Solar Storm. Navigating Through the Turbulence to Reap Value in Solar Energy. Philipp Gerbert and Holger Rubel

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1 Solar Storm Navigating Through the Turbulence to Reap Value in Solar Energy Philipp Gerbert and Holger Rubel October 2009

2 Contents Solar Energy in the Context of Global Energy Demand and Generation 2 Solar Technologies and Their Applications 3 Photovoltaic Technologies 3 Concentrated Solar Power 3 Cost Position and Competitive Considerations 3 Future Demand for Photovoltaics 8 The Photovoltaic Industry s Structure and Current Dynamics 11 Key Issues for Current and Future Solar-Market Participants 11

3 Solar Storm Navigating Through the Turbulence to Reap Value in Solar Energy The solar-energy industry prospered from 2003 through Concerns over climate change, energy security, and the price and ultimate availability of fossil fuels led to increasing government support for solar technologies, translating into soaring demand for solar products and surging revenues for solar providers. But the industry has run into severe turbulence in Demand has fallen significantly, hurt by the economic downturn and shock waves from regulatory changes in Spain, one of the industry s major markets. Compounded by the glut of production capacity that came online in response to government incentives earlier in the decade, the effect on prices has been dramatic for example, prices for solar panels are down roughly 40 percent from their peak. Some of the weaker competitors are expected to exit the industry; many of the survivors face additional stress from the debt financing of past growth plans, which are now obsolete. Not surprisingly, stock-market valuations for the entire segment have collapsed. Given this turn in fortunes, critical questions are now being raised by both industry participants and governments about the true potential of solar energy as a viable energy source and as a business. Current industry participants and potential entrants, such as technology companies and major oil and gas companies, are also trying to determine optimal short- and long-term competitive strategies. In this paper, we seek to answer some of these questions by providing a fact-based review of the industry s current situation and outlook. While the bulk of the discussion focuses on the photovoltaic (PV) segment, which constitutes the largest share of the solar-energy market, we also look at concentrated solar power (CSP), also referred to as solar thermal energy, the industry s other main technology. Our high-level findings are the following: The basic argument for solar energy remains strong. But its costs will have to come down significantly for the business to be viable. For solar energy to compete successfully in centralized electricity generation, its generation costs will need to fall to about one-third of today s levels. For distributed solar energy (that is, solar energy generated on-site or very near where it is used) to reach grid parity, or match current retail electricity prices, its cost will have to fall by 30 to 50 percent. The increasing diversity of solar technologies and the emergence of new entrants from low-cost countries are spurring innovation and competition. This development will eliminate past bottlenecks and speed up cost reduction. For instance, polysilicon, a key ingredient of most solar panels, will lose a significant amount of pricing power in the PV segment. Distributed PV is on its way to reaching grid parity in favorable markets and should do so between 2012 and Neither PV nor CSP, however, will be able to compete in centralized electricity generation over the next five to ten years without government subsidies. But utilities continue to explore solar energy, both PV and CSP, as a long-term strategy. Growth prospects for the solar-energy market over the next five to ten years remain dependent on government policy. For the larger and more predictable PV market, favorable developments on the government policy front in Europe, the United States, and elsewhere around the world should ensure healthy volume growth of approximately 30 percent annually from 2009 through 2015, with lower, less-subsidy-driven growth of approximately 20 percent per year thereafter. Historically, the PV segment s value chain has seen the highest profit margins upstream, with lower margins for midstream and downstream competitors. But market power is temporarily shifting downstream. And both the PV and CSP value chains are becoming more integrated through merger-and-

