Estimated reading time: 10 min
1. Module prices will continue a gradual decline by another 5-10% in 2013.
That means that the average first customer price will be in the neighborhood of $0.60/watt — with many manufacturers selling in the mid to low $0.50. There is no chance of prices going up in 2013. By the end of the year you’ll be able to get two solar modules at the checkout register of your local dollar stores.
2. The game of Chinese Checkers will continue as the big solar manufacturers jump over the smaller companies and absorb their capacity. Modules are commodities distinguished by balance sheets — not minor incremental performance differences. Unfortunately, government support of manufacturers (of which almost all countries are guilty) distorts the reality of these balance sheets. Small manufacturers will just roll their marbles off the board and disappear in dusty cracks in the sofa — and half a billion dollars worth of mothballed solar manufacturing equipment will clutter the back alleys of Asian tourist markets. Weak module companies will merge with other weak companies or just disappear.
There will be no meaningful acquisitions of module companies (except by state run enterprises) since no one wants the warranty liability from the installed base. Valuable technology and equipment will be sold for pennies on the dollar or cauterized through bankruptcy. The net effect on worldwide capacity will not be enough to increase ASPs, just stabilize the rate of decline. This eventual consolidation will set the industry up for 5-10% profits to be made on commodity module manufacturing sometime in the 2015 or 2016 timeframe.
3. Module manufacturers will continue their downstream diversification efforts in order to find customers for their production. Inevitably, their balance sheets will be consumed by their need to provide financing for projects using their own products. But these projects are not profitable enough or fast enough to kick off sufficient cash for rapid growth. So in total, he who has the biggest balance sheet has the best chance for success in this downstream project business.
4. Inverter prices will also continue to coast down another 5-10%. China is a manufacturing freight train, and its next stop is inverters. Once again, bad news for inverter company profits, good news for customers, mixed news for installers and EPC companies (see below), and challenging news for inverter company M&A.
5. Large and medium scale EPC/installers will leave the market, go out of business or change business models. They are valued by their pipeline, not their historic revenue (because historic revenue comes with future performance liabilities). Profits for EPC companies and installers get severely squeezed when ASPs go down. At a 25% gross margin and $8/watt ASP, there is $2 to cover soft costs and direct labor; one can operate a viable business. But when ASPs go down to $4, there is only $1 to cover these costs — not enough to be profitable when the soft costs are stuck at about $1.50. Without creative accounting, the larger you get the more money you lose; it’s an inherently localized business. These negative economies of scale are born out by the financial trends of every single publicly traded EPC/installation company.
6. Climate change legislation will be kicked around and posited as the solution to the looming worldwide climate catastrophe. But nothing comprehensive will happen in the U.S. because the catastrophe is too far off. I hope I am wrong, but we are already two disasters past Hurricane Sandy — the most compelling U.S. climate change manifestation to date. Instead, the U.S. Congress will approve bipartisan incremental policies targeted towards enabling new sources of solar financing such as MLPs and REITs.
7. Utilities and other incumbent energy suppliers will intensify their all-out war on DG solar, deploying every dirty trick in the book. Of course, we all know that “solar is expensive, unless managed by your friendly local utility.” NOT. Net metering will be attacked everywhere in a consolidated, coordinated effort. The solar industry will remain conflicted about taking a strong net metering position, since although half the industry makes cheap electricity for DG customers, the other half sells products and services to utilities. The big lie that net metering is a cost shift from rich people to poor people will continue. White papers and esteemed research will be published confirming both opposing points of view, while states and PUCs kick the can down the road stalling for conclusive research while their retirement beckons.
8. Soft costs will continue to increase as a percentage of system costs — just like we’ve experienced over the past three years. Ouch. Paperwork and bureaucracy is not easily reduced for two reasons. First, incumbent energy providers will redouble their efforts to increase solar costs in every jurisdiction that they can influence; paperwork and bureaucracy in the name of “safety” is an easy way to accomplish this goal. Second, there are thousands of solar paperwork service providers all over the country — from incentive administrators to software developers to utility interconnection managers — who are employed solely to approve and reject solar paperwork. So without a national-scale effort, localized soft cost reduction efforts will be a drop in the bucket.
9. More residential financing companies and products will become available to homeowners, building on the sales ramp successes of SolarCity, SunRun, Sungevity and others. The economics of rooftop solar will keep getting better, but ordinary installers and EPC companies will continue to struggle. Whether commercial or residential, the Golden Rule applies to solar financing: he who has the gold makes the rules.
10. Solar trade shows will consolidate. There are not enough profitable module, inverter and racking companies to fill committed exhibit halls. Marketing dollars paid by China, Inc. will end for all but the biggest manufacturers. Luckily, the remaining shows will be profitable and well attended. By 2018 the entire renewable energy industry — solar, wind, geothermal, hydro, smart grid — will hold their annual show in Vegas, just like Comdex in the ‘80s.
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