Photovoltaic industry achieves record profits, discussion over high module prices continues

by Rolf Hug

Solar power is more in demand than ever before: photovoltaic power plants are built in ever greater numbers all over the world to transform sunlight into electrical power that, according to experts, will be able to compete with conventionally generated electricity in the medium term. At the end of the particularly hot month of July 2006, the daily rate for peak-hour electricity from coal, gas and nuclear power plants reached a high of 54 euro cents per kilowatt hour at the german electricity stock exchange (Leipzig) and thus exceeded the price for generating solar power for the first time. Within the framework of the renewable energy law, in Germany solar power is compensated with 40,6 to 51,8 euro cents per kilowatt hour. Problems with refrigerating water of some nuclear and coal power plants, as well as the increased electricity demand for air-conditioners led to the price hike. However, prices for solar raw material silicium also exploded during the past months and led to increasing customer prices and placed new emphasis on international markets. In co-operation with the expert magazine Photon, the Solar Report zooms in on the discussion regarding module prices.

10 MW solar park in Pocking 4 kW solar power plant on a private roof.
10 MW solar park in Pocking; 4 kW solar power plant on a private roof. Sources: Martin Bucher; Solarkonzept

Photovoltaic demand and prices remain high; industry doubles profit margin

The indirect state subsidisation of solar power production has proven to be an energy- and economic-political success model, not only in Germany: legally guaranteed feed-in tariffs have set a new framework for an economic sector with above-average growth in France, Spain, Italy and China. The photovoltaic industry is investing heavily, global demand remains high, profits of the producers of solar silicium, wafers and solar cells are good and also the performance of large photovoltaic companies on stock exchanges is remarkable. According to a study conducted by the magazine Photon, profit margins of the photovoltaic industry have doubled from 15 to 30 percent during the past two years and production costs have decreased significantly. The price decreases for solar power plants envisaged by the german legislator, however, have not yet been put into practice in Germany. "Fantastic profits" for silicium, wafer and solar cell manufacturers"Due to the renewable energy law in Germany, production costs for solar power plants decreased dramatically. However, because of the worldwide demand exceeding the supply, companies were able to continuously increase their prices over the past two years.

The photovoltaic industry is currently achieving fantastic profits – especially those companies positioned at the beginning of the value-adding supply chain," states Photon Chief Editor Anne Kreutzmann. Complete photovoltaic systems saw a price increase of 10 % over the past two years, although prices for inverters – which transform solar direct current into alternating current for the network – decreased by 5%, as had been envisaged by the renewable energy law. The reason stated by PV producers are the costs for the raw material silicium, from which first solar wafers, then solar cells and finally solar modules are manufactured.

Price development for solar modules since 2003.

Price development for solar modules since 2003.

Sources: Navigant Consulting; Photon. Graphics: Heindl Server GmbH [Wording in graphics: Module prices in euro per watt (average price of all models)

If prices for complete PV-systems do not decrease soon, the seemingly safe investment made in Germany could soon become unviable, thus are the fears of Anne Kreutzmann. This applies particularly to smaller solar power plants and locations with less sunshine, because the legally stipulated solar power feed-in tariff decreases by 5 % per annum. Some politicians and the media are already spotting “long shadows” over the solar landscape (Der Spiegel) and place the blame on manufacturers. Subsidisation in terms of the renewable energy law strived for and also achieved productivity increases as well as cost decreases through increasing production volumes. Such developments, however, lead clients to anticipate a decrease of system prices – which is in line with the approach of the so called Fathers of the renewable energy law that is to be revised at the end of the year to avoid over-subsidisation.

DGS (German Association for Solar Energy): price hike of photovoltaic systems must be counteracted as soon as possible

Critical voices from the ranks a german government coalition party regarding feed-in tariffs in terms of the renewable energy law should be cause for concern in the sector, for example remarks by the Christian Democratic Union/Christian Social Union party whip Katherina Reiche or the economic speaker of the coalition party, Laurenz Mayer, who is quoted in the Spiegel report “Long shadows”. Even the DGS (German Association for Solar Energy) who conducted an online survey (with disappointing participation) on the Internet, as well as the Member of Parliament of the Social-Democratic Party of Germany and initiator of the renewable energy law, Hermann Scheer, raised subtle warnings. "All participants in the PV market in Germany know that the price hike for photovoltaic systems as witnessed during the past years must be counteracted as soon as possible and must be replaced by a price decrease,” states DGS. In view of the next 5 % and/or 6.5 % reduction of feed-in tariffs as from 1 January 2007 onward, this is to be absolutely essential to avoid a collapse of the market, DGS emphasises. The warnings from Berlin and Munich have already led to first reactions: in June the stock exchange star SolarWorld AG announced clear price decreases for complete photovoltaic systems, however, only for 2007. The Freiburg-based PV distributor SolarMarkt AG, for example, reduced its prices for modules from Schott und Solon according to its own statement from 01.08.2006 by two to three percent.

