Solar producers feeling the heat
The solar industry may have an assured future as part of the world's energy mix, but suppliers must weather the effects of the economic downturn if they are to share in it, writes Ian Lewis
Global solar generating capacity is continuing to grow at a rapid rate, despite the economic downturn. But this is doing little to ameliorate tough times for companies across the industry's supply chain, whose business plans were based on assumptions of even faster growth and who, as a result, find themselves selling to an over-supplied market.
The 20 largest solar-panel manufacturers alone are forecast to produce around 7 gigawatts (GW) of capacity in 2009, according to US research and brokerage company Gabelli & Co. But total global demand for solar products for the year is estimated by research firm New Energy Finance (NEF) at only around 5-7 GW – a spectacular increase in cumulative installed capacity, which stood at around 14 GW at end-2008, but nowhere near enough to soak up supply.
This over-supply has sent the price of solar panels into a tailspin. Modules that were selling for over $4 a watt in mid-2008 are now fetching around $2.50 a watt – a fall of around 37.5%, with further declines likely in coming months.
The difficult market has resulted in a profit warnings from the sector's big players. In February, Germany's Q-Cells, the world's largest solar-cell manufacturer, reduced its estimate for 2009 sales for the second time in less than three months. It now expects turnover of €1.7bn-2.25bn ($2.2bn-2.9bn), around 5% lower than its December forecast, itself nearly 10% down from its previous forecast.
First Solar, a US producer of thin-film solar panels – which are cheaper to make than silicon cells – is pessimistic about the outlook for the trading environment in general. "The short-term outlook for the solar industry has never looked more difficult," Mike Ahearn, First Solar's chief executive told investors in February. The company said it would invest in solar projects itself to generate demand for its products; this will have the effect of deferring $200m of 2009 revenues: First Solar has cut its 2009 sales estimate to $1.8bn-1.9bn from $2bn-2.1bn.
Chinese companies, which have invested heavily in the industry in recent years, are faring even worse. JA Solar Holdings has slashed it its 2009 sales forecast to $0.83bn-0.95bn from $1.5bn-1.7bn. Another Chinese company, LDK Solar, plans to delay a 300 megawatt production-capacity expansion for wafers – the plates of silicon that lie at the heart of solar cells.
All the companies blame tight credit markets for preventing the launch of solar energy projects. And the limited availability of finance also calls into question the survival of some solar-panel manufacturers, whose cash-flow is dwindling rapidly. Q-Cells was able to extend a €0.75bn loan expiring at the end of March, of which it had drawn down €250m, to end-December, through €0.5bn of bridging finance. But smaller companies with less financial clout could go bust.
"A lot of new entrants that haven't established themselves properly yet will exit the market, as will some of the better established firms, if the difficult conditions persist," says Jenny Chase, a solar-sector analyst at NEF. A string of smaller companies, many in China, have already mothballed their production lines until demand picks up – and some are unlikely ever to return to the market.
The situation for companies further down the chain is not much better. Silicon, the basic raw material for most panels and once in short supply, has suffered a similar price collapse to that seen in solar cells. In fourth-quarter 2008, the spot price averaged around $350-430 a kilogramme (kg). By mid-March 2009, it was trading at around $140/kg. The more vertically integrated companies, which provide their own silicon, are faring better, as they can adjust their own prices more easily. But many manufacturers are returning to their silicon suppliers to try and renegotiate long-term contracts drawn up in more optimistic times.
The flip side of the grim situation for solar producers is that developers have seen the costs of their projects plummet, which should provide some demand stimulus once credit flows improve. Help is also coming from improved government incentives in important solar markets, as part of economic stimulus packages.
Indeed, the success of the large-scale solar sector has been heavily reliant on subsidies throughout its existence – it may be among the cleanest of energies, but, unsubsidised, it still remains around three or four times more expensive than electricity generated from natural gas, and similarly more expensive than wind, which can be competitive with fossil fuels in some locations. Favourable feed-in tariffs in big European solar markets, such as Spain and Germany, helped foster rapid industry growth.
In the US, President Barak Obama's $15bn a year package aimed at boosting renewable-energy use contains tax incentives that should enable solar-project development to maintain momentum. In Canada, heavy subsidies and incentives continue to make the solar sector attractive. The Czech Republic and Italy are other growth markets to watch, according to NEF's Chase.
But Spain, which has been a magnet for solar investment in recent years, is seeing a slow-down in development following the pruning back of ill-thought out incentives that resulted in far more subsidised capacity being built than the government had intended.
There remains optimism about prospects for the survivors in the sector in the longer term, given that solar energy will remain an important component in the renewable-energy mix. Big investments are still being made in the sector, as indicated by Germany's Wacker Chemie, which is going ahead with construction of a $1bn plant to produce Polycrystalline silicon for the solar industry in Tennessee, US.
NEF's Chase says there should be sufficient demand to boost global output in 2010 by around 6 GW at worst and, if a recovery starts soon, by as much as 10 GW. "The solar industry is growing incredibly rapidly and, although the demand dip will hold it up, cheaper costs mean it remains a really exciting prospect for the future," she says.