Initially, this 40-50% annual expansion of production raised concern that
a "glut" might reduce prices and margins. Further, we worried about
negative impacts on demand if interest rates were to rise, hydrocarbon
prices fall or pro-solar policies be reversed. However, interviews with
400+ solar power executives and policymakers in 10 geographic markets have
fortified our conviction that demand will significantly exceed supply
through the end of the decade, that prices are likely to remain high and
that margins are likely to continue expanding for at least 3 more years.
Overall, we suspect that many managers and analysts are significantly
underestimating the sector's strong prospects for volume, price and
earnings for 2006 through 2010.
Supply:
10 GW BY 2010. Interviews with 400+ solar companies and 50+ site visits
have convinced us that sector production will reach at least 10 GW by 2010
(530% growth versus 2005). The bulk of this growth will be in crystalline
silicon (c-Si) solar cells/modules. With production of high purity Si
feedstock rising from 32,000 tons in 2005 to at least 85,000 tons in 2010,
the solar sector will have at least 59,000 tons available in 2010. At the
same time, increasing cell efficiencies and decreasing waste will enable
silicon usage per watt to improve by 40%, from 11.5 g/W in 2005 to 7 g/W
in 2010. The result is that total c-Si cell/module production will likely
exceed 8 GW by 2010. In addition, we see even stronger percentage growth
of non-traditional technologies (CdTe, a-Si, CIS, ?c-Si, concentrators)
which are capable of filling a portion of demand unmet by c-Si. We expect
nontraditional production to expand from 0.15 GW (9% market share) in 2005
to 2 GW (20% market share) in 2010. There is upside potential for both
c-Si and non-traditional beyond our forecasts.
Demand: No Glut
With so much production coming online, we spend most of our time worrying
that over-supply will drive down prices, margins and returns. This concern
is exacerbated by risks that could diminish demand, such as higher
interest rates, lower hydrocarbon prices or reversal of pro-solar
policies. After months of research, we have come to the conclusion that
there is much, much more demand than capacity, and that demand is growing
faster than supply. Today, global demand isapproximately 5 GW for modules
at prices of $3.50 to $4.50/W. This is far greater than production (2.4 GW
in 2006); the results are a 16% increase in module prices and 30+% average
pre-tax margins for the overall sector in 2006. By 2008, we expect
underlying demand will expand to 8 to 10 GW at current prices compared
with production of only 5 GW.
Demand growth results from a variety of factors, with two dominant drivers
of demand. First, residential grid electricity prices are rising quickly
in many markets as high hydrocarbon prices are passed through to
residential customers. 2008 prices for residential grid electricity appear
likely to be 20 to 30% higher than 2005 prices in many markets. Second,
the political case for solar is strengthening due to high energy prices,
climate change risks, national security concerns, and the desire for solar
job creation. In this setting, we believe significant reductions of
existing solar support programs are unlikely and that there is realistic
potential for global solar policy spending to increase from $1.8bn in 2005
to $7.2bn in 2008 (60% CAGR). While we are deeply concerned about factors
that could derail solar demand growth, these two trends (significant
increase in grid prices and strengthening political case that is expanding
policy spending faster than production) makeit likely that demand will
outstrip supply through at least 2008, likely 2010.
Price & Profit: Increased Expectations
Based on interviews with executives who oversee more than 80% of industry
volume and fund managers who oversee more than 70% of the industry's
float, we are convinced that consensus is too conservative. Specifically,
we believe that most business plans and models for this sector include
assumptions about volume, price and margins that are unrealistically low.
With demand outstripping supply, prices will remain firm and revenue will
expand quickly from $12 bn in 2005 to $19 bn in 2006 (+51% YoY) and $27 bn
in 2007 (+43% YoY). At the same time, incremental efficiency gains and
manufacturing improvements are driving costs 7 to 10% throughout the
supply chain (excluding feedstocks) and industry average pre-tax margins
are expanding from 22% in 2005 to 30% in 2006 and 33% in 2007. By 2010,
there is realistic potential for revenue of at least $70 bn in 2010 (40%
CAGR 2005 to 2010) and for pre-tax profit to grow at least as quickly. For
the last three years, many business managers and analysts have been too
conservative in their evaluations of the sector. We recommend
incorporating stronger volume, price and margin assumptions into
strategies and models.
Strongest Sprinters: 20 Industry Leaders
The leading solar companies are in a full sprint to grow faster than the
overall sector and establish sustainable long-term advantages. As we
screened the sector, we have sought to identify "leading runners" who are
building sustainable competitive advantages and other "fast runners" who
are likely to deliver faster-than industry-average earnings growth.
This includes:
Applied Materials (US)
BP (UK)
Carmanah (Canada)
Conergy (Germany)
Ersol (Germany)
Evergreen Solar (US)
First Solar (US)
GT Solar (US)
Hemlock (US)
Kyocera (Japan)
M.Setek (Japan)
Motech (Taiwan)
Q-Cells (Germany)
REC (Norway)
Sanyo (Japan)
Sharp (Japan)
SolarWorld (Germany)
SunPower (US/Philippines)
Suntech (US/China)
Tokuyama (Japan)
A detailed profile for each of these 20 sprinters - including evaluation
of their growth potential over the next five years - is given in the new
Solar Annual 2006, published on July 11, 2006 by PHOTON Consulting.
Michael Rogol is the report's lead author. Paul Choi, Joel Conkling,
Anthony Fotopoulos, Keith Peltzman, Scott Roberts also contributed to it.
For more information on the report see the following link.
The information and views expressed in this article are those of the
author and not necessarily those of RenewableEnergyAccess.com or the
companies that advertise on its Web site and other publications.