Why does everyone believe MENA is the next big solar market?

25. April 2013 By:  Yasser Gamil, Solarpraxis' MENA office

The Middle East and North Africa (MENA) has shown little solar growth over the past few years; predictions are, the region will still only account for between 1 and 3% of global solar demand in the next 3. So why do so many believe MENA is the next big solar market? Where is all the fuss coming from, asks Yassir Gamil, managing director of Solarpraxis MENA. He also states his reasons for why anti-dumping trade cases are bad news for the industry.

Yassir Gamil, managing director of Solarpraxis' new MENA office.

Attending a one-day conference about PV and CPV in Europe recently, myself and three others of Middle Eastern origin got to wondering why over 60% of the presentations were about Middle Eastern market opportunities. Why has the Middle East become so attractive to European companies?

PV/CPV demand in 2012 in the whole MENA region did not total more than 100 to 150 MW, thus accounting for less than 0.5% of the world market. Furthermore, demand is not forecast to increase beyond the range of 1 to 3% in the coming 3 years at least. So what happened? Why does the industry constantly talk about MENA being the next big solar market?

I remember very well in 2008, that Middle Eastern companies were trying to talk with the sales director of one of Germany’s largest solar equipment manufacturers. He refused to sit down and give us a quotation, because we only had US$20 million to $25 million to invest. This amount, from his point of view, could buy us nothing from his busy company (ironically enough, the market value of this company is now sitting below that number).

The Middle Eastern picture

For the past two years, the Middle Eastern solar industry has been receiving (almost daily) news from politicians about the “great opportunities” for renewable energy in the region. Furthermore, companies from across the globe are visiting MENA, opening local office branches and undertaking joint ventures with local companies (and in the process, closing their eyes to the rampant corruption in the business world there).

However, for the past 2 years, almost nothing has happened in the region solar-wise, and the foreign companies are losing a steady stream of money. This is because:

  • It’s all petro-dollar talks from MENA politicians, with no actual planning, real time frames and or commitments;
  • Bragawatts – in the Middle East everyone is talking about GW projects, not MWs. However, the financial structures of these 20-25 year billions dollar projects have not been considered;
  • No grid assessment has been carried out to see where and how these GW projects will be grid connected; and
  • There is no legal framework for such projects, either in the form of PPAs or IPP contracts.

Overall, the MENA region still does not represent more than 0.5% of the global PV market. In comparison, Europe accounts for over 50%. The way I see it, European companies believe that opportunities in the Middle East will bring them new business, with high margins. However, this is simply wishful thinking and escapism from the ugly truth (i.e. low margins) about business in Europe nowadays.

It’s all between Germany and China, and the rest are third-wheels

From a supply point of view:

Riding on the back of their semiconductor industry experience, many German equipment manufacturers operating early on in the solar industry did not take the time to consider if the PV industry needs, let alone deserves, a different manufacturing approach –  i.e. more compact, less complicated, faster cycles and cheaper – because demand was so high and the market accepted the existing equipment and technologies. As such, many equipment manufacturers ended up with high capital expenditure, high cost of ownership and high final product costs.

However, China put a spanner in the works when it began manufacturing gigawatts worth of photovoltaic wafers and modules. These huge capacities served to pile enormous pressure on China’s European (read German) competitors.

On the back of this development, the Wall Street banks and many other financial institutions jumped into the solar spotlight, offering IPO’s and easy access money. This was followed by the Chinese banks which, with their huge liquidity, started handing out enormous amounts of equity to those “stock market recognized” companies, based purely on the expectations of high gross margins multiplied by enormous GW volumes.

Everybody was happy: the Germans were selling equipment to the Chinese; and the Chinese were selling their final products back to Europe – subsidized by the EU, and funded and financed by U.S. and Chinese banks.

China really is the right place for manufacturing (like it or not). The entire PV supply chain is based there – glass, aluminium, chemicals, electronics, polysilicon, etc. – logistics are easy there and, after Apple started producing in China, its credibility as a manufacturing destination was sealed.

Furthermore, from 2005 to 2009, Chinese companies successfully managed to achieve two things: (i) attract equipment and raw materials from across the globe; and (ii) convert PV from a niche industry to a commodity.

