The Solar IndustryMarch 2012
Solar Outlook – Macro ObservationsOBSERVATIONS• Large and growing market   — Through it all the installed solar market is ...
Solar Outlook – Micro Observations… OR LESSONS TO LIVE BY• “It’s all about the costs stupid …”   — In this environment gre...
Clean Tech Eco System                                                                      Materials and Manufacturing    ...
Global Analysis of Renewable Energy DevelopmentTop Countries with Installed Renewable Electricity by Technology1Source: 1N...
U.S. Analysis of Top States forRenewable Energy DevelopmentU.S. Solar Energy Development1                                 ...
Solar Energy
Global Solar MarketOVERVIEW                                                                 Global Solar Demand1• Solar en...
Global Supply and Demand ForecastPoly-Si Supply and Demand Forecast1                                                      ...
Challenges to Global Solar PowerWe believe the next 3-4 quarters will                Challenges to Global Solar Powerremai...
Key Global Solar Valuation Drivers                                                       Brand Positioning                ...
Electricity PricesSelect Countries: Cost of Electricity for Industrial Usage1                                             ...
Feed-In Tariff (FIT) Overview – Select CountriesA Feed-In Tariff (FIT), also known                                        ...
Levelized Cost Of Energy (LCOE)INDUSTRY1                                                              LCOE Cost2• LCOE is ...
U.S. Solar MarketOVERVIEW                                                               U.S. PV Installations (2005 - 2010...
Solar Value Chain                                                          Solar Electric Technology                     S...
Solar Photovoltaics
PV Value Chain                               Polysilicon & precursors                              Wafers to PV modules   ...
Global PV MarketOVERVIEW1                                                                                 Global Installed...
Analysis of Pricing & MarginsOVERVIEW                                                                                     ...
Analysis of Pricing & MarginsMODULE PRICING & COST DYNAMICS –IMPACT ON GROSS MARGINS1                                     ...
U.S.: Production, System Prices and IrradianceOVERVIEW1                                                                   ...
U.S. PV MarketOVERVIEW                                                                              Grid-connected PV Capa...
Photovoltaic Process Technologies                                        Wafers                         Crystalline Silico...
Photovoltaic Landscape                                                 Ancillary / Inverters                              ...
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
Silicon Valley Bank Solar Industry Report
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Silicon Valley Bank Solar Industry Report

  1. 1. The Solar IndustryMarch 2012
  2. 2. Solar Outlook – Macro ObservationsOBSERVATIONS• Large and growing market — Through it all the installed solar market is growing rapidly with no end in sight. Even as subsidies may be eliminated, new markets, grid parity/cost, and better distributed transmission should continue to fuel growth.• Activity from foreign strategics — Foreign corporate investors offer glimmers of hope for second generation technologies as several have recently struck joint venture or merger agreements with leading technology. These include Total/SunPower, SK/Heliovolt, Stion/Avaco, and others in the pipeline.• Good news for downstream — Lower costs equal grid parity, better downstream margins. Good for the developers and financiers of generation.• Don’t underestimate China (or South Korea for that matter) — China’s commitment can not be ignored. South Korean companies have become very active recently. It could be that the country hopes to leapfrog China in bringing second generation technologies such as CIGS to scale.• ASPs may continue to plummet as oversupply sustained for at least 12 months — Gluts in all steps of the supply chain from crystalline silicon to panels will take time to work through.• Massive consolidation — The lucky ones have enough technology to interest foreign and the remaining US players (e.g., First Solar). In fact, much of this will just be liquidation. In addition to the obvious oversupply and large number of manufacturers, China has indicated that it expects just 4 or 5 of its manufacturers to survive. Government will likely pick the strongest and allow the rest to “drift” away.• Exits will only occur on results, not promise• The Solyndra Effect — In the current environment, every solar investment decision bears the cloud of Solyndra. Much of this stigma is well-earned as we embark on consolidation. There will be winners but selection will take time and be difficult to predict. There will likely be good companies that will be adversely selected in the fallout. The Solar Industry 2