4 Solar Storm 2 acquisition (M&A) activity, partnerships, and consortia. This is expected to stabilize or even increase margins in the future. We conclude this paper by identifying key questions that the different stakeholders current solar-energy specialists, large energy-technology companies, utilities, major oil and gas companies, and governments should ask themselves in order to determine future strategies. It is critical that industry participants ask these questions now, because competitive advantage in tomorrow s solar market will likely be established on the basis of moves made during the industry s current turbulence. Solar Energy in the Context of Global Energy Demand and Generation The world used roughly 20,000 terawatt-hours of electricity in 2008; that amount is expected to increase by about 2.8 percent per year and reach 28,000 terawatt-hours in Three-quarters of current electricity generation is based on fossil sources, such as coal, oil, and gas. 1 This creates well-known problems. First, the world is heading toward an unprecedented greenhouse effect, with carbon dioxide levels already at more than 380 parts per million (up from about 310 parts per million in 1950) and projected to exceed a range of 400 to 430 parts per million in Second, cheap fossil sources are becoming scarce, and energy prices are certain to resume their sharp rise after the current economic crisis recedes. Last but not least, geopolitical uncertainty within resource-rich countries is already causing leading industrial nations to express concerns about energy security. Now, consider solar energy. More than 150 million terawatt-hours of energy are irradiated by the sun toward the earth s landmass every year. Put differently, in an area the size of Austria in a location as solar-radiation-exposed as the Sahara, you could capture the amount of solar energy necessary to fully meet global electricity demand. Solar thus seems by far the most attractive solution to the world s energy needs. Today, however, solar energy contributes less than 0.1 percent to the power generation mix. The reason is simple: solar generation is not cost competitive. (See Exhibit 1.) 1. International Energy Agency, World Energy Outlook Intergovernmental Panel on Climate Change, Working Group I Fourth Assessment Report, Climate Change 2007: The Physical Science Basis. Exhibit 1. Solar Technologies Are Not Cost Competitive Today Levelized cost of energy (euro cents per kilowatt-hour), Nonrenewable energies 1 Renewable energies Retail price range Wholesale price range 0 Nuclear Combinedcycle gas turbine Hard coal Gas Integrated gasification combined cycle (with CO 2 capture) Water (running) Wind (onshore) Biomass CO 2 -emissions related Fuel Operations and maintenance Capital expenditures Sources: Bernstein Research; European Energy Exchange; BCG analysis. 1 Based on an oil price of $78 per barrel and a permit price of 20 euros per ton of emitted CO 2. 2 CSP = concentrated solar power; PV = photovoltaics. Assumptions are for California, with an assumed solar radiation of 7.5 kwh/m 2 /day. Solar CSP assumes a 200-megawatt plant; PV assumes thin-film modules. Solar CSP 2 PV 2

5 Solar Storm 3 Although the numbers can only be indicative, given that both wholesale and retail costs and prices vary significantly by location, the data demonstrate that solar-energy technologies today cannot match other power-generation options in terms of cost (based on the levelized cost of energy, or LCOE, a widely used measure for comparing the cost of energy generation across technologies). Thus, subsidy programs, cost-reduction measures, and regulations that put a price on carbon-based energy sources are all critical for the development of solar energy. (Note, however, that solar PV is distinct from most other energy-generation technologies in that it can be installed at the user site. Its prices are thus often compared with retail rather than wholesale prices.) Solar Technologies and Their Applications Solar power has several applications. The best-known and most prominent are rooftop PV installations, which have both residential and commercial markets. Such installations have electricity-generating capacities ranging from 5 to 1,000 kilowatts and constitute approximately 70 percent of the installed base of solar capacity. Ground-mounted PV solar parks and central CSP plants account for about 25 percent of installed capacity. The latter two applications can reach utility scale in terms of generation capacity, ranging from 1 to several hundred megawatts. Finally, off-grid PV use, which is typically found in remote locations or mobile facilities, represents approximately 5 percent of installed capacity. Each of the several competing solar technologies has its own sweet spot in the above applications. This competition is critical to ensure fast technological advances and drive down costs and prices. Solar technologies can be classified as either photovoltaic or concentrated solar power. Photovoltaic Technologies PV technologies leverage the ability of semiconductors to absorb light and directly create an electric current. PV has several subcategories: 3 Polycrystalline silicon (c-si), today s dominant technology, is based on the use of a 200-micrometer-thick silicon layer. This technology is the current leader in efficiency and is the primary technology used in solar panels found on residential and commercial rooftops. Thin-film technologies are based on a very thin (only several micrometers thick) layer of different semiconductors, such as cadmium telluride (CdTe), silicon, and copper indium selenide or copper indium gallium selenide. These technologies are the cost leaders for commercial rooftop applications and medium-sized ground-mounted facilities. Organic technologies and nanotechnologies aim to optimize the critical PV parameters the absorption of light, the separation of charges, and the charges lifetime and flow to the electrodes while controlling costs. Most of these technologies are still in the early prototype stage, but their promise nurtures the industry s ambition to revolutionize costs and efficiency. Concentrated Solar Power CSP concentrates sunlight by means of mirrors and powers a conventional steam or gas turbine or other heat engine to generate electricity. It is most attractive for large, utility-scale applications in the world s solar belt. (See the sidebar Concentrated Solar Power. ) Cost Position and Competitive Considerations In this section, we mainly discuss PV, which constitutes the lion s share of the market and has a larger variety of applications relative to CSP. The most critical issues for PV technologies are their current cost position and potential for improvement 3. The list is not exhaustive. For instance, there is also concentrated PV, which combines PV elements with concentrators. This technology, however, seems to lack a sweet spot in terms of applications.

