By Matthew Feinstein

Competitive dynamics within the solar industry are two-fold: Solar’s competitiveness as an energy source, and the competitiveness of individual solar companies against one another. Since 2008, natural gas prices have quickly declined and are poised to remain low with shale gas supply exploding in the U.S. and elsewhere. Since solar’s main competition as a daytime energy source is peak-fired natural gas, Tier-1 Chinese suppliers are squeezing margins and searching for savings on materials costs to keep up. In doing so, high-cost solar options like that offered by Solyndra are increasingly uncompetitive with other solar companies, let alone natural gas. This price pressure is compounded by massive oversupply in the crystalline silicon supply chain. There is simply no room for high-cost solutions, and that is the mantra of the ongoing solar shakeout.

Who Stands to Win

Further, these same low-cost incumbents are not content with their current positions; they are pursuing new technologies and increasing capacities. While thin-film startups struggle to reach 500 MW and realize the cost targets that secured their venture financing, crystalline silicon incumbents are pushing towards 3 GW or more annual capacity. While manufacturing scale helps to incrementally decrease costs, those same Tier-1 incumbents are also investing in high-efficiency cell technologies to further reduce cost-per-watt, as was documented in the Lux Research State of the Market Report ‘Traversing the Road to Higher Crystalline Silicon Efficiencies: Who Stands to Change the Game, and How It Will Play Out’. All solar companies at each step of the value chain remain innovative, looking for new ways to reduce cost-per-watt or cost-per-kilowatt-hour. For many startups, like those producing thin-film modules or micro-inverters, their success hinges on these innovations and realizing the associated cost targets. Incumbents have the luxury of rolling out these new technologies as they become cost-effective. Solar remains an industry where innovation runs rampant, but any disruptive technology without significant potential for cost advantages will find it extremely difficult to secure a foothold in today’s market.

Opportunity Remains

Demand for solar is growing, indeed--the market will increase from 15.8 GW in 2010 to 37.5 GW in 2016. However, system cost reductions are outpacing this growth. Industry revenues stood at US$64.4 billion in 2010, and decline to US$56.9 billion in 2012 before recovering slightly, increasing to US$65.4 billion in 2016. To these ends, many potential entrants have withdrawn their efforts or shied away from solar. However, don’t be fooled--opportunity remains. First, potentially low-cost innovations will always be welcome to the solar industry, though companies that cannot then ramp and execute on their potential will wither away. Second, the downstream market--installers and developers--are poised to capitalize on the increasing demand market. How else to explain the success of American solar companies like SolarCity and SunRun, amid the failures of Solyndra, Spectrawatt, and Evergreen? In the case of Solyndra, the company demonstrated a truly innovative cylindrical solar module. However, we believe it fell victim to high production costs and low manufacturing yields. These are design and execution flaws, not the fault of Chinese government grants or suddenly falling polysilicon costs--a drop Lux Research predicted accurately in the 2009 State of the Market Report, ‘Finding the Solar Market’s Nadir’.

Solar Is a Business More than a Movement

The solar downturn has made its way into the mainstream media, thanks to bankruptcies, pulled IPOs and falling stock prices. What remains largely unacknowledged is that innovation remains welcome and opportunities remain present, though neither is a sure path to easy money. The solar shakeout is about companies with innovative technologies that cannot ramp operations, execute, and compete on cost--because while these companies can attract venture funding thanks to environmentalism and clean tech-enthusiasts, they won’t be sustained by either. Solar is a business more than a movement, and it will continue to prove its Darwinian nature (only the strong will survive) with each additional bankruptcy.

As an analyst at Lux Research (www.luxresearchinc.com), Matthew Feinstein currently leads the Solar Systems Intelligence practice, covering solar module technologies, grid interconnection and project development/finance, as well as power electronics and other balance of systems technologies. Feinstein received his B.S.E. in Mechanical Engineering from the University of Michigan.

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Companies that Cannot Compete on Cost Should Prepare for Failure

InterPV has sat down with Lux Research Analyst Matthew Feinstein to talk more about

the state of the solar market and who will  win and who will lose.

Reported by Jeanny H. Lim (swied@infothe.com)

What are the major threats to the solar industry at the moment?

The biggest threat to the solar industry at the moment is the global economic crisis. The solar industry remains very much dependent on subsidies and favorable policies, and so the crisis threatens the subsidies that make solar power a viable energy option in many markets at the moment.

Governments around the world including Spain, Germany and Italy have been reducing or limiting their solar subsidies, slowing the world market. What is your view on the direction of solar subsidies? Will the subsidy cuts continue? How will it impact the solar industry?

