Wednesday, January 9, 2013

Paint by Numbers - A Quick World Tour of Photoelectrics in 2013

The Untold Stability Story 
  • Spot market prices for polysilicon, cells and modules have stabilized. Not only have they stabilized but they've done so in the face of a rising dollar. 
  • China announced an annual solar installation target of 10 GW and a medium term target of 40 GW. 
Put these things together and what do you get? A new story is what. If solar had a mantra in 2012 it would have been oversupply. That story was never very interesting but it thankfully looks to be wrapping up. The rag hacks and banalysts will say the World has in excess of 50 GW of production capacity while demand in 2013 is only expected to be 35 to 40 GW. We're still oversupplied right? 

Look at things from a different angle. If there are 100 people for 50 jobs, will all the jobs be filled? Maybe, maybe not. You need 50 qualified people out of the 100 if you hope to fill all the jobs. When it comes to the solar industry the world doesn't have over 50 GW of qualified supply - qualified capacity is much closer to the 35 to 40 GW of expected demand. My own tracking indicates around 37 GW at the end of 2011. 

An additional factor here is that in addition to the relatively balanced supply of "qualified" product it looks like China is taking steps to curtail the production of unqualified product. The fact that the spot market is stabilizing in the face of a rising dollar tells me that things are moving forward quickly.  

Me thinks a balanced market will bring some buyers out of the woodwork. The logic here is that you don't want to buy a widget just as prices are dropping through the floor. Might as well sit on the sidelines if you can and wait out  the price evolution. Down the road you can buy a bigger, better widget for less. He waits, he shoots, he scores.

The balancing of the solar market doesn't only have an effect on individual buying behavior - governments behave the same way. Why spend a bundle on something like solar when you're well supplied by coal, natural gas, nuclear or whatever? Better to let the first movers carry the cost of pushing the gizmo down the learning curve - better to wait. The stabilization of prices is a signal to these bystanders to reassess the solar market and decide whether the product is now cost effective and desirable. In my experience people are downright shocked when they find out how cheap solar has gotten.

Over the last six months we've seen a wave of bystander enter the space - South Africa, several countries in the Middle East, Chile, Brazil, Mexico...  It looks to me like the bystanders want to play. Or maybe there are some shady backroom deals pushing the interest. Probably a little of both.... Shady solar, I like that. Needs a little work but it's good for now.

Many have been expecting movement towards solar from the Middle East for a while now. Saudi Arabia burns an attrocious amount of petroleum to make electricity and desalinate water. They have a clear incentive to use solar to produce electricity and save the petroleum for sale on the market at 100 bucks a barrel. Finally - a real connection between oil and solar. I figure Saudi Arabia could turn into a 500 MW plus market overnight.

Germany: Prices and Demand in 2012 vs. 2013

Feed in Tariff (Euro/kWh)0.24430.1700
Retail Electricity Rate (Euro/kWh)0.26220.2800
Average System Cost (Euro/kWp)1,9501,500
Levelized Cost of Electricity0.130.11
Internal Rate of Return12%13%
Modified Internal Rate of Return10%12%
Net Present Value909834
Simple Payback Period9.29.0
Time to Net Positive Cash Flow9.08.0

This comparison of a standard 10 kWp systems indicates that despite the 30% reduction in the FiT rates the buying conditions in Germany at the start of 2013 are comparable to where they were at the beginning of 2012 as far as IRR, MIRR, NPV and payback metrics go. Logically you'd think this would drive a comparable volume of installs between 2012 and 2013 - for small and medium systems yes and no. For larger systems no. 

Official installation estimates for 2013 range from 3.5 to 6.5 GW depending on who you listen to. This is a obviously a very wide band. The problem with guessing what's going to happen in Germany arises from the fact that the new FiT policies are expected to curtail the development of larger multi-MW systems. One simple way to guess at 2013 installs would be to subtract out the multi-MW installs from the 2012 statistics and use the resulting value as a guess for 2013 installs. If you were to do this you'd guess at about 4.5 GW of demand in 2013. 