6 Solar Storm 4 Concentrated Solar Power Concentrated-solar-power (CSP) plants, which have a long history in California, are experiencing a modern revival, driven in part by the surging interest in photovoltaics (PV). This revival is spurring significant innovation and cost-effectiveness in the CSP space. One of the most prominent CSP initiatives currently is the Desertec consortium, which is assessing the feasibility of capturing solar power in the Sahara and channeling it to Europe, the Middle East, and North Africa using high-voltage direct-current cables. CSP shares the use of sunlight with PV, but the technologies have other, very different characteristics: Unlike PV panels, which have limited scale effects, the traditional turbines and engines that CSP employs enjoy significant scale effects up to a capacity of several hundred megawatts. Thus, CSP is a conventional central, rather than distributed, power-generation technology. CSP plants can add thermal storage capabilities to extend electricity generation beyond sunlight hours, an important feature for use in the electric grid. On the other hand, CSP requires direct sunlight and water for its operations. Several types of CSP exist today, with parabolic trough technology having the longest track record. (See the exhibit below.) In principle, all these technologies have their specific merits and could join in the critical effort to drive down costs by two means: Technological Innovation. While some elements of CSP technology, such as mirrors, turbines, and engines, are mature in terms of development, there remains potential for improvement. Engineering companies are confident that they can increase efficiencies in the system considerably (from 13 percent today to 17 to 20 percent in the coming years) by adopting new techniques for example, by transitioning to higher operating temperatures. Experience Curve. The greatest potential for reducing costs lies in the optimization of a large range of cost and efficiency levers at the system level on the basis of accumulated experience. Parabolic trough has an initial lead over other technologies because of its tenure and large Parabolic Trough Technology Has an Experience Lead in Concentrated Solar Power Types of Concentrated-Solar-Power Technology and Their Characteristics 1 Parabolic trough 2 Tower 3 Linear Fresnel 4 Dish Stirling Description A parabolic trough with reflectors concentrates power on absorber tubes to heat a transfer fluid Heliostats concentrate solar energy on a central receiver A multifaceted reflector heats fluid in absorber tubes Parabolically arranged mirrors reflect sunlight to power a Stirling engine Operating temperature About 350 to 400 degrees Celsius About 550 to 600 degrees Celsius About 280 to 450 degrees Celsius About 750 degrees Celsius Generation Steam turbine Steam turbine Steam turbine Stirling engine Size 30 to 80 megawatts electrical 11 to 20 megawatts electrical (single tower) 10 to 30 megawatts electrical 10 to 25 kilowatts electrical (single dish) Maturity Mature technology with further development potential Several plants in development Several pilots in operation In demonstration stage; several prototypes in operation Market share, percent 3 percent 1 percent Trials phase Sources: Abengoa Solar; DLR; Solar Power; broker reports; BCG analysis.