Subsidy cuts will continue. Part of this is good, and planned--as system costs naturally reduce over time, subsidies that reduce in kind keep returns stable for investors in solar. We believe Germany and Italy’s subidies do this quite well for the near future--and the stability that accompanies long-term market visibility, for investors, is actually a very good thing for the industry.

The PV module industry has recently suffered from a huge oversupply, which has led to fierce price competition with average prices dropping by around 20% in a single quarter. Do you think the oversupply will continue?

We think steady system cost reduction will continue, but that oversupply will lessen over time. Much like the semiconductor industry, oversupply and shortage could circulate, and cause fluctuation in prices. However, near-term--lessening oversupply could allow dominant crystalline silicon module suppliers to roll out innovative production technologies boasting higher cell efficiencies, as discussed in one of our latest state of the market reports authored by my colleague, Pallavi Madakasira.

In this highly competitive market, who will win and who will lose?

Simply put, companies that can innovate, ramp and execute will win. Among larger competitors, companies that diversify geographically--finding a number of small markets that can subsidize on the order of 100s of MW (versus the GW-scale markets, like Germany, which are obvious) for a short period of time before moving on, will win.

Competition in the PV market is only going to get more intense. Do you have any advice as to how PV module suppliers should position themselves to win in the market?

Companies that cannot compete on cost should prepare for failure. Cost competitiveness is a need-to-have in solar, not a nice-to-have. Once in the market, they must position themselves in whatever is their most competitive market segment and geography (this differs by technology offered by the company).

Is the failure of PV module suppliers such as Solyndra, Evergreen Solar and SpectraWatt a warning to all the other PV module startups?

Yes; it should be a warning that investors are growing weary, and lofty expectations of cost competitiveness down the road are not enough to compete in solar today. Firms must meet their cost and performance milestones at the risk of losing investor support; further, they must prove cost competitiveness--Solyndra scaled and still could not compete on cost. PV module startups must understand that they cannot succeed solely on the back of solar market growth, but that they are involved in an uphill battle against low-cost incumbents reluctant to cede market share.

Regarding the Solyndra closure, do you think further capacity expansion, increased production and a few more years of technical advancements could have changed the situation?

We believe that, after nearly US$1 billion in venture funding and US$500 million in a federal loan guarantee, Solyndra’s high production costs (and likely low manufacturing yields) were a design flaw more than a lack of support from any end. We don’t believe the company was destined for success, especially given the volatile market conditions (polysilicon pricing) that led to massive reductions in crystalline silicon module prices. Crystalline silicon modules dropped from US$3.80/W in 2008 to US$1.50/W in 2010. While we don’t believe the drop in pricing was unexpected, we do believe it severely hurt Solyndra’s business case.

Solyndra’s failure will come as a warning to the vast number of other thin-film startups that have recently emerged. Is there enough room for further cost and price reduction in c-Si to compete with thin-film and/or new technologies in the long run? Or will thin-film become the dominant PV technology in the coming decade?

There is room for panel manufacturers in the solar market. Solyndra was one supplier, with a particularly unique technology. However, many thin-film competitors claim production costs at US$0.50/W or lower at scale--those who can achieve these costs and price accordingly, are an attractive option, at least for product evaluation. Those who cannot compete on cost are already at a disadvantage given their lack of performance history, and are likely to fall out of the market without significant help from large partners.

Solar panel manufactures have rapidly lowered costs through vertical integration. Those companies who have vertically integrated stand to benefit from more expansion and growth and possible M&A activity. Additionally, the Chinese government has announced it expects to double solar capacity from five (5) to ten (10) GW by 2015. What does this mean to the US and European manufacturing of solar PV? Is there any chance that the US and Europe can compete and if so how?

Again, module suppliers can compete if they can compete on cost. The massive scale Chinese suppliers have already achieved means that expanding capacity only brings incremental cost reductions; for thin-film technologies first acheiving scale, there is the opportunity for high-risk high-reward technologies to reduce costs signficantly (and also to fall flat). While firms will always need to compete with Chinese companies receiving heavy government support, it does not mean they do not have public support themselves--like Stion, Calisolar, and SoloPower in the U.S. It is up to individual companies to prove that they can compete against one another in the global solar market.

What factors will affect the future growth of the global solar industry?

The future growth of the solar industry is dependent first and foremost on policy. Whether it is cut based on economic woes or boosted based on anti-nuclear sentiment, the industry is still very much reliant on governments subsidizing solar power as investors seem to be growing weary with regards to funding companies.

What is your outlook for the PV market for 2012?

We project the solar market to grow from 15.8 GW in 2010 to 17.4 GW in 2011, and 18.8 GW in 2012.

Jeanny H. Lim is Editor-in-Chief of InterPV. Send your comments to swied@infothe.com.