One of the big questions in the global energy is around the shape of the cost curve for solar PV in coming years. After stunning most people, including those in the solar industry itself, with cost declines of 70 per cent over the last two years, there is a great amount of speculation as to what happens next.
Will the shakeout in manufacturing, the balancing of supply and demand, and the inevitable search for sustainable operating margins mean that the speed of the cost declines is arrested? Or will technology improvements, productivity requirements, and the scalability that will be delivered as more countries reach cost parity deliver yet more cost declines?
Global consultancy McKinsey & Co, in its report Solar power: Darkest before dawn, says underlying PV costs are likely to continue to drop as manufacturing capacity doubles over the next three to five years. Indeed, the cost of a typical commercial system could fall a further 40 per cent by 2015 and an additional 30 per cent by 2020, permitting companies to capture attractive margins while vigorously installing new capacity.
McKinsey believes companies will achieve these dramatic cost reductions by using techniques used in more mature industries to optimise areas such as procurement, supply-chain management, and manufacturing. “Our analysis suggests that the cost of a commercial-scale rooftop system could be reduced by 40 per cent by 2015, to $US1.70 per Wp from roughly $US2.90 per Wp, and by approximately another 30 per cent by 2020 — to nearly $1.20 per Wp. Thus, it says, companies could position themselves to capture attractive margins, even as prices for PV modules decline.
This is how McKinsey expects this to unfold:
McKinsey says scale will be crucial for solar manufacturers; a few years ago, manufacturers needed to have 50-100MW of solar capacity to compete in the PV market, today they need 2-3GW of capacity to compete, it notes. And to achieve scale, they will also need strong balance sheets. Interestingly, China appears to have recognised this, too, which is why it has set ambitious targets for its major solar manufacturers over coming years.
McKinsey says partnerships across industry groups will almost certainly emerge as the impact of solar PV feeds into the broader economy. It envisages partnerships between manufacturers and home builders, security companies, broadband providers, phone companies, or retail power providers.
But the real money may be made away from the manufacturing sector. “The cost of capital is often the most crucial factor determining returns on solar projects,” it says. “To succeed in downstream markets, companies need strong capabilities in project finance – indeed, the entities that structure solar investments often achieve better returns than the companies that manufacture or install modules.”
It notes that solar companies are increasingly likely to turn to institutional investors, asset-management firms, private equity firms, and even the retail capital markets, to raise the sums required to finance the expected demand for solar, which could add up to more than $1 trillion over the next decade.
“As the solar investment pool swells, financial institutions, professional investors, and asset managers are likely to be drawn to the sector, since solar projects that are capital-heavy up front, but rely on stable contracts, will become attractive in comparison with traditional financial products. New types of downstream developers and investment products will emerge to aggregate low-cost equity and debt and to structure financial products with risk-return profiles aligned with the specific needs of institutional investors.”
In short, the maturation of a significant energy market.
Just out of interest, the McKinsey report also includes a brief description of how the global boom-bust in solar PV occurred and why. It’s one of the most concise reports on what happened, so it’s worth repeating.
Boom: 2005 to 2008
“The solar industry was initially nurtured in Germany, Japan, and the United States, then gained strength in countries such as Italy, where government support designed to boost demand helped photovoltaic (PV) manufacturers increase capacity, reduce costs, and advance their technologies.
“These subsidies helped spur demand that outpaced supply, which brought about shortages that underwrote bumper profits for the sector until 2008. The focus during this period was developing better cell and module technologies; many Silicon Valley–based venture-capital firms entered the space around this time, often by investing in companies in thin-film solar-cell manufacturing. Valuations for some of the more promising solar-cell start-ups at that time exceeded $1 billion.
“The price to residential customers of installing PV systems fell from more than $100 per watt peak (Wp) in 1975 to $8 per Wp by the end of 2007—although from 2005 to 2008, prices declined at the comparatively modest rate of 4 percent per year. German subsidies drove value creation, with the lion’s share of the value going to polysilicon, cell, and module-manufacturing companies in countries that are part of the Organisation for Economic Co-operation and Development.
Bust: 2009 to 2011
“Encouraged by the growth of the industry, other countries— including France, Canada, South Korea, Australia, South Africa, India, and China—began to offer support programs to foster the development of solar sectors within their borders.
“Chinese manufacturers began to build a solar- manufacturing sector targeting foreign countries where demand was driven by subsidies, particularly Germany. Armed with inexpensive labor and equipment, Chinese players triggered a race to expand capacity that drove PV prices down by 40 percent per year; prices fell from more than $4 per Wp in 2008 to about $1 per Wp in January 2012. We estimate that balance-of-system (BOS) costs declined by about 16 percent per year in this period, from about $4 per Wp in 2008 to approximately $2 per Wp in 2012 (these are more difficult to track, in part because BOS costs vary more than module costs).
‘The cost curve flattened for many upstream segments of the value chain during this period. For example, costs converged for many polysilicon manufacturers from 2010 to 2012; one force that drove this trend was the entry of players such as China’s OCI Solar Power and Malaysia’s GCL Solar, which contributed to polysilicon spot prices declining from about $50 per kilogram in 2010 to between $20 and $25 per kilogram today (exhibit). Solar-cell and module cost curves have flattened to similar degrees. As a result, value has migrated downstream to players that develop and finance solar projects and install capacity.
“By 2009, venture-capital firms began to shift their new solar investments from capital-intensive solar-cell manufacturers to companies focused on developing innovative downstream business models, such as Solar City, SunRun, and Sungevity.”