Edurne Zoco
The second half of 2016 was a roller-coaster ride for the global solar PV industry. Although the third quarter of 2016 was marked by oversupply with slow demand, strong price decline, and high inventories throughout the module supply chain, the fourth quarter presented more balanced supply and demand with higher module shipments, stabilized pricing and lower inventory levels. The principal explanation for this radical change in the solar industry was the announcement in September by China’s National Energy Administration (NEA) of the new 2017 feed-in tariff (FIT) proposal. Although the 2017 FIT proposal was not officially released until late December, the widely anticipated FIT cuts, uncertainty about the extent of the grace period allowing projects to be connected in 2017 and fear of a further limiting PV target contributed to the end-of-the-year rush in China.
Since its beginnings, the global PV module industry has required different forms of government support (e.g., FITs and tax credits) to increasingly compete against conventional energy sources; therefore, solar industry development is still greatly influenced by policy and economic regulations. The NEA announcement and the subsequent reaction throughout the supply chain revealed once more how dependent the global solar industry is on the largest upstream and downstream solar market.
According to the IHS PV Demand Tracker, installations in China represented close to 40% of global installations in 2016, and China is home to the majority of solar manufacturing. Thus, for most suppliers, utilization rates, pricing evolution and inventory levels are highly interlinked with demand in China. In China, 35 GW were connected to the grid in 2016, according to official statistics. Based on IHS Markit analysis, only 30 GW of the 35 GW were actually installed in the same year.
From the first week of October, after the announcement of the new 2017 FIT proposal, module demand reactivated in China and caused a reduction in the high inventories of many module suppliers. For a few weeks, it also caused the price of cells and wafers, which had hit bottom in the third quarter, to stabilize and slightly rise. There is now very strong demand in China for monocrystalline modules and high-efficiency modules. Tier 1 and Tier 2 module suppliers have maintained high utilization rates since October, and inventory levels have been considerably reduced throughout the supply chain. In the case of polysilicon, the peak in demand and limited global capacity of polysilicon (aggravated after the closing of some operations by key suppliers) reduced the existing high polysilicon inventories and contributed to increased prices from November.
What kind of year will 2017 be?
After two years during which global PV installations grew over 30%, 2017 and 2018 are forecast to be years of moderate growth (+3% and +4%, respectively), with quarterly shipments and pricing dynamics continuing to be severely shaped by policy changes in the largest solar PV markets – most notably in China, India and the U.S.
According to IHS Markit, the top four markets in PV installations in 2017 will continue to be China, the U.S., India and Japan, with more than 55 GW and 70% of total market installations.
There are two major policies that will impact the development of the solar industry throughout 2017. First, in December, China’s National Development and Reform Commission (NDRC) published the new FITs for PV systems to be installed in 2017. The final version of the 2017 FIT implies a softer cut than initially proposed in the first draft proposals announced in September 2016. However, developers are still racing to install eligible PV systems within the grace period in order to receive the higher 2016 rates. IHS Markit projects China will add 15 GW in the first half of 2017, followed by a decline to 10 GW in the second half. In fact, the NEA’s proposed restrictions to new approvals to PV in 2017 in certain Chinese provinces could result in a steeper decline after the grace period.
The second major policy change impacting the solar industry in 2017 concerns the Indian market, which is forecast to grow the most in 2017 (+70%). The introduction of a comprehensive indirect tax regime under the Goods and Services Tax (GST) in India is likely to be delayed from April to September 2017. A side effect of the GST introduction is that the tax exemptions for PV systems will most likely end. As a result, India’s Ministry of New and Renewable Energy estimates that the total cost to install for grid-connected solar PV will increase by 12%-16%. As of this writing, there are still some uncertainties surrounding how and when the GST taxation will be finally applied.
