Monday, November 21, 2011

The solar PV feed-in tariff crisis is one sign of a maturing industry

solar panels on a council house in London
The furore over the change in the Feed-in Tariffs to small-scale photovoltaic (PV) electric power in the UK, with Friends of the Earth (FoE) and some companies threatening legal action, is just one part of a larger upheaval that is affecting the solar electricity industry globally.

Prices are falling, companies are going under, and a trade war between the US and China is looming.

At the same time, the number of installations and the generation capacity of PV are at a record high.

In Italy, experts are predicting that solar power will cost the same as ordinary electricity in 2014, with the rest of Europe following up to 2020.

As I have to speak on the subject at this week's Solar Flair '11 conference, I've been taking a closer look at the solar industry.

What I've found shows that, although they may be right about the government's mis-timing of the tariff change, FoE and their supporters are wrong to insist that the tariffs stay high.

To see why, we need to look at the wider context.

The state of the solar industry

Along with the whole of the renewable energy sector, which globally is seeing growth rates of up to 70% every year, PV is booming, despite the economic recession and public finance crises in many parts of the world.

But it is experiencing disruption caused by its transformation into a mature energy sector.

The latest figures show that the total installed PV capacity in the world is now 40 GW. This generates a huge 50 TWh/yr (EPIA 2011).

Last year, the EU installed over 13GW and the rest of the world installed over 17GW. For the first time ever, during 2010, Europe added more PV than wind capacity.

The new kid on the block, concentrating PV (CPV), is also doing well, with 0.02 GW connected to the grid worldwide during 2010 and early 2011.

Meanwhile, fossil fuels' annual growth is in the low digits, and nuclear's share is further shrinking.

But scratch a little deeper and you see that things could be better still.

PV is still generating less than 0.2% of total global electricity demand.

With the IEA projecting that electricity demand (18 trillion kWh) will rise by 76% to 4.7TWh by 2030, even if PV keeps up its current expansion rate it will barely keep pace with the increase in overall demand.

To make a real difference, deployment must increase at an even faster rate, which requires strong, international political will.

Falling prices

But the real good news is that the price of PV modules is falling fast.

In seventeen months the lowest price of mono-crystalline modules has been cut by 45% from €1.65/Wp to €0.91/Wp.

The more efficient multi-crystalline module price has fallen by somewhat less: 28% to €0.93/Wp.

The price of thin-film modules has fallen 32% to €1.3/Wp (prices from Solarbuzz).

And next year this downward trend is projected to continue with a further 10% price reduction.

Despite this, the cost of PV at the global average utility scale is still 3-4 times that of onshore wind & biomass.
Nevertheless, at this phenomenal rate of reduction, the forecast is that prices will be between €0.08 and 0.18/kWh in 2020 (depending on the application), matching the price of conventional grid electricity in many areas of Europe.

As the EPIA says in this year's market survey: "The price of PV modules has decreased by over 20% every time the cumulative sold volume of PV modules has doubled."

Falling revenues

This success is partly the cause of the industry's turmoil.

Although in this quarter revenues are forecast to rise by 22%, next year they are forecast to drop by 25% because of three factors: major cuts in solar incentives, a weak project financing environment, and the module price crash that is causing downstream companies to offload their stock or face significant write-downs.

So in the first three months of 2012, the market in Europe is projected to be down 72%, with the ground mounted (solar farm) segment the hardest hit and the residential sector the least affected (down 41%).

But Greece (fortunately for its financial state), Spain, and UK are still slated to provide the highest incremental market share growth opportunities.

Falling share prices

All these forecasts are hitting share prices.

German market leaders SolarWorld and Q-Cells are among the solar companies suffering, because last year they ramped up production to meet the surge in demand from Germany, UK and Italy due to the feed-in-tariffs.

SolarWorld, Germany's number two solar company by sales, has cut its projections and no longer expects 2011 revenue to reach 2010's €1.3 billion.

The situation is no different in China.

Shanghai-based JinkoSolar has forecast a 10% reduction in quarterly module shipments to 210-220 megawatt (MW), and expects revenue to be down by a similar amount at $270-$280 million.

Similarly, Daqo New Energy, Yingli Green Energy and ReneSola Ltd have also cut their shipment and profit margin forecasts.

First Solar, Suntech, Yingli, and Q-Cells (once the world's largest maker of solar cells) all have their shares down by around 25%.

American backlash

Even more dramatic shakedowns have been happening in the American solar industry, with Energy Secretary Steven Chu taking huge political flak for making a half-billion-dollar loan to California solar company Solyndra, that later went bankrupt partly because of the fall in module prices.

This and other bankruptcies and layoffs are being blamed by some on competition from China, whose solar cell prices are undercutting those of US manufacturers. (The cells are often assembled into modules by different companies.)

As a result, there are calls for an import tariff, which would lead to a crazy China-US trade war.

The industry is already divided amongst itself on the issue.

Germany's SolarWorld, which owns American factories, is pitched against a new body called CASE, or the Coalition for Affordable Solar Energy.

This is comprised of Carbon War Room, MEMC, SolarCity, SolarFirst, Sungevity, Suntech America, SunRun, Trina Solar, Verengo, Yingli Americas, Recurrent Energy, and others.

