The Solar Market: Horseshoes, Hand Grenandes and Demand Predictions

By Daniel Englander

The solar market is funny in that it exhibits many of the inefficiencies associated with markets that move according to artificial price signals. In this case, the artificial price signals are policy and incentive programs designed to increase deployed capacity. These range from renewable portfolio standards to tax credits to REC programs and ancillary credit markets to feed-in tariffs to something the French have that I’m not sure even they understand. Such programs play a key role in setting local prices and, by extension, determining demand in those markets.

Easy, right? Setting a feed-in tariff to EUR 0.42/kWh or an REC to $33.23/MWh, or even a tax credit to 30% of the installed cost, gives customers a somewhat known price. Combine this with suppliers moving into gigawatt scale production in 2008, easing raw material constraints, and cost-engineered process improvements, and you start to get a picture of an industry moving down the cost curve while succumbing to some strong market drivers. Among these are high commodity prices, unpredictable power markets, and growing environmental consciousness (tangible or intangible, depending on who you ask). Taking all of these variables into account, it should be relatively easy to estimate the size of the demand side and the size of the overall solar market.

Not quite. Demand side estimates range in accuracy from pin the tale on the donkey to Dick Cheney with a shotgun. Photon thinks demand will reach roughly 24 GW by 2010, outstripping supply by 80 percent. I’ve heard this estimate includes a 500 MW market in the Czech Repubic. I’d like to try whatever it is they’re smoking. Most other estimates range between 5 GW and 10 GW, which isn’t something you wouldn’t want to bet grandma’s life insurance on.

Part of the reason estimating demand is so hard is that consumer prices are still largely a function of political will. Sure, economies of scale on the producer side ought to bring down costs, which, tempered by rising demand for cheaper modules, will establish some kind of marginal price to guide producers. But if policies do too well and end up costing too much, it’s pretty easy to lower tariffs or eliminate tax credits. We’re seeing this in Spain right now, and we almost saw in it Germany. It’s possible the demand side models suppliers use fail to take this into account. Instead, they see unlimited demand prospects at a certain price level and at a steady rate of tariff declination.

The problem is that this causes a certain amount of, dare I say, irrational exuberance. Sure, I love slicing wafers as much as the next guy, but the hope that markets will materialize shouldn’t justify supply growth at 70 percent while growth on the demand side moves at 45 percent. It’s unlikely we’re going to experience another Spain-Germany-Japan trifecta like we did in the golden days of 2005. Maybe unaccounted for demand in India and China will move this market. Or maybe the Spanish could start making panels out of ham – I’ve seen 243 different kinds of ham this week in Valencia. Clearly, solar ham is the next logical step. I doubt the Spanish government would rescind that feed-in tariff.

Comments

[aquaculture:]

Well Photon has been RIGHT in predicting demand for the last 5 years. Not sure you're looking at the same Valencia. Forget the ham & the beach.
Photon mentioned the likelyhood of a compromise in the next FiT revision, a higher Spanish PV cap of 500-600 MW/annual as opposed to earlier 300 MW.
When looking north-west see dwindling natural gas supplies & aging nuclear plants facing enormous decommisioning costs.
Looking south see political instability.
Eastward, think EU wealth redistribution & energy security in light of Russia's historic relations with Chechs, Roemenians, Hungarians, Slovenians, Georgians, Kroats etc. etc...

2008 Sep 04 08:08 AM

[gebby:]

throw in the united states. what is the likely impact on demand of that? energy prices will remain high despite the recent pullback. 2010 could be ugly in terms of high oil prices and its impact on the economies around the world. the need for solar will accelerate worldwide.

2008 Sep 04 09:58 AM

[David Lentz:]

In assessing the demand for solar, you might want to try and factor in the expected price of oil in 2010. Here too , one finds guesstimates all over the map, from low-end estimates well under $100/bbl to numbers double that and climbing.

That just goes to show you the uncertainties in projecting energy market prices. It's the same pretty much everywhere. Uncertainties abound.

So what does that mean? Lots of volatility. A trader's market, rather than an investor's -- or that investor's have got to have deep pockets, and a high tolerance for risk, as there will be no reliable guesstimates that they can hang their hats on.

Investing in energy is as much a matter of faith as finance.

2008 Sep 04 11:36 AM

[searcher:]

Germany is not likely to take their foot off the alternative accelerator in view of the sourcing of their energy. The same will apply to the rest of Europe when they come to their senses.

2008 Sep 04 01:34 PM

[RLLH:]

In Florida the local power company has file for a 31% price increase for this year. If that trend continues, and solar prices drop 20% a year, how long will it be before they cross?

2008 Sep 04 02:34 PM

[realisticguy:]

I have to say you do attempt to be funny. It doesn't work. But you attempt. As to the inability to predict the energy market,,,,does this surprise you? One thing is certain. Oil is not going to be cheap in ten years. Too many cars, not enough oil. And, as for coal-fired electric plants....let's hope we have empathy enough to not want to leave our great grandchildren an uninhabitable planet. I think the world is smart enough to recognize the necessity for solar power. It is just a matter of when and how it gets that done. Obviously you do not think solar is positive. It would be nice if you kept that opinion to yourself.

2008 Sep 04 05:07 PM

[vpratt:]

And then there is the nagging problem of politics interfering in what should be a fairly logical progression of innovation and science.
For a long time to come, I will be haunted by the image from Giuliani's convention speech. Thousands of otherwise good, intelligent folks chanting "Drill Baby Drill, Drill Baby Dill"!!! It was a haunting echo from the past of an unrelated, but similar chant, "Burn Baby Burn"

2008 Sep 04 07:35 PM

[Buffettz:]

Interesting article in latest Photon mag on Japan, could turn out to be anything up to a 1GW market if they reintroduce a subsidy plan

2008 Sep 05 02:14 PM

[PeteK:]

When the price of gasoline drops back to below $3.00 per gallon, people will rush to buy monster-trucks and 300-horse power vehicles. Americans never learn. That's why we are always begging the Fanatics to sell
us more oil. What a shame !!!! We need solar & wind power, that's what we have plentyful. Tell that to your congressmen and senators. When loud enough, they will listen.

2008 Sep 07 06:19 AM

[everbrite:]

In some ways you are right. The supply of all panels will meet the demand for all panels. Solar panels, as in most things made in Asia, will see geographical demand and price paid for its product based on the quality of its product. What is acceptable for China, India and Africa is not going to be acceptable to the USA and Europe. A top quality panel will cost $4.00 per watt. A poor panel with doubtful warranty will cost $2.00. The average panel will be somewhere in between. The large energy developer has no problem with CdTe in their fields but would they put it on their personal property where their kids play? CdTe will not do well at retail so deflates the value of thin film. Most panels made in China are not subject to quality and warranty controls of those made in Germany. This reduces the overall value of silicon wafer panels. So the true value of a panel will be like a four door sedan. Both go 60 miles an hour but ones a Lada and the other a Mercedes.

2008 Sep 17 04:36 AM