According to a survey by the German Federal Association of Solar Economics (BSW), however, the distributor prices for photovoltaic systems (not modules) were already reduced by approximately five percent in the first half of 2006. The reasons for this, claims BSW Managing Director Carsten Körnig, lie in increased productivity, a relaxation in silicium supply and in increased competition. But also the annual reduction of the legally guaranteed feed-in tariff has already shown its effects.

Profit margins highest at the beginning of the value-adding supply chain

In March 2006 Photon already reported on high silicium prices resulting from a supply shortage. The expert magazine showed, however, that the shortage of silicium was not the only reason for the high priced modules, because the price increase of the sought-after raw material coincided with production improvements that reduced the need for solar silicium by 50 % due to manufacturing thinner wafers.

Share of silicium price in the overall costs of a solar power system, indicating the various components: solar silicium, wafer, solar cell, module and complete system.
Graphics: Photon

Photon rightfully asked whether on the way to the finished solar power plant “the one or other extra euro went missing”. The answer is provided in the study “Solar Annual 2006”. It proves that the profit margins are higher the closer the manufacturer finds himself to the beginning of the value-adding supply chain, i.e. silicium manufacturing.

Share of silicium price in the overall costs of a solar power system, indicating the various components: solar silicium, wafer, solar cell, module and complete system (i.e. modules, inverter and assembly system).[Wording: Si: 100 %, Wafer Si Share: 30 %, Cell Si Share: 15 %, Module Si Share: 7-8 %, System Si Share: 5,0-5,5 %]

The study conducted by Photon Consulting proves that the profit margins are higher the closer the manufacturer is located to the beginning of the value-adding supply chain, i.e. silicium manufacturing. To simply pass the criticism to module manufacturers is thus unjustified.

Furthermore, the strong profits in the solar industry are in no way dubious or even counter-productive if they are channelled towards research and capacity-building – and if production improvements and benefits of scale (cost advantages when larger volumes are produced) are at least partially passed on to clients.

"Solar Annual 2006" study Granular solar silicium.
"Solar Annual 2006" study; Granular solar silicium. Photos: Photon; Wacker Chemie AG

Photon study predicts 10,4 gigawatt production in 2010

The authors of the Photon study, a team of analysts under Michael Rogol, predict that solar module prices will decrease slightly in the next years. However, cost decreases are expected to be larger for the industry, which would lead to a further expansion of the profit margin. According to the study, the photovoltaic industry annually reduces its costs by seven to ten percent. However, this requires a strong market growth. The Photon study assumes an average of 44 percent until 2010. Should this “rough estimate” materialise, Rogol expects a production in 2010 of 10,4 gigawatt at a turnover of 57,6 billion euro and a pre-tax profit of 21,6 billion euro.

Whereas interest in solar power systems currently seems to be on the decline in Germany, it is anticipated that in Spain, Italy and France new, advantageous regulations will lead to an increase in demand. Experts in the field expect the overall European and international demand to remain on a high level in the years to come. This is proven by new megawatt projects, e.g. in Spain, where high feed-in tariffs and high sun radiation further promise profit expectations. It is there that the companies Ecostream and City Solar are planning to build the largest solar power parks worldwide, with 14 and 20 megawatt respectively

Large solar power plants in Europe increasingly use modules from China. On the picture a solar roof with Yingli solar modules
Large solar power plants in Europe increasingly use modules from China. On the picture a solar roof with Yingli solar modules. Source: Baoding Tianwei Yingli New Energy Resources Co., Ltd
Although German manufacturers can hardly meet the demand in production, they are experiencing problems in passing down the increased purchasing prices to fitters and end users. At the same time Chinese solar modules are increasingly being offered on the local market, either by German system integrators or as direct imports. "In Asia, module manufacturers that are not working at full capacity will pay virtually any price for cells just to get the photovoltaic business running,” Photon quotes Lars Podlowski, member of the board of directors of the Berlin-based module manufacturer Solon AG (Photon, July 2006, p. 38). The effects of the Chinese offensive on the German market, are highlighted in a forthcoming Solar Report.

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