7 Solar Storm 5 Concentrated Solar Power (continued) installed base, but the beginning of industrialization (that is, standardization of design and mass production) in the industry is lowering costs across technologies. At the required large scale and in locations with direct sunlight, CSP appears slightly more cost competitive than PV today. It should keep this advantage over the next three to five years, though longer term the situation is less clear. Dispatchability, based on the ability to store heat, remains a key advantage of CSP over PV. In this area, molten-salt tanks are the proven technology, although alternatives based on concrete or phase-transition materials seem viable. Demand for CSP is concentrated in the world s solar belt particularly the southern United States, southern Europe, North Africa, and the Middle East and is slowly extending to Asia and Australia. As a large-scale utility technology, CSP competes head-to-head with other central energy-generation technologies. For the foreseeable future, its market will likely remain smaller than that for distributed PV by a factor of four or five, and CSP will, like PV, require subsidies. Because central generation leverages the traditional skills and business models of established competitors, those competitors are likely the best positioned to assess and act in the CSP sphere without risking major disruptions to their business. The recent acquisition by Siemens of CSP specialist Solel follows this logic. over the next several years. Exhibit 2 summarizes the current situation and outlook for several of those technologies: c-si and the two most popular thin-film technologies one based on CdTe and the other based on the refinement of amorphous silicon, or so-called micromorphous silicon (µ-si). 4 The axes of the exhibit module production cost and average module efficiency are the technologies main cost drivers. Average efficiency determines how many modules are needed to build an entire system and thus influences construction, installation, and balance of system costs, such as inverters. The resulting isocurves for total system costs of 2.50, 2.00, and 1.50 per watt peak are depicted for 2008 and for expected cost levels in Note that the exhibit shows cost only and does not include margins along the value chain. Ultimately, the total system costs drive the LCOE when full installation costs, margins along the value chain, and potential financing costs are added and different solar conditions are taken into account. Today s dominant technology, c-si, is not the PV market s cost leader. Its popularity, particularly in countries with feed-in tariffs, or guaranteed prices per kilowatt-hour, stems primarily from its wide availability and ability to fit on size-constrained roofs. Global cell and module companies, such as BP Solar International, Kyocera, Q-Cells, Sharp, SolarWorld, Suntech Power, and Yingli, built their positions on the basis of c-si. Their suppliers of polysilicon and wafers, such as Hemlock Semiconductor, LDK Solar, REC Solar, and Wacker Chemie, have likewise built strong and highly profitable businesses in the past several years. The competing thin-film technologies currently have two main streams: CdTe, dominated by First Solar, is the cost leader now and will be for the foreseeable future. It is thus popular for ground-mounted applications and commercial rooftops. One drawback of CdTe is the toxicity of cadmium, which has led European countries and Japan to ban the substance in batteries; another drawback is the potential shortage of tellurium beyond 4 to 5 gigawatts of annual production. Amorphous silicon (a-si), whose practitioners are increasingly transitioning to µ-si, has historically trailed CdTe in efficiency. But with a strong base of equipment manufacturers, such as Applied Materials and Oerlikon Solar, and with major product vendors, such as Sharp, scaling up their efforts, µ-si could approach the cost position of CdTe within the next few years. 4. There are other thin-film technologies, such as high-efficiency copper indium selenide (CIS) and copper indium gallium selenide (CIGS), but there are few data on volume production.

8 Solar Storm 6 Exhibit 2. Photovoltaic Technologies Have Distinct Cost Profiles and Growth Prospects Module production cost (euros per watt peak) µ-si (a-si) 2 c-si System cost per watt peak Levelized cost of energy per kilowatt-hour euro cents euro cents 1.0 CdTe 3 c-si euro cents 0.5 µ-si (a-si) 2 CdTe Average module efficiency (%) Market size (megawatt peak) Source: BCG analysis. Note: Module and system costs do not include margins. 1 This depicts costs for average competitors in the polycrystalline silicon space. Best-in-class competitors can achieve costs that are closer to those for CdTe-based companies. 2 Micromorphous silicon, toward which amorphous silicon is migrating. 3 Cadmium telluride. The most important conclusions regarding the above are the following: As several PV technologies compete for cost leadership, it should be possible to push total system costs below the critical 1.5 mark. Price competitiveness will also ensure that even without subsidies, an LCOE of less than 12 euro cents per kilowatt-hour should be achievable in favorable solar regions. Supply bottlenecks in specific technologies, such as those we have witnessed with polysilicon for c-si over the last several years, should in the future neither constrain the industry nor lead to exploding prices. (See the sidebar Polysilicon Cycles: The End of Oligopolistic Pricing Power. ) Obtaining a leading cost position will become critical for individual competitors in the industry. On the cell and module levels, cost reductions are typically driven one-third by gains in conversion efficiency, one-third by gains in operational and process efficiency, and one-third by a move to large-scale production in low-cost countries. The above factors will ensure that PV reaches residential grid parity by 2012 to 2015 in distributed power generation in the lead markets. It is difficult, however, to see how current PV technologies in central power generation can compete on cost against other types of energy (for example, nuclear energy) in these and other markets without government subsidies. 5 Thus, while countries can gradually reduce today s very high subsidies and differentiate more strongly the level of support by application of solar PV (as, for example, France already does today), it could take ten years before subsidies and favorable regulation can be fully removed without endangering the future growth and adoption of PV within the overall powergeneration landscape. 5. We discuss only conventional business costs here. Deeper tradeoffs faced by governments are reviewed later in the paper.