In addition to these two major policies, there are additional questions concerning the potential political impact on solar development as a result of the new U.S. presidency. The new presidency has generated considerable uncertainty for the U.S. energy sector, but there is little concrete evidence that the new administration will have a major impact on the near-term growth trajectory of PV in the U.S. market. One of the first topics that stirred up the PV industry following President Donald Trump’s election was the risk of losing the federal solar investment tax credit (ITC). However, as of this writing, there is no indication that the new administration plans to eliminate or reduce the tax credit earlier than the incentive’s scheduled phase-down. Even under a scenario where the ITC could be eliminated or significantly modified, supportive state-level clean energy policies, including renewable portfolio standards, solar renewable energy certificates, state tax credits, net energy metering and other incentives, would continue to drive PV demand in most developed U.S. markets, albeit at a slower pace than projected under the ITC.
Quarterly trends in 2017
Throughout the supply chain, the two biggest concerns right now are what will happen to demand in China after the installation grace period ends in June 2017 and the degree to which another sharp decline of shipments in China will affect global pricing.
IHS Markit estimates that it is increasingly likely that the quarterly dynamics of the solar industry in 2017 will replicate those seen in 2016. In other words, module shipments will remain high in the first two quarters, stabilizing pricing throughout the supply chain, but demand will considerably slow in the third quarter, putting additional pressure on module pricing and on manufacturers’ balance sheets.
The major difference from 2016 lies with module demand from India. IHS forecasts that if the GST is delayed for a few months until September, the introduction of the GST scheme will extend the window to install PV systems at lower tax rates and will impact the quarterly distribution of module shipments to the Indian market. Thus, shipments to India, where four out of five modules installed are imported from China, are forecast to grow from the end of the second quarter of 2017 and peak in the third quarter, just when shipments within China will start slowing down. Even with the GST, India will be able to absorb only some of the decline in China, but not all, triggering another cycle of demand contraction, module oversupply and price erosion.
Module manufacturing in 2017
How is the module manufacturing industry reacting to the low-demand market predicted in 2017 and 2018? The first reaction has been a considerable reduction in the number of capacity expansions announced in the last few quarters. According to the IHS Markit PV Integrated Tracker, C-Si module manufacturing capacity grew by 21% in 2015 and 17% in 2016, but it is forecast to grow by only 5% in 2017. China and Southeast Asia continue to be the preferred regions for module capacity expansions, and India is one of the markets generating more interest for manufacturing expansions, from both local and international companies.
Second, the market is increasingly demanding higher-efficiency products, and the module industry is evolving to satisfy this growing demand. Most of the new capacity expansions on the cell side are being done on high-efficiency products. IHS forecasts that more than 50% of new capacity installed in 2017 will be high-efficiency lines of either passivated emitter rear contact (PERC) or n-type cell technologies. PERC cell capacity, which represented only 5 GW in 2015, more than doubled in 2016 to reach 12 GW, and it is projected to increase to 28% of global cell capacity in 2020.
Finally, concerning solar module manufacturers’ profitability, it is remarkable that despite sharp price declines in the third quarter of 2016, third-quarter earnings calls of Asian Tier 1 module suppliers showed higher-than-predicted gross margins (15%-20%). This highlights how successful most industry leaders in China and South Korea have been in reducing production costs and operating expenses to cope with the challenging pricing environment of the third quarter of 2016. Manufacturers with the lowest cost structures are benefiting the most from the current strong demand from China and India and will be well placed to face 2017. Although fourth-quarter 2016 gross margins are predicted to be lower than in the third quarter, gross margins for most module producers are forecast to recover in the first half of 2017; however, uncertainty remains for the second half of 2017, when another cycle of oversupply is predicted to add pressure throughout the supply chain.
Total module costs for industry leaders are forecast to continue declining throughout the second half of 2017 to reach around $0.30/W for best-in-class p-type module costs, thereby widening the gap in cost structure between lowest-cost producers and other producers and affecting gross margins and profitability throughout 2017.
Edurne Zoco is director for the solar research group at IHS Markit.
