THE PV INDUSTRY IS FACING MAJOR CHALLENGES IN THE NEXT YEARS
Solar developments have positively surprised everyone again in the last years – and this trend will continue in the future. In 2017, no one believed the market would grow, but after the stellar 50% growth rate in 2018, we have again seen the market demand surge by over 30%. Even though experts in the sector are concerned about China’s recent announcement to cut solar subsidies, some analysts are predicting a market contraction.
However, the world should be thankful to China, as they have financed the growth of the global solar sector in the last few years, and it is high time for this global market leader to reform its solar sector and transition from overpriced uncapped feed-in tariffs to more sustainable incentive schemes. There is no doubt that China will stay committed to solar – it is one of the few countries that has a clear vison about the technology’s potential, and considers solar a key tool to fight air pollution and climate change. Solar is a major pillar of China’s future energy system as it quickly pushes for electrification of its transport sector. Although Asia is still a growing market for solar, other markets such as Europe or the USA are reaching a level of maturity. Saudi Arabia and the Emirates have become one of the major technology and price drivers in the recent two years. Not only are they using local money for funding, but also improved technology and project management in order to get the most competitive prices.
The record low solar prices that were achieved in 2016 caught many energy experts by surprise. That year, bids awarded in several tenders were below the 3 US cent per kWh level (2.95 US cents for a 800 MW project in Dubai, 2.91 US cents for a power supply contract in Chile, 2.42 US cents for the ‘winter’ supply part of the 1.18 GW plant PPA in Abu Dhabi). Discussions about sustainability of such low price levels became quickly obsolete as the price spiral has continued its way downwards. In February 2018, a 300 MW tender in Saudi Arabia was won by a local company, ACWA Power, at a new world record low price of 2.34 US cents/kWh, (see Figure 1), while the first seven shortlisted bids were all below 2.90 US cents/kWh.
Figure 1: IPP Pricing For A Typical 300 MW PV Solar Project in Saudi Arabia
But then again next to a shift to much lower production costs, the markets where PV plants have been installed also changed. The Asia-Pacific region expanded its solar market leadership in 2017. After adding 73.7 GW in 2017, it had 221,3 GW of total installed capacity, equal to a 55% global market share (see Figure 2). After Asia-Pacific had become the largest solar-powered region in the world in 2016, it now even owns more than half of the global power generation capacity. The European solar pioneers are still ranked second, but its share slipped to 28% based on a cumulative PV capacity of 114 GW. The American Continent remained on the third position – with a total installed capacity of 59.2 GW and a 15% stake. The Middle East and Africa lost again market share. After adding 2.1 GW in 2017, the total solar capacity of 6.9 GW equals a world market share of 1.7%.
Japan’s 49.3 GW resulted in a 12.2% global share, compared to 14% and 13.8% in 2016, respectively. In 2017, again no European country was among the top 3 solar power generating countries. Though Germany could defend its fourth rank as the only other country with a two-digit global share, its comparatively low 2017 installations of 1.8 GW mean a drop in market share down to 10.6%, from 13.4% in 2016. The new addition in the top 5 and first time above the 10 GW solar generation capacity level is India, which doubled its total PV capacity in 2017 to 19 GW and a 4.7% market share.
Figure 2: Evolution Of Total Installed Global Solar PV Capacity By Region
Even though the China’s National Energy Administration (NEA) announced strong subsidy cuts on domestic solar plants, the global market will still continue to grow.
In 2020, the global solar market is anticipated to show 2-digit growth rates. By then China will have fully restructured its solar market, which will enable the administration to have much better control of solar deployment through low-cost auctions and capped incentive schemes. There will also be a notable volume of bilateral PPA-based systems. In the Medium Scenario, we expect China to significantly increase its solar demand again to around 40 GW in 2020, 45 GW in 2021 and 55 GW in 2022. These numbers are much higher than the targets formulated in the early 2017 published Photovoltaic Industry Roadmap of the China PV Industry Association (CPIA), which was looking for 10-20 GW additions between 2018 and 2020, and 20-30 GW in 2022. But the new tools to command incentive schemes on the one hand, and solar combined with storage being the cheapest flexible solution to reduce CO2 emissions and fight air pollution on the other hand, will boost solar in China again.
Figure 3: World Total Solar PV Market Forecast 2022
Even though there is so much to be positive about in relation to solar, we see four major topics that need to be addressed, as they are major challenges to the industry. Only if a company is willing and able to overcome these challenges it will sustainably grow:
Business Transformation
The actual declining power production costs are one of the major drivers of the industry currently, and are the foundation for the future growth of the industry. It is not only the solar panels or the rest of the hardware that stimulated the decline of costs, the costs for financing reduced, as well as the starting core margin which lowered significantly. The industry needs to find new price mechanism in order to recover its profitability, otherwise it will face too many insolvencies in the future.
