Navigant Research Blog

Is Quality Over Quantity the New Game in Solar?

— November 21, 2016

Rooftop SolarThe solar module manufacturing industry is facing the second abrupt collapse of module prices in a decade. Prices fell by 12%-20% between January and October 2016 (depending on the technology and location) as the industry expanded manufacturing while the Chinese government decided to reduce its targets amid a deceleration in other markets, particularly in Europe.

Manufacturers have been in planning mode for the last few months thinking how best to ride out this dry spell. The last time the market saw a significant oversupply (between 2009 and 2012), prices fell 80% in a 3-year period. The survivors of the crisis managed to do so mostly by cutting costs, hence offering better value for the same product.

New Strategies Needed

But the same strategy is unlikely to work this time around, according to the US Solar Photovoltaic System Cost Benchmark: Q1 2016 report published by the National Renewable Energy Laboratory. The report states that for a residential installation in the United States in 2015, non-equipment-related costs were $1.91/W, or 65% of the total cost, while module costs were $0.64/W (21%) and inverter and other equipment costs were only $0.42/W (14%). Therefore, a 20% reduction in the cost of a module only reduces the total installation cost by about 4%.

The impact for utility-scale projects is more important. Installation costs for these projects vary significantly depending on the size, but non-hardware costs usually make up between 45% and 55% of the final cost of a project, while the module represents between 40% and 45%. Although cheaper modules could make a difference in this market, the current auction system used in different countries to give long-term agreements has made the segment ultra-competitive, leaving only a razor-thin margin (if any) for the whole value chain.

Manufacturers Adjusting Course

After months of planning, companies are now announcing new strategies to their investors. SolarCity/Tesla announced an alliance with Panasonic for its Gigafactory, as well as a new set of building integrated PV solar tiles and shingles aimed at carving out a luxury segment from the residential market, especially for new builds and re-roofers.

First Solar also chose quality over quantity. On November 16, it took the decision to scrap its Module 5 product, which had been expected to debut next year. The new plan is to instead accelerate the production schedule of its Module 6 and introduce it in 2018, a year earlier than previously planned.

On December 9, SunPower will be the last American module manufacturers  to make an announcement of its strategy. We will see if the company follows a similar pattern, but for the time being, it seems that quality is winning over quantity.

In Navigant Research’s Next Generation Solar PV report, published before the latest collapse of module prices, we forecasted that advanced solar modules would become mainstream by 2025. The plunge in prices could slow the adoption of new technologies, but it seems that American manufacturers are willing to sacrifice market share and are doubling their bets on higher quality (and higher price) products to keep positive margins.


New Technologies and Systems Widening the Solar Market

— September 30, 2016

Rooftop SolarUntil recently, most solar installations have been set up to generate the maximum kilowatt-hours per day/year possible. This was because the incentive programs in place only took into account the overall production of a plant. This is not an issue in regions with low solar PV penetration in their energy mix, but it’s becoming a problem in areas with high solar penetration relative to the peak demand, such as in California, south Germany, northern Chile, and southwestern United Kingdom. As I have argued before, all kilowatt-hours are not equal, but since the two most common policy incentives (feed-in tariffs and net metering) treat them as equal, installers choose to maximize generation.

There are some signs that this is changing. Chile has introduced a tender system that divides the market by delivery time, and there are efforts to introduce solar-based time-of-use (TOU) tariffs in some markets. But perhaps the strongest force pushing the industry away from equal kilowatt-hour values is corporate power purchase agreements (PPAs).

Unlike in traditional PPAs, in which a utility (or the government in the case of feed-in tariffs) buys electricity and then sells it to their customer base (which has different load requirements), corporate PPAs are signed with single entities that have a specific daily load demand curve. In this scenario, the offtaker corporation might prefer to match the PPA agreement (and hence generation profile of the project) as closely as possible to its demand curve, even if that means the project will produce less than its full potential.

New Technologies Widen the Opportunity

In a world that only looks at maximizing output at the lowest cost possible, the premium that innovative solar technologies that tackled the TOU mismatch was almost nothing; the modules that were sold at the lowest price per watt were king. Once TOU enters the equation, installations will favor technologies that maximize revenue (or avoid cost from the corporate view). It is possible to use technologies like energy storage systems or implement demand response systems to match generation and demand, but it can also be tackled from the solar system design, including new technologies like bifacial solar modules based on n-type PERT (passivated emitter, rear totally-diffused) module designs, which allow vertical installations that flatten the daily generation profile of an installation, producing more electricity in the morning and in the late afternoon and less at midday.