  3. 3. Solar Outlook – Micro Observations… OR LESSONS TO LIVE BY• “It’s all about the costs stupid …” — In this environment great technology loses out to lower costs. Downstream buyers can command prices in a commodity market defined by oversupply. Companies that cannot deliver continuous cost reduction will suffer.• Revenue growth is fleeting — As suggested above, revenues can dissipate quickly if a lower cost alternative appears. Supply contracts are still subject to price adjustment and are not commitments. Meeting price adjustments could equally result in margin pressure or worse.• Sales cycles are very long for certain channels — In particular, utility buyers are monolithic and slow to act, This is compounded be the project nature of those solar purchases. Power Purchase Agreements, the foundation for project financings, often drag through extended approval processes.• Bad news for new entrants — Yes, there are still new players devising ever more advanced technologies. The likelihood of venture support is negligible.• Exits may look more like “absorption” than traditional M&A or IPO — Except for potential downstream plays like Solar City and BrightSource, IPO is likely a distant aspiration and certainly challenged valuation. The Solar Industry 3
  4. 4. Clean Tech Eco System Materials and Manufacturing Materials & Manufacturing Recycling & Energy Energy Energy Agriculture, Air & Energy Storage Waste Generation Efficiency Infrastructure Water Management • Solar / Thermal • Batteries • Building materials • Smart Grid • Waste to energy • Agriculture • Wind • Fuel Cells • Lighting Hardware • Waste • Air • Hydro • Utility Scale • Demand • Smart meters repurposing • Water • Alternative fuels grid storage response systems • Transmission • Energy Management • Improved and • Improved power • Reduced • Reduction in • Economic in • Organic economical reliability operating costs wastage nature - well- pesticides / Application Benefits source of • Intermittency • Lower • Reduce outage run recycling fertilizers energy Management maintenance frequency / programs cost • Water • Less pressure • Increased costs duration less to operate purification on non- cycles/longer • Extended • Reduce than waste • Water renewable storage equipment lives distribution loss collection and remediation resources (oil landfilling • Efficiency • Purification and gas) • Management • Energy security • Grid/ Off Grid Residential End User Commercial Industrial Utilities, Government and Others The Solar Industry 4
  5. 5. Global Analysis of Renewable Energy DevelopmentTop Countries with Installed Renewable Electricity by Technology1Source: 1NREL (National Renewable Energy Laboratory) Data Book, 2011. The Solar Industry 5
  6. 6. U.S. Analysis of Top States forRenewable Energy DevelopmentU.S. Solar Energy Development1 U.S. Geo-Thermal Generation2U.S. Hydropower Generation3 U.S. Wind Power Generation4Source: 1,2,3,4NREL (National Renewable Energy Laboratory) Data Book, 2011. The Solar Industry 6
  7. 7. Solar Energy
  8. 8. Global Solar MarketOVERVIEW Global Solar Demand1• Solar energy demand has been on the rise, and the past decade 8000 7,410 2009 2010 (MW) was dominated by Europe, especially Germany 7000 6000 5,000 — Germany and Italy continue to rank as the two highest volume 5000 3,800 demand markets for solar PV in 2011 4000 3000 — 2012 demand remains more uncertain, as slowdown is 2000 1,448 1,000 1,030 822 expected in Germany and limited growth in Italy 1000 720 740 185 411 614 475 85 500 389 144 72158 481 0• Asia and the U.S. are expected to emerge as the next Republic Germany India France Rest of Europe Canada US Italy Japan China Czech powerhouses of growth in solar demand• The solar industry has been hard hit again by increasing global competition, price pressure, supply chain bottlenecks, capacity oversupply and reduced subsidy support in key markets Solar Generation as % of World Electricity Consumption2CRITICAL SUCCESS FACTORS (Solar Generation as % of World 12.0% 3,000.0• Low production costs: Current European producers face plant Electricity Consumption) closures, write downs and losses, while newer Chinese and (Solar GW Installed) 10.0% 2,500.0 U.S. manufacturers continue to expand and grab share with low 8.0% 2,000.0 price offers and improving product quality. This divergence is 6.0% 1,500.0 likely to accelerate as capital will flow from higher-cost to lower- cost manufacturers 4.0% 1,000.0 2.0% 500.0• Cost leadership and superior market access: In an increasingly competitive global market, solar panel manufacturers will need to 0.0% 0.0 2003 2010 2015E 2020E 2025E 2030E lower costs by investing in R&D (i.e., increased efficiency) and scale to stay ahead of the pack Solar GW Installed Solar Generation as % of World Electricity Consumption• New strategies: More JVs, outsourcing & tolling arrangements, mergers and levels of integration are possible responses to future industry growthSource: 1Solarbuzz, 2Energy Information Administration. The Solar Industry 8
