Where are solar prices heading?

Regular readers of Climate Spectator know that the prices of solar photovoltaic (solar PV) modules have declined dramatically over the last three years (for example see Cut price solar, April 13). But there is still some debate about the cause of the drop and whether we can continue to expect significant cost reductions.

Those on the sceptical side argue this is an unsustainable decline in price driven by an over-exuberant Chinese communist government encouraging too much solar module production capacity. This is a one-off gain according to sceptics and prices will in fact go up rather than down in the future. They argue this is necessary because profit margins are now so low that manufacturers are going out of business and with the consolidation, competition will decrease.

However the solar ‘true believers' argue these dramatic price drops are just a sign of what's to come. They point at the fact there is still large room for improvement relative to theoretical physical limits for solar cells, and that this hyper competition is in fact forcing rapid innovation in order for the existing businesses to avoid bankruptcy.  

The chart below, prepared by Deutsche Bank analysts Eric Cheng and Michael Tong, illustrates that both points of view are partly right and partly wrong. It illustrates the global average sales price (ASP) for a fully complete solar panel or module in blue and the average total module production cost in red over January to December 2011.

Average solar PV module price and production cost per watt –  Jan to Dec 2011 

Source: Deutsche Bank - April 2012

The first thing that strikes you is that the sales margin has dropped dramatically. In January producers were earning a 60 cent margin per watt and this dropped to about 15 cents by the end of the year. So that's a point in favour of the solar PV sceptics.

But what it also illustrates is that underlying production costs have continued to decline over 2011 from around $0.98/watt in January to $0.81/watt. That's a pretty dramatic cost reduction of 17 per cent in just 12 months.

If we delve down deeper into the supply chain for solar PV modules we see a similar pattern of considerable margin compression due to increased competition combined with significant steady improvement in underlying production costs.

Overall, the end conclusion is that sceptics are right about the need for consolidation and for margins to improve, but they are wrong to conclude that prices will therefore go up.

While the dramatic reductions in price we've seen in recent times seem unlikely to continue, production costs are still continuing to decline significantly. For example it is anticipated that low-cost leaders such as Trina and Yingli will achieve production costs for solar modules of around $0.65-0.70/watt by 2013 versus the $0.81 illustrated in the chart above for December 2011. Plus producer consolidation would have to be incredibly dramatic to noticeably lessen competition, as no solar PV producer currently holds more than 10 per cent market share.

Probably the only thing that might reflate prices would be for governments to induce a dramatic increase in demand. Japan and China could potentially be the governments that make up for reductions in demand in Europe. But this would actually inhibit consolidation of the solar PV industry and leave us with a highly competitive environment.