Will Subsidy Reductions Kill the Solar Photovoltaics Industry?

Despite the economic downturn, continuing raw material supply limitations and high prices, the solar photovoltaics industry enjoyed very strong growth in 2007. Although subsidy changes in key markets could curtail this upward trend, it is more likely that manufacturing efficiencies, among other factors, will more than offset the proposed subsidy reductions without a major impact on profit margins.

In 2007, Europe saw the largest number of global solar technology shipments. With 1GW of solar module and cell technology sales, Europe took the lead ahead of the rest of the world region (led by China and Taiwan), and Japan, which had 941MW and 911MW of shipments, respectively. The US took fourth position with 237MW.

However, demand for solar photovoltaics (PV) is artificially stimulated, a fact that is especially pertinent at a time when some of the industries’ most sizeable incentive programs, namely those in Germany and Spain, face significant changes to promote and simultaneously control solar PV demand levels. In 2007, the US did not extend the federal tax credit, adding further speculation that demand in solar PV would see a sharp decline. Moreover, the fact that Japan does not operate a subsidy program, combined with the fact that its demand for solar products is declining (as a result of a stagnating building market brought on by economic downturn) means that Japanese manufacturers are increasingly reliant on Europe as a market for solar PV module products.

Based on initial proposals from Germany and Spain, market forecasts estimate that the average worldwide subsidy levels will decline by around 5% in 2008 and 10% to 15% in 2009 on the basis of unchanged US subsidy policy.

Continued demand for domestic and commercial solar PV is currently driven and upheld by attractive rates of return on solar projects, which are, in turn, underpinned by guaranteed government subsides, generally in the form of feed-in tariffs. Reductions in subsidy prices will put pressure on solar PV average selling prices which will, in turn, encourage installation and production costs to decrease proportionally, not least as system developers tend to price solar systems at the maximum possible price that will allow investors to make an attractive return.

Therefore, the most likely outcome is that the impact of reduced subsidies will be absorbed along the supply value chain by the various market players, with solar PV manufacturers experiencing some margin pressure, despite their aggressive near-term plans to reduce manufacturing costs in order to bring down installed costs.

This brings us to the crux of the argument: installed costs will need to come down in line with subsidy reductions if healthy margins are to be maintained. However, since solar power projects are front-loaded and capital intensive, interest rates also have a high degree of influence on installed costs. Therefore, a likely reduction in future interest rates would – along with reduced component prices – help to offset subsidy reductions by reducing installed costs further.

Despite this positive near-term outlook, and until true demand-pull can be created, it is worth noting that the PV industry is at the mercy of government programs that drive artificially stimulated demand.