  9. 9. Global Supply and Demand ForecastPoly-Si Supply and Demand Forecast1 Wafer Supply and Demand Forecast2 250,000 50.0% 30,000 40.0% 200,000 40.0% 24,000 (y-o-y % growth) (y-o-y % growth) 30.0% 150,000 30.0% 18,000 (MW) (MT) 20.0% 100,000 20.0% 12,000 10.0% 50,000 10.0% 6,000 0 0.0% 0 0.0% 2010 2011E 2012E 2010 2011E 2012E Supply Demand Supply: y-y growth Demand: y-y growth Supply Demand Supply: y-y growth Demand: y-y growthCell Supply and Demand Forecast3 • FY2011 witnessed a massive over-supply in silicon, wafer and cells segment 30,000 20.0% • The supply-demand gap is expected to reduce in FY2012, driven 24,000 16.0% through a potential revival of demand in Europe, which is the largest market for solar PV products (y-o-y % growth) 18,000 12.0% — Global capex is expected to decline by ~15% in FY2012 (MW) 12,000 8.0% — Further production capacity shutdowns in Europe are likely, 6,000 4.0% while many second-tier players in China could also close capacity in the next 4 quarters if significant pressure remains 0 0.0% on prices 2010 2011E 2012E Supply Demand Supply: y-y growth Demand: y-y growth • Current economic situation in Euro zone could be a major threat to demand — Decrease in FiT in Europe particularly in Germany — Fiscal uncertainty in Euro zoneSource: 1,2,3Mirae Asset Research. The Solar Industry 9
  10. 10. Challenges to Global Solar PowerWe believe the next 3-4 quarters will Challenges to Global Solar Powerremain a difficult time for the playerswith lower margins and weaker Economic uncertainties • The economic trend in Europe and the US may impact every country’s governmentbalance sheets. Top producers with policy to support solar power across the globe, especially as Europe is the largest solar market in the worldlower production costs and healthy • The favorable tax credits and Feed-In Tariff (FIT) might face cuts which will reduce thebalance sheets will be more resilient, Internal Rate of Return (IRR) of solar power projects, thereby a fall in demand for solarwhile Tier II and III producers will face powermargin squeeze. This could lead to Conventional power price • The high coal and oil prices have lowered the IRR of conventional power projects,consolidation as comparatively decrease thereby increasing the attractiveness of renewable energy • If coal and oil prices drop, the IRR of conventional power projects will be higher, whichhealthier crystalline silicon or other will reduce the attractiveness of solar powerenergy companies look to acquirefailing or weaker thin film companies Environmental policy to • The process to produce PV components causes a certain degree of pollution. If the control the manufacturing government implements stricter standards or policies, it leads to an increase in the cost process of manufacturing Technology breakthrough • Demand for solar power might be impacted if there is a technology breakthrough for in other renewable wind power to reduce wind power cost, or a technology breakthrough for nuclear power energies to reinforce safety, or a new development for other types of power such as, geothermal power, biomass generation or even nuclear fusion Infrastructure bottleneck • If solar power demand or capacity installation is too fast, the development of the infrastructure for solar power, such as power grid connections, high voltage cables and storage batteries, may not be fast enough to facilitate the high growth of solar power capacities • Eventually, the solar power demand growth may be capped by the growth of infrastructure Survival of the fittest • Falling production costs have created an oversupply of PV components, leading to depressed ASPs. Therefore, marginal players lacking economies of scale with higher production costs will face higher margin squeeze pressure and this difficult environment could last until early 3Q12Source: SVB Analysis, Mirae Asset China Green Energy Report November 2011, pg.47 The Solar Industry 10