Once Again, Renewables Costs Reach a Record Low

— September 1, 2016

Rooftop SolarOn August 17, Chile announced the results of what the specialized media called the Mega Tender. The country’s energy regulators tendered 12,430 GWh per year of electricity over 20 years starting in 2021—that’s 30% of the load of Chile’s regulated market (residential and small commercial consumers). Not surprisingly, the country received the lowest bids for renewables in history; this is the fourth or fifth time in 2016 that we are seeing record low numbers—it’s also happened in Peru, Mexico, and Dubai.

The lowest solar bid, by Solarpark, will sell electricity for $29.10 per MWh, while wind’s lowest bid was also a record-setting $38.00 per MWh. It is important to note that the projects will start producing electricity in 2021, and as such will probably be built in late 2019 and 2020, giving the developers another 4 years of technology innovations before construction.

One interesting feature of Chile’s auction system is that it splits total load to be tendered into different blocks, differentiating by time of the day when the electricity must be provided instead of dividing it by technology. Block 1 allowed for generation at any time of the day, block 2-A allowed generation only between 11 p.m. and 8 a.m., 2-B allowed generation between 8 a.m. and 6 p.m., and 2-C between 6 p.m. and 11 p.m.

It was expected that wind developers would dominate Blocks 1, 2-A, and 2-C; interestingly, they also got most of 2-B. Solarpark’s Maria Elena Solar project was the lowest bidder in the whole tender, but it was the only winning solar bid in a country famous for its excellent solar resources.

Connecting the Sun

The problem for Chile’s solar industry is that its best resources are concentrated in an unpopulated area of the country—in and around the Atacama desert. A significant number of solar projects were proposed there in the last few years to supply the copper miners in the area, but with the collapse in the price of the metal, a significant amount of solar projects in the area have struggled. For the Chilean solar industry to see significant growth, the country first needs to connect the sunny north to the rest of the country where most population lives.


Consumer Choice in the U.K. Energy Market, Part 2

— June 24, 2016

TabletIn my previous post, I discussed my experience changing energy providers in the United Kingdom and the surge in market share of new players (known as independent providers). This time, I’ll talk about some of the propositions the new players are offering to attract customers.

When I did my research to choose my new energy provider, I was surprised by the number of companies that are now in the market. Back in 2012, the first time I switched providers, there were 14 companies available according to Ofgem, but I can only remember the Big Six and a couple of premium green providers. As of December 2015, Ofgem reports 32 energy providers.

Differentiation through Pricing

Providers are trying to differentiate themselves by using different selling points. The most obvious area to compete in is pricing, and as expected, there are several undifferentiated providers focusing on price alone. Their effect on the average retail price in the United Kingdom is apparent, but some other companies are bringing new ideas to the table.

From variable prices to 3-year fixed prices to different levels of greenness to buy local options like Bristol Energy (a company owned by the city council), companies are trying to stand out from the crowd. Tempus Energy offers a so-called sunshine tariff, which matches prices with peak solar generation for customers in areas with high solar penetration. Others offer smart energy hubs and management tools as a hook for the service. I couldn’t find any that would manage your house for you to reduce consumption, but Tempus Energy does offer some flexible contracts for commercial customers that include time-of-use rates in their tariff structure as well as demand-side management. Most of the new players don’t have generation assets, but others—like Octopus Energy—started as renewable project developers and then moved into retailing.

Better Options Needed to Fit Consumer Needs

It took some time for Ofgem to simplify the switching process enough to make it hassle-free, and a faux pas from the Big Six’s price strategy helped encourage people to take the plunge and make the switch. But now that the process is in place, I can see energy shopping becoming a yearly ritual. It is up to energy providers to develop options that better fit consumers’ needs and tastes.

During my latest switch, I went for a contract of 100% renewables generated by the provider’s solar and biogas projects, which beat most of the competition in price. I also chose a variable rate without any exit fees. For the time being, I don’t see a price spike coming unless the United Kingdom gets a long, cold winter in 2016. But I’ll be happy to switch if something better comes to the market.


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