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Rogol's monthly market commentary
June, 2008: We are forecasting more than 25 GW of solar cell/module production in 2010. Nearly no one agrees with this outlook. If you disagree, let me suggest a bet:
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© Stefan Hippel
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How much?: There is a huge range of forecasts for cell/module production in 2010 but nobody is as bold in its estimates as PHOTON Consulting. If 25 GW seems too high to you, let's bet!
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If there is less than 25 GW of cell/module production in 2010, I will make a donation to blueEnergy, a non-profit organization dedicated to solar installations in developing countries. If there is 25 GW or more, those who take this bet will make a donation to RAG Foundation, an organization supporting, among others, German coal areas as they transition to post-coal times. To sign up to this bet, please send an email to: info@photon-consulting.com .
Does anyone else believe that there will be more than 25 GW of solar cell and module production in 2010? Vigorous disagreement is the nearly unanimous response to our 26 GW production forecast for 2010. Others are predicting between 10 and 20 GW in 2010, which is well below our forecast.
The negative response to our supply forecast strikes us as odd for at least four reasons:
• Breadth of coverage: First, we have deep coverage of suppliers along the silicon and thin-film supply chains. For example, we are currently tracking 175 companies attempting to produce high-purity silicon and 152 companies attempting to produce thin-film modules. The breadth of this coverage provides us with a strong basis for bottom-up forecasts of silicon and thin-film production.
• Conservative methodology: Second, our forecasting approach significantly discounts the »aspirations« of nearly all silicon and thin-film players. On average, we are discounting silicon »aspirations« by more than 50 percent to estimate 2010 production. Similarly we are discounting thin-film »aspirations« by more than 75 percent to estimate 2010 production. Overall, we suspect that these discounts are too conservative and that many companies will exceed our current estimates.
• Cross-checks: Our forecast methodology involves several cross-checks. For example, we »peer review« our analysis with executives at each step of the solar supply chain. We also cross-check our top-down estimates with bottom-up analysis of production for each step of the supply chain for the next 5 years. On top of this, we spot check with equipment and feed stock vendors to ensure that the bottom-up production goals of specific companies are (or are not) reasonable.
• Track record: Disagreement with our forecast is nothing new. Many across the sector have disagreed with us since we began forecasting in 2003. Yet for 5 years running our »unbelievable« forecasts have turned out to be too conservative.
Despite these reasons, almost no one else in the solar sector agrees with 25 GW or more of cell/module production by 2010.
Calling our bluff
If you genuinely believe that we are wrong – that there will be less than 25 GW of solar cell module production in 2010 – then let's place a bet to benefit a charity. I propose*:
• Amount. $1,000 per person.
• »You win.« If solar cell/module production is less than 25 GW in 2010, you win the bet. In this case, I will send payment for $1,000 per person to blueEnergy ( www.blueenergygroup.org ). This donation will support solar installations (more specifically, the solar component of solar-wind installations) in Nicaragua.
• »I win.« If solar cell/module production is more than 25 GW in 2010, you will send payment for $1,000 per person to the RAG Foundation ( www.rag-stiftung.de/stiftung.htm ). The RAG donation is aimed at supporting education measures in German coal areas that might also be negatively impacted by the rapid expansion of solar power.
• Measurement. PHOTON International's global cell/module survey for 2010 (to be published in early 2011) will serve as the measure of record for this bet. The editorial team at PHOTON International (the independent, sister organization to PHOTON Consulting) tracks annual cell/module production. They have deep interest in both accuracy and supporting the solar power sector. On top of this, they would very much like to see me lose this bet – it would give them true satisfaction to see donations made to support the solar sector instead of coal.
• Signing up for the bet.* To sign up for this bet, send a short email titled »Bet: Less than 25 GW in 2010« to info@photon-consulting.com . We will reply with a standard form to collect your contact information, confirm that you expect less than 25 GW of cell/module production in 2010 and affirm each side's commitment to pay this $1,000 bet in the case of a loss. The deadline for submitting this completed form is July 1, 2008 and up to 100 people will be accepted on a first-come, first-served basis.