  11. 11. Key Global Solar Valuation Drivers Brand Positioning Cost Structure Outsource & Partnership Investment in Brand, Distribution & R&D Western Solar Chinese Solar Manufacturers Manufacturers Quality & Distribution Conversion Scale Manufacturing Innovation Strategy Efficiency Strategy • Sell direct vs. distributor • R&D budgets • Horizontal vs. Vertical • Sell modules vs. projects • Partnerships • Processing expertise • Sell projects vs. energy Average Cost Selling Price Profit Quality & Innovation Distribution Strategy Conversion Efficiency Scale Manufacturing Strategy Brand quality in solar is • Using distributors lowers • Higher conversion • Scale or volume drives • Manufacturing in low cost crucial because - selling and distribution efficiency lowers balance both cost and profitability geographies versus higher • Solar industry requires 25- costs of system and fixed project cost end markets is a key year warranties costs and allows the • Scale allows purchasing differentiator of cost today • Increasingly, companies installation customer to economies and • Risk profile around module are moving downstream to maximize revenue improvements to cost • Firm’s decide to focus on performance determines chase greater profit pools based on the “kaizen”1 process Attributes both bankability and and sell projects, not just • Higher efficiency modules experience curve optimization and Just-In- project return modules alone are preferred, and Time (JIT) inventory command a premium price • Innovation in product relative to conversion quality and efficiency is a efficiency modules. All key factor panels are becoming commoditizedSource: SVB Analysis, Jeffries & Co. Energy Generation – Solar report July 2010, pg.7.Note: 1Kaizen refers to "improvement", or "change for the better" , implies a philosophy or practice that focus upon continuous improvement of processes in manufacturing and engineering. The Solar Industry 11
  12. 12. Electricity PricesSelect Countries: Cost of Electricity for Industrial Usage1 Select Countries: Cost of Electricity for Household Usage2 $0.35 $0.35 $0.30 $0.30 $0.25 $0.25 ($ / KWh) ($ / KWh) $0.20 $0.20 $0.15 $0.15 $0.10 $0.10 $0.05 $0.05 $0.00 $0.00 2001 2002 2003 2004 2005 2006 2007 2008 2001 2002 2003 2004 2005 2006 2007 2008 Germany Italy Japan Spain U.S. Germany Italy Japan Spain U.S.U.S.: Average Retail Price of Electricity to End-Customer3 • Typically, investments in electricity generation capacity have gone through “boom and bust” cycles, with periods of slower growth followed by strong growth, in response to changing $0.14 expectations for future electricity demand and fuel prices $0.12 $0.10 • According to Energy Information Administration, in the U.S., renewable electricity generation, excluding hydropower, accounts ($ / KWh) $0.08 for nearly one-quarter of the growth in electricity generation from $0.06 2009 to 2035 $0.04 — Total non-hydropower renewable capacity is forecast to $0.02 increase from 47 GW in 2009 to 100 GW in 2035 $0.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 — The largest increase is in wind-powered generating capacity U.S. Residential U.S. Commercial U.S. Industrial — Solar generating capacity expected to increase five-fold, with most capacity additions coming in the end-use sectors. The additions are based on a decline in the cost of PV systems and the availability of Federal tax credits through 2016Source: 1,2,3Energy Information Administration. The Solar Industry 12
  13. 13. Feed-In Tariff (FIT) Overview – Select CountriesA Feed-In Tariff (FIT), also known History Recent Activity Outlookas standard offer contract oradvanced renewable tariff is a • Main incentives in form of invest. • California fails to pass SF722; 33% • Approval of the treasury cashpolicy mechanism designed to Tax Credit (ITC), and accelerated renewable energy by 2020 expected grants could divert some resources depreciation benefits, along with • Treasury cash grant extended for to regions where FIT rates are onaccelerate investment in some state level incentives one more year (part of new tax bill) the decline and more time sensitiverenewable energy technologies. • Boosted by cash grants in lieu of • Cash grant due to lapse at end of • Large scale projects for utilities U.S. ITC in ACES bill passed in 2009 2011, revert to Inv. Tax credit (ITC) should drive meaningful growthIt achieves this by offering long-term contracts to renewable • Adopted FIT program in mid 2006 • Enacted FIT rate cut for ground • French government will likely cut FIT • Rooftop/BIPV get best rates mount installs in September 2010 rates in 2011 (when installenergy producers, typically based • Focus on aesthetics • 4 month moratorium on new solar moratorium is lifted)on the cost of generation of each PV connections to slow growth • Likely to mandate an installation capdifferent technology France • Longest history of FIT incentives • Midyear FIT cuts effective July 2010 • Further growth will becomeIn addition, FIT’s often include • Adopted a very attractive FIT and October 2010 increasingly more challenging"tariff degression", a mechanism program in 2004 • Restrictions in the use of farm land • Ground mount power-plants to drop • Revised its FIT program in 2009 to for open field installations sharply in 2011according to which the price curb installation growth • More FIT cuts likely in 2011 Germany(or tariff) ratchets down over time.This is done in order to track and • Adopted FIT program in 2007 with • Planned 2011 FIT cuts to be • More FIT cuts likely to beencourage technological 2% digression scheduled for 2009 implemented in three phases, with announced for 2012, along with and 2010 ground mount systems seeing larger talks of a capcost reductions • Italy has a ~3GW installing goal cuts than rooftop • Installations are expected to grow over 3 years (2010 – 2012) y/y as FIT rates remain relatively Italy attractiveThe goal of FIT’s is ultimately tooffer cost-based compensation • Adopted one of the most attractive • Announced planned FIT cuts: 5% • Given growing burden of funding the FIT programs in 2006 for small rooftop, 25% larger FIT program, Spain is not expectedto renewable energy producers, to be a meaningful market in 2011 • Surge in installations lead to severe rooftop, and 45% for power plantsproviding the price certainty and cuts and 500MW hard cap • Threats of retroactive FIT cuts didlong-term contracts that help not pass Spainfinance renewable energyinvestments. Hence incentives are • Adopted FIT program in early 2010 • Adoption of new FIT rates have led • Installations in the UK expected to to robust growth, but not likely to grow y/y, but at a moderate pacethe key drivers in the solar break over 200MW in 2011 (and still relatively small)PV systems U.K. Source: Deutsche Bank – Alternative Energy Solar Photovoltaic Industry – January 2011, pg.6. The Solar Industry 13
  14. 14. Levelized Cost Of Energy (LCOE)INDUSTRY1 LCOE Cost2• LCOE is defined as the $/MWh price for an inflation-adjusted, fixed-price power off-take agreement that, taking into account all project- specific costs, offers the project developer the $250.0 minimum equity return necessary to undertake $232.9 the project — LCOE is the sum of capital amortization, interest payments to creditors and dividends to investors, $200.0 and operation and maintenance over the entire life- cycle of an electricity installation and is commonly used in the energy world to compare the LCOE ($ / MWh) $150.0 generating costs of different technologies $138.1 $129.8 — Factors that go into calculating it for solar, the most important of which are costs of equity, longevity, $104.4 efficiency of the panels and inverters, and of course $100.0 location $74.9 $70.1• The all-in cost of electricity generation is the key $59.8 $57.3 factor influencing the feasibility and hence the growth $50.0 of individual power generation technologies• The use of LCOE allows different power sources to be compared according to their long-term cost of $0.0 Landfill Gas production while taking into account financing costs, Wind Municipal Solid Waste Geothermal Solar PV Biomass Natural Gas Coal capital and operating costs, and generation efficiency• Solar LCOE is the highest amongst different sources of energy• LCOE estimates for wind and especially solar PV power have declining. PV prices dropped sharply from 2008–2010, and for every doubling in capacity a corresponding 28% drop in solar PV’s cost is witnessedSource: 1,2Bloomberg & CIBC World Markets. – Initiating Coverage April 2011. The Solar Industry 14
  15. 15. U.S. Solar MarketOVERVIEW U.S. PV Installations (2005 - 2010)1• The total size of the U.S. solar market grew 67% from $3.6 billion 1,000 in 2009 to $6.0 billion in 2010 900 878• Solar electric installations in 2010 totaled 956 megawatts (MW) 800 Installations (MW) to reach a cumulative installed capacity of 2.6 gigawatts (GW) 700 600Photovoltaic (PV): 500 435• Grid-connected PV installations grew 102% in 2010 to reach 400 290 878 MW, up from 435 MW in 2009, bringing cumulative installed 300 160 PV capacity in the U.S. to 2.1 GW 200 79 105 100• Sixteen states had installed more than 10 MW of PV in 2010, 0 up from four states in 2007 2005 2006 2007 2008 2009 2010• 52,600 PV systems were connected in 2010, bringing the cumulative number of grid-connected PV systems in the U.S. to 152,516 U.S. PV Installed Capacity by Segment (2005 - 2010)2• U.S. PV cell production capacity reached 2,112 MW in 2010, 1,000 with cell production across all technologies increasing by 88% to 900 by the end of the year 800 Installations (MW) 264 700• Historically in the U.S., non-residential installations drove the 600 market, comprising more than 45% of total installations. In 2010, 500 however, both the residential and utility markets expanded rapidly 400 372 such that each of the three market segments contributed over 300 157 25% of total installations 200 77 208 58 242Concentrating Solar Power / Thermal (CSP / CST): 100 27 51 38 67 93 190 70 0 22 1 9• The largest U.S. CST plant to come online in nearly 20 years, 2005 2006 2007 2008 2009 2010 was completed in 2010 - The 75 MW Martin Next Generation Utility Non-Residential Residential Solar Energy Center• Six U.S. states have operating CST projects, a total of 17 operating plants which cumulatively generated 507 MW in 2010Source: 1,2Solar Energy Industries Association. The Solar Industry 15
