Solar's elephant in the room

Next month, we will celebrate 21 years in the PV industry and the changes I have been fortunate to witness over more than two decades can only be described as profound. But are we living an illusion? Perhaps.

I presented at All Energy last week and couldn't help straying from my theme of ‘What's happening in Australia' to ‘Pay careful attention to what's happening in the global PV manufacturing industry if you are in Australia' as I am increasingly worried about what's going on.

I used to work for a (formerly) huge PV manufacturer before I started this company, and over the decades I vividly remember conversations about growth versus profitability. “We need more scale and we need 100 per cent capacity utilisation with ever expanding volume; it's the only way to reduce costs and get industry growth.”

This has and probably always will be true for manufacturing industries and there is an inevitable tension between the required investment prior to the arrival of scale and the profitability required to survive.

For most of the 35 years which my former employer survived, profits were slim or non-existent. They are to be commended for breaking ground, but were perhaps just a little too early to the party and ultimately, missed the parade. Amongst other things, they just ran out of steam for frequent losses, volatility and perpetually declining selling prices.

When I started with them in 1997, the entire world market was around 69MW – about the same amount as Australians will install in four weeks this year – and the average cost of PV was around $6.10/watt compared to around 70 cents today. So huge progress has been made and even some profits along the way for those able to sustain the changes. To their credit, my former employer, despite losses, did manage to turn the company around and start making profits. We worked tirelessly on building a powerful brand, impeccable quality and high value so we could get those profits. We fought against the commoditisation of our offer into ‘just a low cost solar panel' and relentlessly tried to build offers, instead. It worked, but just came too late.

Today, there are new giants in the world of PV. Industry revenues have grown from perhaps $500 million in 1997 to more than $30 billion despite declining revenues (from falling sale prices) but there's a catch: if you make a loss in an industry this big, it can quickly become a very, very substantial number. It's one thing to lose a million or so in the interest of growing a business in an immature, niche market. It's another thing altogether to lose a billion dollars when you are Nasdaq-listed.

Clearly, today's low prices are great for consumers but as I noted in my presentation last week, the international PV manufacturing industry is in a world of pain. Just looking at a sample of second quarter 2012 statistics tells an alarming story;

1) The top 10 Chinese manufacturers have a combined debt of $7.8 billion dollars.

2) The average gross margin across these same players is 4.7 per cent, the lowest is -39 per cent.

3) Inventory across the top 14 manufacturers is worth $4.4 billion dollars – equivalent to around 27 million solar panels.

4) According to our data, average selling price in Australia is around 70 cents/watt and average manufacturing cost across the top 14 producers is – around 70 cents/watt.

This is clearly not a healthy situation; in fact one PV manufacturer at All Energy described it as the ‘solar winter'. Our local price index below, demonstrates this price trajectory:

Coming back to Australia, what does this mean for our industry, for solar consumers and for the cost competitiveness of solar power?

Industry

Firstly, as I say to everyone I work with in the local PV industry: “You are intrinsically connected to the global PV industry; if they lose money and collapse, you lose money and collapse. Never forget this. Don't expect that shareholders and investors will allow losses at this level to accumulate; revenue is about vanity, profit is about sanity.”

Secondly, you need to take a very close look at our PV products available in Australia in the context of market price, volume and quality.

Fact 1: Our foreign exchange rate makes products cheaper than they often appear elsewhere. This has and can change in the blink of a GFC.

Fact 2: Whilst we have achieved vastly improved market scale in Australia, typical purchase volumes in our market are 7-10 times lower than Germany (for example) – so should your buying price really be the same?

Fact 3: In Australia more than 50 per cent of our solar panels are from Tier 3 and Tier 2 suppliers. In our race to have cheap solar, we may be buying – and supplying – the lowest possible quality from companies who even today may be non-existent.

Internationally, there is an almighty stoush going on with trade barriers popping up in the US and the increasing likelihood of the same in Europe before long – the justification being that selling below cost is anti-competitive. I am sitting on the fence when it comes to the issue but in the local context, I am nothing short of alarmed at the proliferation of low end products. It reeks of short term profiteering with no vision to a long-term industry – from suppliers and dealers alike in some cases.

Consumers

Consumers of course want low prices. But I would suggest, and have increasing data to prove it, they don't want low quality, poor service and a supplier who is likely to vanish. My advice to consumers is always ‘caveat emptor' (buyer beware). In practice, what this means is ‘you get what you pay for', ‘don't expect something for nothing' and ‘if it sounds too good to be true, it probably is.'

Having watched a number of stories unfold about unhappy solar consumers and solar dealers over recent years, it would seem that these timeless sayings are being remembered again, but perhaps a little too slowly. The global situation and its local manifestations have the potential to leave a trail of unhappy customers in its wake. Think carefully about what you are buying and whether paying a little more is worthwhile.

Competitiveness

Ultimately, what a lot of this boils down to is competitiveness – in manufacturing and at the power socket. Industry has valiantly fought for decades to reach the all mystical ‘grid parity' – the point at which PV generates energy at the same cost as conventional power. Arguably, in some cases we are there – but in the context of manufacturers selling at or below cost, supplying low quality products and service and needing incentive mechanisms from government to get the end price – we aren't there yet.

PV has achieved a lot and will continue to develop and mature, but I would suggest that we need to be entirely cognisant of just what our current prices are made up of, and whether they are real enough just yet. Industry support from government remains just as crucial for the PV industry in Australia (and beyond) as it does for other industries.

Don't think this is the case? Well, take a look at the following graph. The Clean Energy Regulator released its latest Out of Pocket Expenses data last week and I presented a summary at All Energy that demonstrates how ‘wafer thin' our pricing structure is. In the last quarter, average system prices for sub 2kW systems INCREASED by almost 15 per cent compared to the quarter before. It is my hypothesis that several things caused this increase.

Firstly, margins are so thin in the industry that the drop in the STC multiplier from 3-2 was passed straight through to consumers. Secondly, consumers are increasingly asking for a better quality of offer – they don't want to wait nine months for an install of have their roof tiles cracked or discover their supplier is gone before the system is installed. And the reality is that costs a little more to provide, also driving prices upwards.

So are we in fact living in a great solar price illusion?

PV industry skeptics are likely to pick this story apart and grasp at some of these facts saying, ‘We told you so; PV makes no sense, stick to coal and gas – their prices are an illusion!'. Well, here's the upshot – all prices are illusionary, many industries get subsidies and industry profits ebb and flow with the vagaries of supply and demand. The trick is, to keep a strong sense on what is really going on inside the industry.

To deliver real world PV solutions, profitability and quality needs to rise pretty much right across the value chain and to do that, PV needs continued government support.

Our industry gets substantially less support than many other industries in Australia and is equally, if not more deserving, because it is tantalisingly close to cost competitiveness.

And why? Because Australia is uniquely blessed with the world's largest, free energy resource, it's the fastest growth industry in the world and we have a strong track record in making it work.

It's pretty simple really.

Nigel Morris is the Director of Solar Business Services.

This article was originally published by SolarBusinessServices. Republished with permission.