There is an increasing demand for 24/7 power plants especially on the utility scale. In order to provide this service, future players need to step up their game and provide suitable cheap standalone storage solutions, or combine the Solar PV technology with an additional renewable portfolio. A portfolio of PV only will not be enough for the future.
In general, the Sector can be divided into component suppliers, OEM and IPPs. In order to increase their value chain component suppliers are moving into the OEM area using their expertise of project and supply chain management. In addition, IPPs are establishing their own project and supply chain management resources as well in order to lower the costs of execution. This means that the typical OEM role becomes more and more redundant.
In the next months, one will see more and more consolidation of PV players, which will help each of them to provide a broader international coverage, with a better portfolio.
New Customer Needs & New Markets
There are no real new international markets but there are markets already in a mature stage, like Morocco, Jordan or Saudi Arabia, which implemented in the last years a complete holistic renewable strategy, either for their lack of other power resources such as coal, or diminishing ones like oil.
The investments in such countries into renewable energy are huge, and the Solar PV Power Plant installed there will be, by size, 500 MW and upwards. Since the size of these power plants are mainly located in remote areas, additional transmission lines and substations are required.
European and US project developers in particular are used to develop and operate a Solar PV Power Plant from their home turfs, and quite a number of them have never operated outside their own continent in the past, and there is a need to setup their own subsidies in countries they want to operate in.
New Players & New Money
We have seen in the recent tenders that pension funds, Chinese Banks as well as Private Equity companies are looking into solar as a big long term investment. The money market became very competitive in the recent 24 months. There is actually so much economical money in the market, but very high competition for projects that lenders cannot achieve their former security requirements anymore, and the projects are becoming riskier for lenders. On the one hand, this development helps IPPs to lower their financing costs and to reduce their equity portions to a minimum. In previous tenders, we have seen 160 IPPs and 120 lenders competing for one utility scale Solar Power Plant and the equity portion went down to 10%.
In addition, new Private Equity Players are approaching the market, and possess huge financial resources and buying knowledge from the market. Groups of engineers are suddenly changing to competitors, and this might be positive for an employee, but existing projects of the employer is often left stranded. Therefore, well managed companies should establish a Human Resource culture that encourages their Engineers to stay with the company.
Risk & Cost Management
The Solar Projects have become very mature over the last years and the required components are very reliable nowadays. This has lowered the risk of project failures in the past years, and has given lenders more confidence. Nevertheless, as power production costs decreases, project developers are under enforced pressure to reduce their costs.
Furthermore, the average project development and implementation timelines reduced from 6 years to 3.5 years, needs the urgent attention of IPPs. Project Developers need to gain financial closure at the initial stage of the project, which means future financial partners need to adjust their approval processes. Companies need to uplift their Supply Chain and project management. Most companies are running these units like SMEs, and they need to advance to a state of the art environment, wherein room for errors in project management is nearly zero. The commission of a plant needs to be industrialised and standardised, as we are seeing the same tendency here, as seen in the construction business for buildings.
Another more inherent risk is the Security of Power Supply into the grid. Developers in the past were not penalised if a power plant failed, nowadays with more IPPs in a grid, regulators and consumers require a more reliable power supply, including storage, voltage and frequency control. The project developer must either invest into additional technology or face higher penalties in cases of failure.
Figure 4: Challenges For IPPs And OEMs
It is key for regions and countries to establish reliable governance frameworks to navigate their economies towards clean energy with ambitious and binding renewables targets. This provides investor security and transparency on ambition. Subsidies for inflexible power technologies must be eliminated and phase out plans set up to manage communities transitioning from the most polluting forms of energy.
It is of utmost importance to have an electricity market design that enables profitable investments and the operation of flexible renewable energy sources, taking into account rules for storage, demand response and aggregation to provide new services. A cross sectoral decarbonisation and electrification approach, increasingly based on renewable energy, is required for the power, heating and transport sectors.
Figure 5: Actual Typical Timeline For A Utility Scale PV Plant
Figure 6: Future Driven Timeline For A Utility Scale PV Plant
Take Away
The Solar PV Market has reached a mature stage in some parts of the world, but the new investment opportunities are shifting to other markets. New players are coming into a market which already has too many service organisations, as well as financial institutions. Therefore, consolidation is key to sustain profitability in the future.
The industry needs to industrialise its supply chain and commissioning in order to compensate for the lower margins which the market has seen recently. A 24/7 secure power supply is a must in the future.
John F. Kennedy once said, “Don’t ask what your country can do for you, but ask what you can do for your country.” This same statement applies to the Solar PV Sector. It is no use to complain about the nonexistence’s of regulatory framework, or about possible import taxes. Business leaders of the renewable energy sector will not change this environment in the short term. It is outside their mandate. Their task it to adapt to the upcoming market challenges and stay competitive.