  16. 16. Solar Value Chain Solar Electric Technology Solar Photovoltaic Concentrated Solar Power / Thermal (CSP / CST) Silicon Parabolic Power Fresnel Compounds Dish Design Trough Tower Reflector Wafers Traditional Silicon Cell Thin Film Modules Balance of System Components Installation / Servicing The Solar Industry 16
  17. 17. Solar Photovoltaics
  18. 18. PV Value Chain Polysilicon & precursors Wafers to PV modules Installation to energy PV C-Si approach SIH4 / TCS Polysilicon Wafers PV Cells Distribution Installation Energy Modules Ancillary Manufacturing Equipment Financing EquipmentsThin film approach PV PV Cells Distribution Installation Energy Modules Upstream (manufacturing) Downstream (energy) • Polysilicon manufacturing • Wafer to PV module manufacturing is weak and • Installation to energy end market in the U.S is industry has moved to Asia getting weaker in the U.S. anemic compared to leading markets • Global incumbents increasing • Tax incentives/holidays, labor costs and supply • Effective feed-in tariff (FIT) incentives drove capacity chain benefits have driven ingot/wafer to module primary markets largely in Europe The market manufacturing to Asia • U.S market is driven largely by tax incentives – a • All the industry’s leaders and largest players are less efficient approach to drive market growth expanding capacity in Asia • Tax liability • Tax liability • Project returns (ROI) • Geography – safety • Supply chain cost – Incentives • Supply chain cost • Labor cost – Risk mitigation • Consumables (electricity) Issues / drivers • Landed cost – Geography cost • Skills-set; experience base • Geography – end market • Cash flow mismatch - structured finance vehicles • Labor cost • Private capital scarcity • Landed cost1 • Limited supply of tax equity Source: Deutsche Bank – Alternative Energy Solar Photovoltaics May 2010, pg. 25. Note: 1The total cost of a landed shipment including purchase price, freight, insurance, and other costs up to the port of destination. The Solar Industry 18
  19. 19. Global PV MarketOVERVIEW1 Global Installed PV Capacity (2010)2• European Photovoltaic Industry Association (EPIA) estimated that global cumulative installed PV capacity totaled nearly 40GW by the end of 2010• The ~16.6GW of additional capacity installed in 2010 constituted a 131% increase over the 7.2GW installed in 2009, for a 71% increase in global cumulative installed PV capacity• European markets accounted for ~74% of installed capacity — The biggest markets globally are Germany, Italy, Spain, France, U.S. and Czech Republic — Other markets include Japan, China and India• Wafer to module manufacturing has largely moved to Asia — With the rapid initial phase growth of the solar PV industry over the past several years, manufacturing moved to lower cost/heavily subsidized regions in Asia EU (74%) Japan (9%) U.S. (6%) China (2%) ROW (8%)2012 Global Solar Industry - Outlook3 Subsidy reductions in major Large subsidy reductions in major solar PV markets, including Germany, Italy and U.S. might negatively impact demand solar PV markets level and pricing in 2012 2nd and 3rd tier companies might disappear due to consolidation in the sector, which might lead to a predatory product Industry consolidation pricing scenario Historically, PV module makers primarily focused on increasing manufacturing scale in order to reduce product and Raising R&D expense associated solar PV system costs, but 2012 is expected to be the year where manufacturers fully switch their focus to improving efficiency of products Other conventional Shale-based natural gas production growth in North America is being viewed as an alternative to more expensive alternatives renewable energy sources (like solar) until such renewable technologies can become competitiveSource: 1,2U.S. Department of Energy ,2010 Solar Technologies Market Report released in November 2011, pg. xiii, 3JP Morgan – Alternative Energy report January 2012. The Solar Industry 19
  20. 20. Analysis of Pricing & MarginsOVERVIEW Breakdown of Costs and GP by Segment1• Module prices have dropped 60-80% over the last 2 years. Sharp drop in production costs enabled module prices to drop sharply. Module suppliers would have started to post losses and supply $1.4 would have contracted, if the costs had not declined on pace with Average Selling Price (ASP) US$1.20 $1.2 $0.06 US$1.10 ASP / Cost per wattModule production costs and pricing: $0.07 $1.0 $0.35• Gross margin dollars are earned in every segment of the solar PV module supply chain but how $0.33 much of the gross margin dollars captured depends on how vertically integrated a company is, $0.8 $0.08 $0.07 and how efficient they are in each sub-segment $0.6 $0.18 $0.01 $0.16 $0.03 — Full vertical integration: Top tiered, vertically integrated suppliers can drive low to