IHS examines 22% price gap between modules from China and global rivals

Last year leading Chinese PV manufacturers produced solar modules for $0.47 per Watt, 22% cheaper than rivals in Western countries and Japan.

In a newly released study on behalf of the Solar Alliance for Europe, research group IHS examines the reasons behind the regional price disparities as well as the high rates of decline of solar manufacturing costs around the globe.

In The Price of Solar – Benchmarking PV Module Manufacturing Cost, IHS looked at the direct manufacturing cost of Tier 1 module suppliers by region from 2012 to 2015. It weighted the data of individual companies researched by shipments and aggregated the manufacturers into three regional groups: “China” (Trina Solar, Jinko Solar, Canadian Solar and JA Solar), “Other Asia” (Hanwha Q-Cells and REC) and “Rest of World” (SolarWorld, Kyocera and Sharp).

In 2015, these nine companies accounted for 38% of global PV manufacturing capacity and delivered 47% of global module production.

While regional reductions ranged from 33% to 47%, the data indicates that while the cost gap between the groups is narrowing, Chinese cost leadership still endures. Indeed, production cost of “Rest of World” factories remain two years behind China.

In 2015, Tier 1 suppliers with manufacturing centers located in Western countries and Japan produced PV modules at $0.60 per Watt. During the same time period, Tier 1 producers in China were 22% cheaper ($0.47 per Watt) while producers in Singapore and Malaysia were 10% cheaper ($0.54 per Watt).

Looking at the reasons behind the cost gap, IHS identified three key factors:

• Economies of scale: Factories in China have much higher production capacities and output than elsewhere. The largest factory in China operates at 3.2 GW while the largest factory in “Rest of World” operates at 650 MW. Also average factory size is significantly larger and factories are designed optimally for high output and lower unit cost — and large volumes allow considerable discounts for materials and equipment.

• Proximity to low cost material suppliers: Leading Chinese companies were first to use local, low cost material suppliers and could thus reduce materials costs compared to global rivals.

• Focus on standard modules: Both the “China” and “Other Asia” companies reduced cost by focusing on standard mainstream products (multi-crystalline 60 cells). In contrast Western and Japanese (“Rest of World”) suppliers historically addressed market segments often with a broader range of panel sizes and technologies.

IHS points out that these factors are inter-related and together reduce the production cost of a solar PV module. The differences in scale, the local low cost supply chain and the focus on standard products result in a cost advantage of 22% for Chinese producers compared to their competitors in Europe, the U.S. and Japan.

The PV market will continue to grow, with the biggest demand in Asia, particularly in China. IHS estimates annual growth in terms of installed capacity of 8.6% from 2015 to 2019. In that period, it predicts global cumulative installations will double.

The study forecasts a 21% drop in production cost between 2015 and 2019 — an average annual cost decline of 5% over the four years. In 2019, the manufacturing cost of PV modules will likely reach a range of $0.35 per Watt (“China”) to $0.48 per Watt (“Rest of World”).

Huge cost declines in all regions since 2012

Manufacturing costs for all players have declined significantly in the past four years due to efficiencies of production, product and material innovations and economies of scale, according to the report. Automation of process technologies have allowed more panels to be produced per year. Material costs have dropped through reduction or substitution by lower cost materials. Cell and module performance has increased. The average efficiency of commercial silicon modules has improved in the last decade by about 0.3 percentage points per year.

In 2012, all Tier 1 manufacturers had significantly higher costs than in 2015. In 2012, Chinese manufacturers could achieve the lowest manufacturing cost at $0.72 per Watt. In comparison, "Other Asia" suppliers had a slightly higher cost at $0.81 per watt. Western and Japanese Tier 1 companies had the highest cost at $1.13 per watt.

IHS stresses that while Chinese suppliers currently dominate the solar module production, “the industry landscape is not set in stone.”

Vertical integration from wafer, to cells and module capturing is of value in early stage industries to outbalance fluctuating demand and supply, IHS points out. As the industry matures, it is likely to divide into specialized areas in order to leverage scale and spend less capital.

“The solar market offers long-term growth, which makes it interesting for investments,” IHS said. “Despite the intense competition we believe that new investors and business models will appear and that the list of top ten module suppliers will continue to change as during the last 10 years.”