Average pricing for Chinese-manufactured photovoltaic (PV) solar modules could surge by 45 per cent in June, cutting some solar project IRRs to below 7 per cent and further dampen demand in Europe as a result of the preliminary anti-dumping duties imposed in the European Union, according to IHS.
Chinese modules carried an average price of $0.66 per watt (W) in March, and were expected to increase to $0.67/W in June, based on a forecast from the IHS Solar Module Price Index. However, with EU commissioners planning to impose import duties on solar modules from China, average pricing could surge to $0.97/W in June, as presented in the attached Figure 1.
Commissioners for the EU plan to levy import duties on solar modules from China ranging from 37.2 percent to 67.9 percent. EU member states will vote on the proposals, expected in the next two weeks, and a preliminary decision will come into force by June 6. A further six months of negotiations is likely before a final decision is made.
“In recent months, prices of Chinese modules have crept upwards in key European markets as a result of the additional overhead incurred from the mandatory registration of imported modules from China,” said Ash Sharma, senior director of solar research for IHS. “However, when the duties go into effect, prices for Chinese modules will rise dramatically as they cannot absorb these additional costs due to the poor state of their balance sheets. This likely will force many Chinese PV module suppliers out of the European market and could spur rising costs for installations.”
Chinese module suppliers to seek greener pastures
With much of the European market closed to them, Chinese suppliers are likely to direct their attentions to other regions. Japan may soak up some demand for Chinese modules, along with markets in South East Asia.
However, to make up for the European sales deficit, a large volume of modules will need to be installed domestically in China. Given the low prices and the long delays in receiving payments for installation projects in China, this may prove to be challenging.
With the levies on Chinese modules already in place in the United States following similar action there and the relatively low demand in emerging markets in places such as Latin America, Chinese vendors will suffer a huge impact in 2013. Such a development is likely to accelerate the consolidation of the Chinese module supplier base and result in more bankruptcies.
Outsourcing of module production to PV original equipment manufacturers (OEMs) outside of China may be one strategy suppliers employ to circumvent the duties.
Is opportunity knocking for non-Chinese suppliers?
Meanwhile, benefits for non-Chinese suppliers are expected to be somewhat limited.
Despite the reduction in competition from China, Western vendors will be unable to raise prices significantly as incentive schemes throughout Europe have been repeatedly ratcheted down because of severe price declines for both module and system prices. Any major prices increases would seriously deteriorate the internal rate of return (IRR) on solar projects and make PV financially unviable in many segments of the market. Resulting price increases would need to be absorbed by the installer/EPC and/or the owner/investor of the project.
One possible winner may be module producers located in other low-cost regions outside of China, including Taiwan. However, total module production capacity in these regions was just 3.4 gigawatts (GW) at the end of the first quarter of 2013, less than one-tenth of China’s 35GW. Because of that, the short-term upside is limited for these regions.
European PV system prices to rise
The increase in module prices will inflate PV system prices in Europe. At the same time, installers and engineering, procurement & construction companies EPCs are likely to absorb some of the additional costs and sacrifice their margins to limit the price increases they pass on to customers. IHS predicts that both events most likely will occur simultaneously.
Large installations that tend to favor low-priced modules will be most impacted, while smaller rooftop installations that gravitate to German, Korean and Japanese modules will be less affected.
“The analysis by IHS of project IRRs shows that the most price-sensitive market segments are German ground-mounted and large rooftops without self-consumption,” said Dr. Henning Wicht, senior director of solar research for IHS. “A system price increase of 10 percent in Germany would reduce the return on investment to less than 7 percent, seriously dampening investor appetite for this sector. This change could eliminate nearly 2 GW of installations that would have otherwise occurred.”
The attached Figure 2 presents the return of investment for solar installations in Germany before and after the tariffs.
Other segments, such as residential and commercial applications, will be less impacted by module prices. This is because modules contribute to a relatively smaller share of overall system costs in these areas and will continue to provide interesting IRRs for owners and investors, albeit at slightly lower values.
Impact on inverter and balance-of-system suppliers
To reduce the impact of any module price increases, installers and EPCs likely will seek to reduce costs elsewhere and will place additional pressure on inverter and balance-of-system component suppliers to reduce their prices more aggressively. But such a move will negatively impact the supplier base, which has already suffered substantial price declines in the past two years. The price decreases have driven several companies to bankruptcy and have caused several market exits. It’s likely that installers, particularly for smaller installations, increasingly will utilize low-cost Chinese inverters as a means to reduce their costs. An unintended consequence of the EU’s decision may be that in an attempt to protect European solar module producers, they harm European inverter suppliers.
Downstream margin shrinkage
In many European markets, installers will be unable to fully pass on any price increases incurred as a result of the duties, which would result in a deterioration of their margins. In many segments and countries, however, installation remains the most profitable part of the value chain, and it seems highly likely that margins will be squeezed here too, mirroring the evaporating margins at every stage upstream.
Nonetheless, IHS expects that a combination of all these events will occur and that further volatility in pricing and supply can be expected.