mid-30% $0.4 $0.22 $0.20 gross margins. However, this comes at the expense of higher capex and fixed overhead. $0.2 $0.30 $0.24 As a result, production costs would go up if capacity were to be under-utilized $0.0 — Less integrated: Less integrated suppliers purchase wafers, and/or cells to build modules 2011E 2012E and do not benefit from the associated gross margins dollars. But wafer/cell prices are likely to be at a discount in an oversupply state, potentially offering more flexibility and better cost p-Si Cost Wafer Processing Cost Wafer GP structure in a downturn Cell Processing Cost Cell GP Module Assembly Cos Module GP — Drive to vertical integration: Most module suppliers are ramping internal wafering and cell processing while wafer and cell suppliers are expanding into module assembly, in an effort to improve gross margins. This is driving capacity ramp throughout the supply chain, and raising Prices of modules expected to fall below US$1.0 / the risk of over-supply should demand growth slow or contract Watt for top tiered companies in FY2012Forecast for Solar Pricing across Value Chain2 FY2010 1Q 2011 2Q 2011E 3Q 2011E 4Q 2011E FY2011E FY2012E Europe China U.S. Europe China U.S. Europe China U.S. Europe China U.S. Europe China U.S. Europe China U.S. Europe China U.S.Polysilicon - Spot US$ / kg 70.0 85.0 - 69.0 74.0 - 65.0 69.0 - 48.0 48.0 - 45.0 45.0 - 57.0 59.0 - 35.0 35.0 -Polysilicon - Contract US$ / kg 60.0 80.0 - 65.0 70.0 - 58.0 65.0 - 54.0 60.0 - 50.0 55.0 - 58.0 63.0 - 51.0 45.0 -Wafer US$ / Watt 0.90 0.92 - 0.90 0.90 - 0.84 0.70 - 0.67 0.57 - 0.64 0.55 - 0.76 0.68 - 0.53 0.45 -Cell US$ / Watt 1.36 1.30 - 1.23 1.20 - 1.11 0.95 - 0.94 0.80 - 0.88 0.75 - 1.04 0.93 - 0.81 0.69 -Module US$ / Watt 2.08 1.82 1.47 1.93 1.71 1.53 1.78 1.50 1.34 1.58 1.35 1.25 1.43 1.22 1.10 1.68 1.45 1.30 1.35 1.15 1.00Source: 1,2Goldman Sachs Global – Clean Energy Solar July 2011, page 10 & 13. The Solar Industry 20
  21. 21. Analysis of Pricing & MarginsMODULE PRICING & COST DYNAMICS –IMPACT ON GROSS MARGINS1 Global: Solar ASP’s Dropped Faster than Expected2• When the solar PV industry enters an over-supply state, second tier $2.0 suppliers are expected to be the first to see drop off in demand. Price $1.8 cuts in response would then lead module prices lower, eventually pulling $1.6 $1.60 % down module ASPs across the board, to include top tiered suppliers $1.4 change $1.20 YTD Spot ASP in US$ per watt (21%)• Module prices will drop faster than cost cuts, leading to a gross margins $1.2 $1.27 squeeze (proportional to the level of over-capacity). If these price cuts $1.0 $0.90 fail to stimulate enough demand to support utilization levels, production $0.8 $0.78 (35%) costs would also start to increase – pressuring gross margins from both $0.6 $0.43 (43%) $0.51 sides (lower ASPs and rising costs) $0.4 $0.33 (23%) $0.2• As module prices decline, the same level of gross margin percentage $0.0 yields lower gross margin dollars. If operating expenses were to hold flat Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 as gross margin dollars trended lower, profitability would quickly diminish Polysilicon Wafer Cell ModuleDRIVERS TO LOWER PRODUCTION COSTS3• Polysilicon costs: Prices have come down very substantially since Global: Poly-silicon spot prices4 peaking in mid 2008. At present capacity and on-going capacity ramp, prices could approach $45/kg and possibly go even lower should the Long term contracted price range $143.0 supply demand imbalance extend over the next two years. Thinner $121.0 $123.0 wafers and higher efficiencies will all help to reduce the cost of polysilicon in solar PV modules $103.0 $83.0 $90.0 US$ / kg $83.0• Processing costs: Costs of ingoting, wafering, cell processing, and $70.0 $74.0 $67.0 $63.0 module assembly are all driving lower. Declining capital costs, larger $59.0 $45.0 $56.0 $55.0 $55.0 ingots, faster ingot cutting (wafering), improved cell processing, and $43.0 $48.0 $30.0 $40.0 $35.0 $35.0 faster module assembly are all aiding cost improvement $23.0• Conversion efficiency: Crystal (c-Si) silicon based solar PV module $3.0 Q2 2011E Q3 2011E Q4 2011E Q1 2012E Q2 2012E Q3 2012E Q4 2012E Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 suppliers are driving to improve conversion efficiencies by adopting technology advances such as selective emitter, stacked metal lines, N-type wafers, backside contacts, etc. Average c-Si solar PV module Polysilicon spot price (US$ / kg) conversion efficiency is expected to increase from ~15% to ~16% or more over the next couple of yearsSource: 1,3Deutsche Bank Solar Photovoltaic Industry January 2011, pg. 19, 2,4Goldman Sachs. The Solar Industry 21
