Reaping Value in Solar Energy

Reaping Value in Solar Energy

          
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Reaping Value in Solar Energy

Navigating Through the Turbulence
Energy & Environment, Marketing & Sales
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    The solar-energy industry prospered from 2003 through 2008. Concerns over climate change, energy security, and the price and ultimate availability of fossil fuels led to increasing government support for solar technologies, translating into soaring demand for solar products and surging revenues for solar providers.

    But the industry has run into severe turbulence in 2009. Demand has fallen significantly, hurt by the economic downturn and shock waves from regulatory changes in Spain, one of the industry’s major markets. Compounded by the glut of production capacity that came online in response to government incentives earlier in the decade, the effect on prices has been dramatic—for example, prices for solar panels are down roughly 40 percent from their peak. Some of the weaker competitors are expected to exit the industry; many of the survivors face additional stress from the debt financing of past growth plans, which are now obsolete. Not surprisingly, stock-market valuations for the entire segment have collapsed.

    Given this turn in fortunes, critical questions are now being raised by both industry participants and governments about the true potential of solar energy as a viable energy source and as a business. Current industry participants and potential entrants, such as technology companies and major oil and gas companies, are also trying to determine optimal short- and long-term competitive strategies.

    In this paper, we seek to answer some of these questions by providing a fact-based review of the industry’s current situation and outlook. While the bulk of the discussion focuses on the photovoltaic (PV) segment, which constitutes the largest share of the solar-energy market, we also look at concentrated solar power (CSP), also referred to as solar thermal energy, the industry’s other main technology. Our high-level findings are the following:

    • The basic argument for solar energy remains strong. But its costs will have to come down significantly for the business to be viable. For solar energy to compete successfully in centralized electricity generation, its generation costs will need to fall to about one-third of today’s levels. For distributed solar energy (that is, solar energy generated on-site or very near where it is used) to reach “grid parity,” or match current retail electricity prices, its cost will have to fall by 30 to 50 percent.

    • The increasing diversity of solar technologies and the emergence of new entrants from low-cost countries are spurring innovation and competition. This development will eliminate past bottlenecks and speed up cost reduction. For instance, polysilicon, a key ingredient of most solar panels, will lose a significant amount of pricing power in the PV segment.

    • Distributed PV is on its way to reaching grid parity in favorable markets and should do so between 2012 and 2015. Neither PV nor CSP, however, will be able to compete in centralized electricity generation over the next five to ten years without government subsidies. But utilities continue to explore solar energy, both PV and CSP, as a long-term strategy.

    • Growth prospects for the solar-energy market over the next five to ten years remain dependent on government policy. For the larger and more predictable PV market, favorable developments on the government policy front in Europe, the United States, and elsewhere around the world should ensure healthy volume growth of approximately 30 percent annually from 2009 through 2015, with lower, less-subsidy-driven growth of approximately 20 percent per year thereafter.

    • Historically, the PV segment’s value chain has seen the highest profit margins upstream, with lower margins for midstream and downstream competitors. But market power is temporarily shifting downstream. And both the PV and CSP value chains are becoming more integrated through merger-and-acquisition (M&A) activity, partnerships, and consortia. This is expected to stabilize or even increase margins in the future.

    We conclude this paper by identifying key questions that the different stakeholders—current solar-energy specialists, large energy-technology companies, utilities, major oil and gas companies, and governments—should ask themselves in order to determine future strategies. It is critical that industry participants ask these questions now, because competitive advantage in tomorrow’s solar market will likely be established on the basis of moves made during the industry’s current turbulence.

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