On the back of these developments, big headquarters sprouted up here and there, over spending in nonsense marketing and advertising campaigns became rife, and company structures became overloaded. And why not?! The easy money was there. At the end of the day, as long as the market continues to grow, the weak can be weeded out via a correction period (resulting in bankruptcies, downsizing or restructuring) and business will go on.

From a demand point of view:

Photovoltaic demand, in the last years, has been almost solely driven by (European) government subsidies via feed-in tariff (FIT) contracts. Public money – like it or not – was used to subsidize the kWh price of energy generated from grid-connected PV systems: definitely the step which helped the PV industry to commoditize, and reach 20 to 30 GW of new installs a year.

During this period, the private sector was a very passive player in this equation, due to the nature of FITs. Until, that is, the Chinese came along and helped to lower the price of PV, which is now almost at grid parity in many countries, particularly in the sunbelt, (MENA, Southern Europe, Latin America, etc.). Consequently, for many non-oil producing nations, PV is now often cheaper than conventional power plants.

Once prices started to come down, private sector power purchase agreements (PPAs) and independent power producer (IPP) contracts started to emerge, offering similar (or sometimes even more attractive) kWh prices.

Consequently, it is safe to say that PV demand is becoming less dependent on FITs, as it nears grid parity; and thus away from cold Europe, to the sunny Middle East and Latin America. This is being bolstered also by Europe’s anti-subsidy tax payers, who are complaining  about financing and supporting Chinese PV companies.

The current PV situation

Despite all this, the PV sector remains promising at the macro level, with installations reaching 30 GW annually on the back of cheap PV from China. The industry is growing fantastically, and reaching competitiveness with the mainstream energy market. And even though many companies are currently losing money, it’s just a matter of market correction. People have to learn from their mistakes; and in the meantime, the big picture still looks okay.

That is, it did until the EU announced it had launched an anti-dumping investigation into Chinese photovoltaic imports. Following the news, PV markets started to react. Let us establish some facts:

  • Usually antidumping rules are established to protect the local industry in long-term, even if it they hurt the end user, who was benefiting from the cheap Chinese prices.
  • However, there is no local  mass manufacturing or logistics industry in Europe, and there is no way to re-establish a viable mass industry there. If you want to produce a €20 t-shirt and sell it for €200, then produce 1,000 pcs in Europe and label it “Hermes”; if you want a €5 mass-produced t-shirt to sell for €10, then set up manufacturing in China. The same goes for PV: for high efficiency panels or panels for special applications, you can still produce in Europe, because the product is not so price sensitive; however, since many “standard” PV panels can be considered a commodity, Asia, and in particular, China, is the place for mass production.
  • It can be argued that Chinese manufacturers are the only customers left for European equipment manufacturers. By hurting the PV module business in China, the industry will also be hurting the European, and particularly German, equipment manufacturers.
  • If there are plans to phase solar subsidies in Europe out in the next few years, as seems likely, thus leaving PV to compete on the market, then it makes sense to encourage dumping since, in the end, it will benefit Europe’s end market users.
  • Chinese companies are looking at how to bypass anti-dumping regulations.

The way out

For the time being, the PV "race" is between Germany and China. Upstream, the technology will remain in Germany, while manufacturing will take place in China. In terms of the downstream EPC market, the E will come from Germany, the P from China and the C from the local market.

In the meantime, let the PV market compete on its own without subsidies.; and refrain from imposing anti-dumping duties on Chinese imports of PV products into Europe.

MENA could become a great market in the future, but it will take time – a lot of development is required, before you can ‘go collect your money.’ The region needs to be educated, upgraded and regulated for the coming PV business.

Overall, the entire industry needs a correction in size, spending, technology and companies. In this sense, companies, associations, professionals have to come together to discuss how this can take place.

About the author

Yasser Gamil from Egypt, is the managing director of Solarpraxis’ new MENA office, Solarpraxis MENA LLC, located in Dubai. Prior to this, he undertook the role of managing director at Disctech-UAE. A civil engineer by trade, he holds a masters in both Soil Mechanics and Business Administration. Overall, he has more than 7 years’ experience in the solar industry.

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Disclaimer: The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.

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