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Japan: Deutsche Bank forecasts falling PV installation costs, but says hurdles remain

On the back of the new feed-in tariffs in Japan, which came into effect Sunday, July 1, Germany’s Deutsche Bank says that while it expects to see an increase in installed photovoltaic capacity, and thus falling costs, implementation hurdles still exist.

Overall, the renewable energy analysts at Deutsche Bank predict that annual photovoltaic installations in Japan will reach between around three to four GW in the next 12 to 18 months, up from the current around 1.5 GW. Meanwhile, this year, they expect to see demand pick up from 600 MW in the first half, to 1.8 GW in the second half.

"There is additional upside potential likely if the government were to signal a rate change (as per current law) over the next six months," write the analysts. They add, however, that due to the low photovoltaic module prices, internal rates of return (IRRs) are already near peak levels, meaning they are "only poised to decline from current levels". "Therefore," they say, "we expect any potential rate change to attract significant funds and stimulate another rush (similar to one experienced in the European market)."

Despite this, they say that non-residential plant IRRs are currently around 10 percent. If EPC costs can be reduced going forward, then IRRs of up to 15 percent could be secured. Prices for large scale photovoltaic systems are approximately US$3.50/W in Japan, compared to between $2 and $2.5/W in the U.S. and Europe.

"Assuming BoS [balance of system] costs are decreased to $1.9/W and module prices decrease to $0.70/W, current level of IRRs can be maintained even in a 20 percent FIT cut scenario, in our view," they add.

BoS cost decreases are likely to occur, states Deutsche Bank, as the Germany-based EPC companies become more active in the Japan solar market. The analysts believe that both Yingli and Trina are likely to benefit from falling costs.

Hurdles

Despite the positive aspects to Japan’s solar industry, including its openness to international manufacturers and stable policy outlook, the Deutsche Bank also sees many hurdles in the way of effective photovoltaic implementation. For example, say its analysts, securing land rights can be problematic, as can securing licensed electrical engineers within a two hour radius.

These, and "and other potential demand elasticity inhibitors could limit the growth of installations over the next 12-18 months," they add.

For instance, increasing production capacities could pose problems, in their view. Overall, the analysts expect photovoltaic production capacity to increase by approximately one GW in 2012, compared to their "base case" demand forecasts of 2.5 GW in 2012, four GW in 2013 and six GW in 2014. "Negative impact of demand reduction from Europe would be far greater than positive demand impact from Japan, even in bull case and growth in other emerging solar markets would be required for supply/demand balance."

Japan FIT overview

Source: Deutsche Bank