Solar Systems Never Cheaper

Solar Systems Never Cheaper

September 16, 2009

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief

Solar panels have never been cheaper. But that development may not be welcome news for the industry unless it is able to sell more units.

While it's all generally good for consumers who will see the cost of installing solar at their homes fall dramatically, it's potentially troubling for solar manufacturers that have excess inventories. Altogether, solar system installation prices have dropped by 50 percent from a year ago and mostly because of unsold systems.

Solar photovoltaic (PV) costs are not coming down because manufacturers are increasing their efficiencies and improving their economies of scale. That said, national governments will continue to fund research and provide tax incentives. As a result, hundreds of smaller companies have been trying to get into the field and will potentially put further downward pressure on prices.

"The combination of lower PV demand and higher PV supply has caused a rapid decline in PV price," write Glenn Harris and David Devir for SunCentic, a solar consulting firm.

It is shaping up to be a year of declining revenues for the global solar industry, or at best a low-growth year, the firm says. Increased silicon supply -- the key ingredient in solar panels -- along with PV manufacturing capacity has led to an abundance of PV modules and reduced profit margins. SunCentric estimates solar panels that would have generated as much as 500 megawatts are now in storage around the world.

The increased supply is largely a function of two dynamics: Spain is reducing its rewards for solar panel installations as a result of that country's enduring economic problems. And, the Chinese government is heavily subsidizing domestically produced solar materials so that the nation can build global market share as well as grow its own internal solar base to 20,000 megawatts by 2020. The cost of Chinese-produced silicon-based solar panels is about $2 a watt compared to $2.40 in other places, all of which is down from about $4.50 a watt from a year ago.

The question of whether the United States can compete with the huge payouts that China is giving its solar businesses is unknown. But there's no doubt that the Obama administration intends to jumpstart the industry here: It has not only made it more difficult for foreign solar material makers who do not participate in global fair trade practices to do business here but it is also giving out tax breaks and stimulus funds.

Consulting firm SunCentric says that when the collective subsidies are tallied up homeowners can then pay the full cost of installation off in 16 years. That's down from 22 years. Specifically, the federal investment tax credit extension passed in October 2008 replaced the $2,000 residential tax credit cap with an unlimited 30 percent tax credit. Consider a $40,000 system: The investment tax credit extension delivered a change from $2,000 to $12,000.

Paying Off

The industry's economics have accrued to the benefit of consumers but it has forced most manufacturers to cut their prices. That has helped diminish corporate revenues even though some associated costs have not fallen as precipitously during this global economic slump. And the downward price spiral is not over yet. Barclays Capital is reported to say that solar panel cost could fall to $1.40 a watt in 2010 and to $1 a watt in 2011.

The industry hopes that their price-cutting initiatives will be more than offset by greater demand for its product. But most businesses and homeowners remain dizzied by the long recession. It's unlikely that the throngs will shell out thousands of dollars for solar systems that take 16 years to pay for themselves. And governments, obviously, can't counterbalance the full cost of deployment.

At the same time, the tougher odds have the potential to restrict already tight financing. That phenomenon has not just produced excess solar panel supplies but has also led to project cancellations totaling $450 million in New Jersey alone, says Pike Research.

"This inventory glut will have a long-term impact on the solar business, with panels set to remain in a state of oversupply until 2012," adds Henning Wicht, a PV analyst for iSuppli that has released a report.

The seeds of success therefore rest with improved manufacturing processes and technological gains. As the global economy rebounds, businesses will regain their footing and the financial institutions will get the funds to lend. National environmental rules will furthermore favor green energy supplies and necessitate more investment in solar energy. That, in turn, should help drive the solar industry to better health.

Even in today's climate, risk-takers consisting of entrepreneurs, venture capitalists and large financiers see potential. Pikes Research says that while the recession has forced some key lenders to drop out, others such as Wells Fargo and U.S. Bancorp are filling the void. Better times are ahead, it adds, noting that First Solar, Sunpower, SunTech, Yingli, Akeena and Real Goods Solar are well positioned to succeed.

"There's a lot of evidence that prices are currently below cost and, therefore we think are not sustainable," adds Rob DeLine, with Applied Materials, that supplies solar panel material. "We expect prices will stabilize and rise as markets once again have access to credit and government policies gain traction."

Feed-in tariffs in Greece, Italy and France are about to kick in, he adds. And once the U.S. market takes off, the current situation could flip with demand outstripping supply.

Drastically cheap solar panel prices can cut both ways. In the short run, that will serve to cut into already thin margins. But the industry is banking on a long-lasting recovery that will enable it to burn off inventories and eventually grow market share.