The fact that the United States and the European Union have imposed trade sanctions against Chinese cell and module manufacturers has done little to lessen the impact of Chinese manufacturers on world pricing. While there are pricing variations among markets, Chinese manufacturers reacted quickly to these sanctions. Some found creative ways to circumvent these sanctions and others decided to open fabs in key installation markets like India or in other countries with favorable production conditions, which could be used as hubs to serve markets like the U.S. and Europe.
At the same time the Chinese PV market went through another incredible ramp-up cycle. Chinas official installation target for this year amounted to a hefty 18.1 GW, already eighty percent more than total installations in 2014. As it turned out this summer, China actually installed around 20 GW just in the first half of this year! It is now expected to reach 25 to 30 GW for the entire year. With such a domestic market driving demand, Chinese polysilicon, wafer, cell and module manufacturers were racing to expand production capacities to seize this spectacular uptake in demand.
Such a surge in demand would normally have increased prices in China and the rest of the world. This would have undoubtedly happened, had not the Chinese government started to reduce its PV feed-in-tariff (FIT) effective July 1st 2016. A FIT program tends to be more generous to PV investors than auctions (especially during an initial phase to support the rollout of solar), since FIT rates are set by the government and are not subject to a competitive process. They typically promise a fixed rate per kilowatt-hour for every kilowatt-hour produced.
In China the looming reduction of FIT rates this summer had prompted the installation rush in the first half of this year. Unfortunately for PV developers in China, the FIT reduction this summer was only the beginning. In late September word leaked out that a further substantial reduction was in the works for 2017. This latest FIT reduction would slash subsidies by up to 37 percent for ground-mounted installations and up to 52 percent for distributed installations, leaving the 2017 FIT at $0.08 to $0.11 in the former market segment and between $0.03 to $0.04 in DG plants.
This will certainly lessen the appetite for solar PV among investors in Chinese PV power plants and thereby dampen demand for modules, inverters and other BOS equipment within China. As prices for these components fall in China, they will also drop in overseas markets as Chinese suppliers try to find buyers for their expanded capacities and output at home.
In fact, at the recent Solar Power International in Las Vegas in September, the largest solar trade show in the U.S., the meltdown in module prices was already well underway. Top-tier Chinese suppliers offered prices as low as $0.40 per Watt for multicrystalline product and smaller manufacturers in lower tiers were being even more aggressive in their pricing. Over on the auction side, the impact of reduced panel prices was also immediate: Mexicos recent auction brought prices below $35/MWh, eclipsing the already very low pricing in an auction earlier this year.
While low module prices make solar more competitive versus other energy sources, it remains to be seen whether the global PV industry can really flourish in such an environment. In the short- and medium-term we could see a strong squeeze on margins across the PV supply chain with some players exiting the market completely because they do not have the cost structure in place to survive or because they have underpriced certain risks on the downstream side (property and environmental issues, etc.). Longer term we can expect innovation and even better economies of scale to keep lowering costs and solar LCOE, giving all players in the PV value chain room to maneuver even at prices well below $35/MWh, especially markets with abundant sunshine like Mexico.
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