is high. You can only really make money in China right now if you are downstream-integrated - meaning you manufacture components and do the EPC work yourself, and have cheap capital.
So China is definitely a high-volume market and certainly a long-term market, but it is very challenging for a solar company to be profitable if it is only doing business in China at the moment.
Despite this growth in solar demand, the global solar industry will remain grossly oversupplied this year, correct? By how much does global manufacturing capacity exceed projected demand? How large is China's role in this oversupply?
The oversupply situation has changed quite rapidly over the course of 2013. At the beginning of the year, panel supply was roughly twice that of demand. Over the course of the year, roughly 13 gigawatts of panel capacity will have been permanently retired. And on top of that, we've seen a number of the weaker Chinese firms reduce operations substantially and idle most or all of their manufacturing capacity - companies like LDK Solar, for example.
On the demand side, we're seeing robust demand come out of the new core markets, with Japan in particular absorbing supply at much higher prices than the rest of the world.
Put those together and right now, we're in a situation where the best-positioned suppliers are experiencing supply shortages and planning to expand capacity in the second half of 2013 and into 2014. On the other hand, weaker firms are still struggling. So whether there is still oversupply very much depends on who you ask at the moment.
How much industry consolidation is occurring this year given oversupply? Despite growing demand, are manufacturers continuing to shut doors and see margins fall?
We're seeing a lot of differing trends manifest in 2013 in terms of industry consolidation.
For the best positioned firms, the market environment is currently the strongest it's been since early 2011. Global pricing has increased about 10% since the beginning of 2013, while production costs have dropped by around the same amount. I think we'll see a number of firms reap significant profits in the second half of 2013.
Amidst this, most non-Chinese firms are still really struggling because of their higher costs of production and the increasing commodification of components. We've seen a number of Western suppliers closing factories and shutting doors over the course of the year and we'll probably continue to see that in 2014.
Margins are on the rise for everyone, but that's still not good enough for many in terms of net profitability.
How long will oversupply continue to plague the solar manufacturing industry?
There is still over 50 GW of solar manufacturing capacity across the value chain from polysilicon to modules. In contrast, demand, however you define it, is in the range of 30 to 35 GW.
That sounds like a big difference. But as I mentioned, a lot of that capacity is mothballed right now, and may never be turned on again. In terms of what's really online, we've been in a fairly balanced situation over the past few months, and we've actually started to see firms talk about adding capacity in 2014. And as demand continues to grow, supply and demand will start to rebalance [Editor's note: see graphic below].
I expect that the next round of capacity in China will be added with much more capital efficiency than in 2010 and 2011. And China has just announced new regulations, where new plants that "purely" expand capacity will be banned, suggesting that instead of companies buying new equipment, you'll see a lot of existing capacity changing hands, possibly through M&A activity. So I think we're looking at a much more balanced market in 2014 in terms of supply vs. demand.
(Source: GTM Research)
Is the solar manufacturing industry's pain the solar installers' and retailers' gain? Is manufacturing oversupply helping drive down prices and spur solar demand?
Undoubtedly, the falling price of PV equipment has led to a lot of projects being developed that otherwise would not have been economical in the last two years, and the oversupply has forced suppliers to explore new markets, which has accelerated their development - good examples are Indonesia and Latin America.
But there's a flip side to this: there's a growing fear in the industry that the drop in costs and prices we've seen may have come at the expense of product quality. Much of the impact of these lower-quality products being installed may not be experienced until several years from now, when systems begin to perform at a level significantly below their guaranteed levels. Not to mention that the supplier insolvencies we've seen have led to doubts that even established manufacturers would be around to honor their warranties even more than five years from now. We're very far away from understanding the long-term reliability risk of all this nascent product out in the field; more than 2/3rds of the world's PV was installed in just the last 2 and a half years.
Thanks Shyam for the insights. For our readers: what do you think about solar's outlook for 2013 and beyond? Continue the conversation in the comments. -Jesse