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.