Billions of dollars are at stake, plus tens of thousands of jobs (the US solar industry, one of the world's largest, employs 100,000).

"The imposition of tariffs will be a setback to the US solar industry," is the view of Kevin Lapidus, Senior VP and General Counsel at SunEdison, part of MEMC.

My view is that this makes complete sense. It is hypocritical of anyone in the US to fight market forces, which are making solar power more affordable for everyone.
The US should quit moaning, import the cells from China as cheaply as it can, and make money on the rest of value chain - module manufacturing, installations and service.

The British solar storm

The US situation makes the UK FITs fiasco look like a storm in a teacup.

The proposed tariff fall of 50% from 42p to 21p per kWh more or less mirrors the fall in the cost of the modules themselves.

Installers are able to buy their products at discount prices now. They'll need to change their marketing tactics, and there will be less business, but sensible installers will diversify into renewable heat and energy efficiency, for which subsidies are also coming.

Indeed, not all installers oppose the cut. Sheffield-based company A Shade Greener doesn't believe its own business will be hurt.

The wrong technology

The real question is: is PV cost effective in the UK? In other words, if the government has limited cash to spend on cutting carbon emissions, which it does, is it worth spending it on PV?

The short answer is: no. And here is the evidence.
According to the last available comparative figures, from the government's Explanatory Memorandum To The Electricity And Gas (Carbon Emissions Reduction) Order 2008, the cost in pounds sterling of saving one tonne of carbon for each renewable technology in the domestic sector is as follows, in order of ascending price:

Community heating with wood chip: £3
Ground source heat pumps: £42
Wood chip CHP: £49
Wood pellet boilers (primary): £58
Micro Hydro (0.7kWp, 50% LF): £60
Log burning stoves: £110
Mini-wind 5 kW, 20% LF: £125
Wood pellet stoves (secondary): £126
mCHP: £176
Photovoltaic panels (2.5 kWp): £218
Solar Water Heater (4m2): £346
Micro Wind (1 kWp, 10% LF): £685
Community ground source heat pumps: £697

This makes PV seventy times more expensive than a district heating system using woodchips and five times dearer than ground source heat pumps.

Saving energy saves public money

And this doesn't even take account of energy efficiency measures.

Again, on the government's own admission, as the AECB recently pointed out, properly insulating buildings saves ten times more greenhouse gas emissions per pound spent than the current Feed-in Tariff (FIT) for renewable electricity - and will still offer five times the abatement per pound, even if the tariff is cut.
As the AECB's Andrew Simmonds says, energy consumers are being told to finance a vast increase in electricity generation and transmission, but if demand was cut few of these new power stations would be needed.

Put another way, properly insulating buildings offers the same carbon and energy benefit as building offshore wind turbines at around a fifth of the cost.

Looked at from this angle, the FITs policy is the gift of a sledgehammer for climate loony James Delingpole with which to attack the Government's climate and energy policy.

He is, for once, not entirely wrong to point out in these cash-strapped times, with fuel bills high anyway, the government is pushing them up still further by financing a form of power generation that doesn't even work efficiently in most of the UK because it doesn't get enough direct sunshine throughout the year.

If you need more evidence, here's another table, adapted from the same government source, detailing the number of kilograms of CO2 saved per pound spent by technology, if they are delivered as a single measure (we ought to include energy efficiency measures, because the goal is really to save carbon emissions):

Existing community heat to CHP: 88
SWI* internal to U of 0.45W/m2K: 42
SWI* external (semi-det house): 25
Wood pellet boilers (primary): 24
Fuel switching to green tariff: 24
SWI external (flat): 23
Loft insulation (prof virgin): 21
Micro Hydro (0.7kWp, 50% LF): 16
Ground source heat pumps: 14
Replacing old boiler (65% by 88.3%): 13
Air source heat pump: 13
MCHP (revised): 9
Glazing E to C rated: 8
Loft insulation (prof top-up): 7
Heating controls - upgrade with new heat system: 6
Mini-wind 5 kW, 20% LF: 4
Solar Water Heater (4m#): 4
Flat roof insulation (whole house): 3
Underfloor insulation: 3
Photovoltaic panels (2.5 kWp): 3
Community heating meters: 3
Draughtproofing (ie not with glazing): 1
Micro Wind (1 kWp, 1% LF): 0
* SWI = solid wall insulation

By the way, I don't believe the figure for draughtproofing, and the one for micro-wind would only be true in urban areas, but the rest of it looks convincing.

Again, PV is more or less at the bottom of the list for cost-effectiveness: 14 times more expensive than internal solid wall insulation.

And look at how combined heat and power (CHP) comes at the top of both lists. Why is it so backward on supporting CHP?
The government has achieved its other policy objectives for FITs: heightening awareness of renewable energy and climate change amongst the public and bringing down the price of solar through upping demand.

It is absolutely right to link the FIT in future to energy efficiency measures.

But why-oh-why has it implemented the whole set of policies back to front? The Green Deal for energy efficiency should have come first, followed by the Renewable Heat Incentive, and only then, possibly, Feed-in Tariffs for electricity.

Solar prices will continue to fall anyway, improving the payback period for those who do want to install PV modules.

My advice to the solar industry: your sector is growing up. It will soon survive without subsidy if you go where the sun is, which is where it makes sense financially anyway.

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