  22. 22. U.S.: Production, System Prices and IrradianceOVERVIEW1 U.S. National Weighted-Average System Prices2 $7.5• 2010 production increased substantially year-over-year for wafers (97% growth), cells (81% growth), and modules (62% growth) $7.0• Factors contributing to strong domestic manufacturing include: $6.5 $6.0 — Strong growth in global demand: From 7.1 GW in 2009 to over (US$) 17 GW in 2010 (a significant percentage is exported to Germany) $5.5 $5.0 — Doubling of domestic demand: From 435 MW in 2009, to 878 MW $4.5 — Increases in manufacturing capacity in the U.S.: $4.0 • Wafer capacity increased 82% to 1,018 MW $3.5 • Cell capacity increased 32% to 1,657 MW $3.0 • Module capacity increased 20% to 1,684 MW Q1 2010 Q2 2010 Q3 2010 Q4 2010• National weighted-average system prices fell by 20.5% over the course Residential Non-residential Utility Blended of 2010, from $6.45/W to $5.13/W. Much of this decline was due to a shift toward larger systems, particularly utility systems• Market is highly disintegrated even within a given state and market segment• Due to high solar irradiance in certain parts of the U.S., states such as CA and AZ have the highest usage of Solar PV and CST technologiesGlobal Solar Irradiance3 U.S. Solar Irradiance4Source: 1,2Solar Energy Industries Association, 2010 Year in Review, pg.10 & 11, 3Prometheus Institute, 4Greentech Media. The Solar Industry 22
  23. 23. U.S. PV MarketOVERVIEW Grid-connected PV Capacity by State – Market Share 20101• By the end of 2010, cumulative installed PV capacity reached 2.5GW, following the installation of approximately 918MW that same year• In 2010, the U.S. moved down from fourth to fifth place in terms of annual installed PV capacity, despite the 54% increase in cumulative installed PV capacity from 2009 to 2010Outlook:• In 2011, installations in the U.S. are likely to double the 2010 total, but global markets will experience slower growth• Project financing remains available at attractive terms for some projects, new markets are emerging and showing strength, and incumbent markets continue their rise• The expiration of the Treasury Cash Grant program at the end of 2011, California (47%) New Jersey (12%) Colorado (6%) as well as the potential rescission of Federal Loan Guarantee funds Nevada (5%) Arizona (5%) New York (3%) remain a concern Pennsylvania (3%) Florida (3%) Others (16%)PV: Thin Film Technologies vs. Silicon Wafer based Technologies2 Thin Film Technologies Silicon Wafer based Technologies • Lower material requirements • Highest market share in solar technology • Simpler manufacturing process • Higher panel efficiencies Advantages • Favorable temperature coefficient and diffuse light performance • Well suited for confined areas such as residential rooftops • Steeper learning curve improvements • Producers have achieved economies of scale • Energy value advantage • Unfavorable module efficiency at standard test conditions • Higher material and production costs Challenges • Relatively small share of today’s market • Expensive technology • SmartCards, RFID tags, implantable medical devices, • Electronics, panels Application microelectronic devices, flexible displays and E-papersSource: 1NREL. The Solar Industry 23
  24. 24. Photovoltaic Process Technologies Wafers Crystalline Silicon PV Cells Modules Thin Films PV • Thin slice of semiconductor • Solid state electrical device that • Assemblies of cells constitute a • Layer of material ranging from material, such as a silicon converts the energy of light module or panels fractions of a nanometer crystal, used in the fabrication of directly into electricity by the (monolayer) to several integrated circuits and other photovoltaic effect micrometers in thickness microdevices • Separated into 3 categories • 4 basic categories based on Technology • The wafer undergoes many based on crystallinity and crystal materials used - Amorphous microfabrication process steps size in the resulting ingot, ribbon silicon (a-Si), Cadmium telluride such as doping or ion or wafer – Monocrystalline (CdTe), Copper Indium Gallium implantation, etching, deposition Silicon (c-Si), Polycrystalline Selenide (CIS/CIGS), and of various materials, and Silicon (mc-Si) and Ribbon Emerging (dye-sensitized, photolithographic patterning Silicon organic, GaAs) • Higher material cost and higher installation cost, even though costs continue to decrease as companies ramp up • Cadmium Telluride and Copper new capacity and improve production processes Selenide are not widely supported, have high production • Functionality during non-ideal sun conditions (early morning and late afternoon) cost and material instability Key bets (toxic etc) • Conversion efficiencies are not as high as crystalline silicon PV DevelopersNote: Partial list of developers.. The Solar Industry 24
  25. 25. Photovoltaic Landscape Ancillary / Inverters Equipment & System Polysilicon Module Wafer Integrated Midstream Cell Publicly TradedNote: Partial list of companies. The Solar Industry 25
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