PV: Shifting demand and falling financial incentives


The report by BHF Bank in Germany said that the records set by the industry in 2010 would be hard to emulate. This is primarily due to significant cuts in photovoltaic subsidies that took effect at the beginning of 2011 in the major European markets of Germany, Italy, France, the Czech Republic and Spain, as well as the inability of developing markets to prop up the global market.

The report also concludes that the coming years will be marked by an oversupply of components. From this oversupply and the lower feed-in tariffs, the BHF Bank predicts annual price declines of more than 20 percent on average, which it says will lead to a consolidation in the industry, spelling the end for a number of European manufacturers.

The key European end markets that account for over 75 percent of global demand and the price reductions necessary to maintain this market demand will reduce industry margins by 400 to 700 basis points, meaning the 150 percent increase in photovoltaic demand and the global installation volume of some 19 to 20 gigawatts peak (GWp) during 2010 won’t be matched.

It is also predicted that this will have the effect of shifting photovoltaic demand growth outside of the Eurozone to the burgeoning Asian and American markets, providing challenges for downstream market players. Asian producers led the strong surge in demand for solar modules in 2010 that led to huge amounts of money entering the new product market, which helped create a surplus.

"[There was] an unprecedented investment boom in new product capacities," the report said. "Based on order intake figures of key solar production equipment suppliers it can be concluded that more than 17 GWp in new production capacities for crystalline solar cells were shipped in 2010."

The growth of the market outside Europe particularly in the utility scale market in the U.S. is also expected to impact upon European businesses, which have traditionally had a higher market share in the residential and commercial business segment, where lowest component prices are not the only differentiator.

Capacity utilization in the photovoltaics industry could also fall to 50 percent according to the base case scenario provided by the report. Even based on an optimistic scenario, capacity utilizations would remain below 75 percent in 2011, leaving the report to provide a rather bleak outlook for the European market.

"Such a low utilization would weigh on the margins of the manufacturers and severely limit demand for further capacity additions," said the report. "Overall, we expect European PV demand in 2012, in the base case scenario, to be below the level reached last year."

Thanks to the massively lower prices for photovoltaic installations caused by competitive pressure, BHF also anticipates that in the sunny regions in the world (almost) no direct financial incentives will be necessary any longer to stimulate rising demand.

What to look out for in the major markets

According to the report, the outlook for 2011 and 2012 is not positive in many ways and "raises concerns" for many key markets.

Germany provides the ideal representation of how changes in government policy have affected the marketplace. After cuts to the photovoltaic feed-in tariffs were imposed midway through last year, they have fallen consistently and were lowered by the maximum amount of 13 percent in January this year.

The report suggests a drop in module prices of around 25 percent would be necessary for the latter half of this year to keep investments in German photovoltaics economically attractive.

"In our moderate scenario envisaging net additions of 5.5 GWp in 2011, we conclude that a further price reduction by around 14 percent will be necessary in 2012," said the report. "Looking at the module prices of some €1.03/Wp to €1.13/Wp resulting hereof, we fear that most European producers will find it hard to achieve those prices."

Political wrangling in Italy, the Czech Parliament’s 26 percent tax on remuneration from installations bigger than 30 kWp, French reductions in feed-in tariffs of 20 percent, retroactive tariff reductions in Spain, and potential 70 percent reductions in UK feed-in tariffs have all helped in making the outlook for the coming years duller than the success enjoyed in 2010.

Despite increases in demand having materialized in countries like Greece, which has been likened to last year’s successful Czech market, the UK, and other central and Eastern European markets, they are unlikely to have any impact on overall global demand.

However, increased demand in the U.S., the booming market in Ontario, and the Chinese and Indian growth rates all spell good long-term news globally, despite not providing as much assistance to European companies. With the expected imminent launch of a much more comprehensive Chinese PV market program, the report concludes that the Chinese photovoltaic marketplace will become more insular and only require small amounts of input from Europe to aid its expansion over the next few years.

India will contrastingly provide greater opportunity after they launched a program designed to develop installations of 20 GWp by 2022. Overall, the report predicts only 400 megawatts peak (MWp) to 800 MWp (as a maximum level) in photovoltaics installations over the next two years in India, although these volumes represent a three-digit percentage growth rate.

Several countries in Asia, the Middle East and also Africa, which in terms of solar irradiation and existing energy needs represent promising future growth markets for photovoltaic installations, still find themselves in a transition period, according to the report. In 2011 and mainly in 2012 those countries will be in the middle of a phase in which the first pilot projects will be realized, whose total growth, however, cannot keep pace with the rise in module availability.

Despite this growth outside of Europe, it is not expected to be enough to offset the conditions caused by a more quiet European market and surplus in products, and could spell the end for some organizations. Companies that survive until 2013 are expected to benefit from the increased demand and magnitude of emerging markets, which will need some time to impact upon the global market.

Fukushima fallout

The report also discusses the impact that the tragic earthquake and tsunami in Japan on March 11 could have on the photovoltaics industry, with a number of countries assessing their energy stance as a result of the nuclear accident.

"A likely consequence of a revised energy policy in Germany could be that a hard cap, which had been a realistic threat to the PV market in Germany for 2012, will not be imposed after all, we believe," the report said. It also mentions the reassessment of nuclear options in the wake of the disaster, but cannot see that benefiting solar in the medium to short term.

"Wind power due to its better economics and biomass due to its dispatchable nature are seen the main beneficiaries," it said. "Furthermore even gas fired power plants as well as coal fired power production could see a stronger increase in demand from an accelerated shut down of nuclear power plants than solar power in the short to medium term."

The big four: Stock predictions

The report also looked at the four major players in the German market and came to some conclusions as to what affect the trends could have on them.

BHF upgraded Roth & Rau from underweight to market weight based on rising peer multiples and the impression that the recent changes in the shareholder structure of Roth & Rau could signal that a take-over bid is becoming more likely.

It goes on to say that SolarWorld is well positioned to benefit from an increasing photovoltaics demand in North America, but downgraded them to underweight.

It also believes other companies like Q-Cells and Phoenix Solar will only benefit to a much lesser extent from increased North American demand, given their limited exposure to this market and maintain their price targets and underweight recommendations, with thin margins and little differentiation make these two companies particularly vulnerable.

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