Given the disagreement we often encounter in the face of our production forecast, we hope that a good-natured wager will benefit either solar installations in a developing country (if you win) or the displaced workers in Germany's coal industry (if I win).
Sector fundamentals:
Remarkably strong
Given our willingness to put our money where our mouth is, it should be no surprise that we continue to have a very strong outlook for the solar sector:
• Supply. We continue to expect the sector to grow from roughly 4 GW in 2007 to more than 7 GW in 2008, 14 GW in 2009 and 26 GW in 2010. We believe there is significant upside on our 2010 forecast.
• Demand. With grid prices continuing to rise, long-term interest rates remaining low and policy support continuing to expand, the demand environment remains very, very strong. While these underlying demand drivers will eventually reverse (e.g., we are increasingly watching potential for long-term interest rate increases especially if commodity inflation becomes a sustained macro-economic concern), there is no sign of this occurring in the near future. As a result, our baseline forecast is for strong demand to continue.
• Price. For the first four months of 2008, prices throughout the solar sector have remained remarkably strong despite aggressive volume growth by many companies. Prices for silicon, wafers, cells and modules in US-dollar terms are at or above their level of the fourth quarter in 2007. This is a function of both depreciation of the US dollar and very strong demand-pull from Spain, Italy and other high-priced solar markets. We continue to expect global weighted average module prices to decline over the next few years in response to much larger volumes and declining incentive rates in specific markets. However, we expect this decline to be modest and believe prices are unlikely to crash. By 2010, we continue to expect global weighted average factory gate module prices at or near $3 per W, compared to roughly $3.80 per W in 2007.
• Cost. There are numerous »splinters« slowing cost reductions across the solar sector. These »splinters« include rising feedstock prices and tight deliveries for a variety of inputs such as MG-Si, low iron glass, isotropic graphite and Tedlar. The result of these »splinters« is that cost reductions are slowing from their historical rate (2006/07) of 3 to 4 percent quarterly compounded cost reduction to a rate of 2 to 3 percent quarterly compounded cost reduction. It is important to emphasize that these »splinters« are slowing but not stopping cost reductions for the sector. It is also important to note that many companies are achieving much faster-than-average cost reductions as the result of vertical integration, new supply contracts at lower prices and technical innovation. Therefore, many companies are on a path to reduce their fully-loaded costs by 40 percent or more from 2007 to 2010.
• Profit. The combination of a strong pricing environment and continuing cost reductions means that profit margins for the sector are likely to remain at high levels. We continue to expect the operating profit margin of the entire sector to be above 30 percent beyond 2010.
PPVX: Up 4 percent in March
Investors in solar stocks already put their money behind their beliefs by picking or shorting specific solar stocks. For those investors that own solar stocks, January and February were challenging times, with the PPVX falling 39 percent (see PI 4/2008, p. 72).
However, after trading down, the PPVX was up 4 percent in March. The gains were widely distributed, with nearly two-thirds of the PPVX stocks up for the month. The biggest stock price increases were achieved by JA Solar (+32%), Q-Cells (+22%) and SunPower (+18%). Conversely, 11 PPVX stocks were down in March. Most of these were small declines, with larger decreases seen for Ersol (-10%), Worldwater (-15%) and Roth & Rau (-18%).
While the future is far from certain, we have conviction that the growth of the solar sector is likely to continue at a rapid pace and with high profitability beyond 2010. Given this outlook, we are convinced that the financial markets will continue to provide capital to the solar sector for rapid expansion.
With 30 percent and more operating profit margins and potential financing from numerous sources (equity investors, convertible bonds, debt markets, government grants and loans, large corporate balance sheets, and, in many cases, customers), we are convinced that there will be growth capital available to enable more than 25 GW of production by 2010. If you disagree, I will look forward to you accepting a friendly bet to benefit a charity.
*Note: Void where prohibited or restricted and all federal, state and local rules and regulations apply. Open to registered subscribers of PHOTON magazine as of May 1, 2008 and limited to the first 100 respondents as described above.
Michael Rogol is managing director of PHOTON Consulting. For more info, please go to: www.photon-consulting.com .
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