This is a decent guess but it doesn't account for new wildcard sources of demand. Check out the ever awesome graph of Germany's system price evolution on the right - so nice... so smooth. I'm a power system operator - we likey smooth graphs. Now that prices are a third of what they were 5 years ago we're starting to see interesting buying behaviors. For example, I see people buying smaller systems (10ish kWp) for cash even though it's easy to get financing in Germany through the KfW. I'm also seeing a lot of people buying who don't care about profit. For most of these buyers photoelectric systems are a hedge play against rising electricity rates but there's a notable contingent making environmental dogood investments. Why are we seeing these buying behaviors so much more now? Well... My thinking is simple - It's a lot easier to pay cash, play a hedge or buy based on  environmental righteousness when the investment is 10 k vs. 30 k. 10 k is middle class accessible - 30 k isn't. The IRR, MIRR and NPV metrics don't tell this accessibility story. 

Now that the FiT architects have structured things to favor smaller projects over larger projects we're likely to see some interesting changes in the market. Will this be the year we see clear action on self-consumption policies? I sure hope so. The market signals are getting stronger by the month. With price drops mostly worked out of the market I figure there's going to be even more focus on alternate demand levers - improving self-consumption is one such lever. Here are some rough numbers comparing the financial performance of systems with 30% vs. 50% self consumption rates.

30% SC50% SC
Internal Rate of Return13%17%
Modified Internal Rate of Return12%12%
Net Present Value8341280
Simple Payback Period9.008.20
Time to Net Positive Cash Flow8.007.00

If Germany was to get hot on promoting self-consumption it would expose a profit angle that has been obscured up to this point. That would drive more demand - how much more I don't know. Germany has figured out a way to install about 7.5 GW for three years straight. I'd like to think they can do it again in 2013. 

P.S. Thoughts on Germany...
  • Germany may consolidate the bottom two FiT tiers into one bracket. This would result in three FiT categories: sub-40 kWp, 40 to 1 MW rooftops and 1 MW+ projects. 
  • Ideally Germany could move to tiers based on production rather than Installed Wattage. Under good sun conditions in Southern Germany you get about a MWh per kWp installed per year. Rather than paying systems that are sized up to 10 kWp a FiT rate of X you give the first 10 MWh of annual production a FiT rate of X, the next 30 MWh/year a FiT rate of Y and all remaining MWh/year a FiT rate of Z. This payment structure maintains the cost control of the current FiT bracket structure but it removes the arbitrary boundaries that can prevent proper system sizing.
  • Germany may tweak the 70% rule - perhaps moving to a 60% rule. Probably unnecessary given the natural incentives in the market.
  • I expect the Solar Developers in Germany are putting feelers out: Have Skills - Will Travel South.
  • In an effort to improve cost sharing and prevent gaming Germany is likely to restructure the EEG payment rules for Heavy Industry.
Growth in the UK

Several months back I projected the UK market would finish the year with 10 MW per week in installs. Tricky thing about December is that everybody goes on holiday so the last few weeks of installations in the U.K. have been minimal. That said, the last regular work week in the U.K. saw 8 MW of installs up from 6.2 MW the previous week. The market is clearly growing at a steady pace. It won't take long for the 10 MW per week threshold to be crossed - a few weeks I'd guess. It won't take long after that to reach the 20 MW/week target - a few months perhaps. All and all the market rebound is on track. I'm going to SWAG for at least 2 GW of commercial & residential installs in the UK in 2013. 

What the Hell is Italy Going to do? 

The Italian FiT budget is going to be used up any day now. Makea you wonder why we haven't heard about an installation rush - it's what you'd rightfully expect given the circumstances. Anyways, at this point there's no more FiT funding planned. I see two reasonable options for Italy. First, they could defy the austerity measures and scrape together another FiT budget and continue scaling down FiT rates. If this option was chosen you'd have to expect more restrictions on larger systems, a step cut in FiT rates down to 15 to 17 cents/kWh (for small systems - lower for medium to large systems) plus reintroducing a monthly/quarterly degression policy. If a full budget can't be found they could compromise on a smaller budget and set  new excess feed rates at a price that is half way between the current FiT and wholesale - something like 10 cents/kWh. Given the investment made so far (over 100 billion in commitments) you'd have to hope Italy can find a way to move forward with option 1 rather than unnecessarily shocking their market with option 2. Option 1 should give 2+ GW growth in 2013.

Solar in the US

The solar kleptocracy will keep right on trucking towards the inevitable oh shit Enron moment. If congress gets serious about closing budget loopholes and fixing over-generous subsidies things could change quickly and for the better - by quickly I mean slowly. I have no sense of what congress is going to do these days. I may be a red blooded American but I prefer to study markets like Germany, China and Australia because these countries build solar policies that actually make sense to me - the US... not so much, not yet at least. Fortunately, hope springs eternal... Maybe this will be the year we boot the crooks out of the industry.

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