9 Solar Storm 7 Polysilicon Cycles: The End of Oligopolistic Pricing Power Over the past several years, commercial success in the photovoltaic industry has been largely driven by access to polysilicon. This situation, we argue, has changed for good. (See the exhibit below.) Polysilicon is a crystallized form of pure silicon that is used by the semiconductor and solar-energy industries. Since 2005, demand from the semiconductor industry has flattened at approximately 25,000 metric tons per year, while demand from the solar industry continues to increase and has surpassed demand from the semiconductor industry since Up to 2007, the polysilicon market was in the hands of six large competitors. But the growth of the solar industry has attracted new entrants, mainly from challenger countries in Asia. These companies made quick inroads into wafer manufacturing, but their impact on polysilicon manufacturing is only emerging. Prices of materials purchased under long-term contracts during 2007 and 2008, at $70 to $115 per kilogram, were well below spot prices, which peaked at $400 per kilogram in September As a consequence, cell and module manufacturers that failed to secure a long-term supply of polysilicon were locked out of the solar boom. They either were forced to limit production or took substantial hits on profitability owing to the spikes in prices of materials. Spot polysilicon prices in 2009 have come down toward the range of current long-term contracts, and, given the recent increase in production capacity, polysilicon supply should soon outstrip demand. In light of this, we expect the following developments: Polysilicon will remain an attractive segment for efficient producers. Polysilicon and wafer producers will continue to play a critical role in ensuring the price competitiveness of c-si modules. While prices for polysilicon arguably need to decrease toward the $40-per-kilogram level by 2012, most suppliers will be able to further lower their costs by moving to largescale, low-cost locations. The most efficient producers could reduce costs to $20 per The Silicon Bottleneck Is Expected to Disappear Constrained supply in 2008 put upward pressure on prices... Spot market prices up to $400 per kilogram Unit costs (September 2008) (dollars per kilogram) $70 $115 per 80 kilogram average selling price for long-term 2008: undersupply 60 contracts demand Capacity (kilotons)...but by 2012, capacity should be sharply higher and silicon s long-term price range should decline significantly Unit costs (dollars per kilogram) : potential oversupply 2012 expected demand mg- Si 1 Additional potential capacity Capacity (kilotons) $30 $40 per kilogram expected average selling price for long-term contracts Demand New entrants Incumbents New entrants--china Demand New entrants Incumbents Chinese entrants Sources: Collins Stewart; Deutsche Bank; Economist Intelligence Unit; Goldman Sachs; Lehman Brothers Holdings; Société Générale; UBS; company reports; BCG analysis. 1 Metallurgical-silicon-based competitors. 2 More than 100 companies announced plans to enter the market following the recent spikes in silicon prices, but we suspect that many of those companies will not follow through. Still, some companies will and there will be additional capacity as a result.

10 Solar Storm 8 Polysilicon Cycles: The End of Oligopolistic Pricing Power (continued) kilogram by 2012 (barring a technological surprise that pushes costs even lower) and continue to earn healthy margins. Advances in thin-film technologies will limit future polysilicon pricing power. The advent of large-scale production of thin-film modules, which compete head-to-head with crystalline modules in the large segment of commercial applications, will force the entire c-si value chain to become and stay price competitive. In combination with government policies that increasingly encourage the cost-effective deployment of PV, thin-film substitutes should rein in the future pricing power of polysilicon suppliers. The development of new technologies, however, could further accelerate the penetration of solar PV. Among the more promising opportunities based on new technologies are the following: It is possible to increase efficiency even further by using more complex materials, such as copper indium selenide or copper indium germanium selenide, whose mass production was pioneered by Würth Solar, or by adopting more complex layer structures, such as third-generation heterojunctions. With either approach, the challenge is to increase efficiency at low cost. Alternatively, there is a lot of activity currently in the development of organic solar cells based on polymers or organic crystals, which would be very cheap to produce. Reaching higher efficiency with low-mobility polymers is a challenge, however. More advanced organic crystals might overcome this challenge and could actually extend the theoretical efficiency limit for traditional semiconductors from 31 percent to 49 percent for single layers. Dye-sensitized solar-cell technology, which is based on a photochemical reaction rather than a p-n junction, constitutes an entirely different approach. These cells are easy and cheap to produce and work with all lighting. The challenge here is stability, given that the liquid electrolyte does not react well to either high or low temperatures. Given the tremendous research going into solar energy all over the world, we should expect significant progress in all of these areas. We must emphasize a particular point: if someone were to develop a low-cost, high-efficiency, stable cell, today s energy landscape would be significantly altered. In concluding this section, we note a tangential development of particular relevance to the growth of solar energy: the growing market for electric cars. This is spawning large investments in R&D and rapid progress in the development of electric storage and smart grids, both of which are essential complementary technologies for a solar world. This is yet another data point to suggest that, beyond the troubled waters of the industry s current uncertainties, the future of solar technologies will be bright. Future Demand for Photovoltaics PV s installed global base amounted to about 16 gigawatts at the end of (See Exhibit 3.) It is concentrated in three countries: Japan, the early pioneer; Germany, the most consistent proponent and the largest market; and Spain, the growth champion in 2007 and The PV market s growth (measured in gigawatts shipped) will decrease in Weighing on growth are oversupply due largely to the policy-driven boom and subsequent collapse of the Spanish market (see the sidebar The Spanish Experience ) as well as financing bottlenecks resulting from the global economic crisis and the market s subsequent drop in prices. Outside of Spain, however, the global markets should continue their 20-to-50-percent-per-year growth in gigawatt terms over the next several years, supported by the previously described cost declines and favorable government policies during the economic crisis and beyond. Through 2015, and beyond that point in many global markets, PV penetration will remain

