Detailing Demand

Authors

Michael Rogol | Christopher Porter

Foreword

Knowledge of local markets and access to customers will become an increasingly important differentiator for vertically integrated PV manufacturers. Changing patterns of demand growth across key markets will alter the relative attractiveness of these markets. This report provides market-by-market analysis for the ten most important solar power markets through 2010 – California, China, France, Germany, Greece, Italy, Japan, Rest of North America, South Korea and Spain.

Overall, a bottom-up review of fundamental drivers of demand in key solar markets around the globe has given us conviction that prices and margins throughout the solar value chain will remain robust through 2010. This report provides the details and answers the question »Where Will All the Volume Go?«

Executive summary

With global solar supply expected to grow to more than 23GW by 2010, serious questions have arisen about the global solar market’s ability to absorb this many modules through 2010. With so much volume coming online, will prices and margins crash across the solar value chain? Bottom-up analysis across 50 solar markets gives us confidence that global demand will support at least 23GW of supply at global weighted average module prices within roughly 20% of 2007 prices.

This conviction is grounded in four core beliefs: 1) The economics of solar installations are strong enough today across a wide range of markets to support current demand that far outstrips supply; 2) A global environment of rising grid prices, strong policy support, low interest rates and improvements in downstream prices and system efficiencies will support even stronger end-user economics through 2010; 3) Markets will quickly respond to these attractive economics by developing solar infrastructure necessary to support substantial and sustained installation growth; and 4) High demand elasticities across a diverse set of markets mean that relatively small declines in prices will generate significant demand growth.

Detailing Demand: Where Will All the Volume Go? presents granular analysis of the key markets that will drive global demand growth through 2010. This bottom-up review of global price setting mechanisms leads us to believe that despite dramatic expected cost reductions, global weighted average factory-gate module prices will still average above $3.00/watt by 2010, and will not go below $2.50/watt for any sustained period. Detailing Demand also identifies key risks and uncertainties that could derail these expectations.

Key global drivers of demand

Rising grid prices
Policy support in new and existing markets
Low interest rates
Downstream cost (and thus price) reductions

2006 – 58% growth and strong prices

The solar industry experienced strong growth in 2006 as global cell and module production increased by 58% to 2.6GW. Policy developments and grid price increases across numerous markets supported demand growth in North America, Spain, Italy, South Korea and other regions. While prices dropped late in the year in Germany after having run up significantly since 2004, price declines on a global weighted average basis were moderated by a shift to higher-price markets with stronger end-customer economics. Germany and Japan maintained their status as the world’s dominant solar markets, installing 44% of globally produced modules. Despite their importance, slowing install growth rates relative to emerging solar markets led to a decline in global market share of the »Big 2.

2007 – 3.9GW, new markets emerging

In 2007, key future solar growth markets of North America, South Korea, Spain and Italy began to realize installations at significant scale. These emerging solar markets collectively increased their annual installs to over 800MW in 2007 from under 300MW in 2006. Strong end-customer economics in these markets continued to be driven by generous policy support and improving downstream costs and prices, supporting module prices at annual average prices above $4/watt in Southern Europe. Moderate installation growth of +50% YoY returned to the German market, supported by modest module price declines and greater availability of supply. Finally, the Japanese market contracted, with installation volume down 20% YoY, as relatively poor end-customer economics have resulted in the Japanese market being out-bid for modules by other markets with a higher willingness-to-pay for modules. Globally, we estimate that weighted average factory-gate module prices declined by 6% to $3.78/watt in 2007, as a greater share of modules flowing to higher priced markets partially offset price declines within more mature markets and a growing share for lower-priced thin-film modules.

2010 – 23GW, ~2/3 outside the »Big 2«

By 2010, installations in Germany and Japan will together account for only about 35% of expected global production. In contrast, we anticipate very strong installation volume growth in emerging markets. In particular, we expect that demand in North America will surge to nearly 5GW in annual installations, driven by robust policy support at the federal and state levels in conjunction with rising grid prices and downstream cost and price reductions. Substantial demand growth will occur in the strongest feed-in tariff markets across southern Europe and in South Korea, as the development of solar infrastructure in those geographies enables installation growth to match very strong end-user economics.

System and module price declines will be seen in more mature markets where declining policy support will degrade end-user economics. We anticipate that demand will shift to markets with relatively higher module prices, leading to a global weighted average factory-gate module price of $3.03/watt in 2010. If fundamental demand drivers do not develop as anticipated, the worst-case scenario we can anticipate is sustained global average module prices of $2.50/watt. We view this $2.50/watt as bedrock for average factory-gate module pricing in 2010 because at this level solar power will be competitive with grid prices across a significant share of the OECD’s electricity usage. This price point ensures attractive economics for suppliers because the typical fully-loaded cost of a module is under $2.20/watt today and will likely be under $1.50/watt by 2010.

Key market profiles

Overall, a bottom-up review of fundamental drivers of demand in key solar markets around the globe has given us conviction that prices and margins throughout the solar value chain will remain robust through 2010. This report provides the details and answers the question »Where Will All the Volume Go?