11 Solar Storm 9 Exhibit 3. Beyond 2009, Photovoltaic Markets Are Expected to See Healthy Growth Estimated market growth Dominant markets Installed base (gigawatts) Germany The largest market; expected to have a cumulative capacity of 28-gigawatt peak in 2015 Photovoltaic solar module shipments (gigawatts) 70 20% per year 65.3 Spain United States A regulatory-driven pullback in 2009 following strong growth in 2007 and 2008 The largest future market and a core battlefield in 2009 and Dip in 2009 due to regulatory changes in Spain following the bull market 79% per year % % per year % 70% policy driven 30% 40% driven by economic demand Italy France Japan China India Middle East High growth from a small base since 2008 Growth driven by BIPV and overseas territories 1 Early pioneer; a revival of programs in 2009 Current renewable-energy focus on hydro/wind, but strong solar vendors and emerging programs Weak measures behind 5-gigawatt government target; high need Mainly driven by strategic investments in large projects Source: BCG analysis. 1 BIPV = building-integrated photovoltaics. Rest of world dependent on government incentive programs and regulation, although to a diminishing degree. This trend introduces an element of uncertainty into market predictions, as showcased by Spain s experience. Recent and ongoing developments in key markets are largely drivers of demand. Among the more noteworthy developments are the following: Germany remains the lead market for PV to date, with the German government providing consistent incentives based on generous feed-in tariffs that ensure a subsidized price for solar-generated electricity for 20 years after installation. (With the recent sizable decline in module prices, however, these incentives now look too generous and will be reviewed by the government.) The government has also encouraged the development of a local PV technology industry, in spite of the country s relatively unfavorable conditions for adopting solar energy. 6 The U.S. PV market is driven by investment incentives and state-level renewable-energy goals rather than by feed-in tariffs. The market has seen important policy changes over the past several years in the form of extended and new federal- and state-level programs that encourage solar-energy adoption and, more recently, investment incentives that were also extended to utilities. The Obama administration s economic stimulus package and its $65 billion allocated to the energy industry contain green aspirations. More important effects, however, would arise from the administration s potential carbon capand-trade and explicit renewable-energy targets, with quantitative goals that are close to the range seen in the European Union. The United States should overtake Germany as the largest PV market after 2012 and is currently one of the most hotly contested growth markets, with California, which represents approximately 50 percent of the U.S. market, leading the charge. Other countries in the industrialized world, such as France, Italy, and Japan, are pushing in the same direction. By 2015, significant contributions to global PV demand are also expected from emerging 6. Germany has a solar-radiation intensity on a par with that of Alaska.

12 Solar Storm 10 The Spanish Experience In August 2005, in line with other European governments, Spain s government approved a new national energy plan (Plan de Energías Renovables) to promote the use of renewable-energy sources. According to the plan, renewable energies would meet 12 percent of the country s overall energy needs and 30 percent of its total electricity consumption by The plan also set targets for different types of technology. Of the 42.5 gigawatts of renewable capacity expected to be in place by 2010, wind would contribute almost half, at 20.2 gigawatts, while solar energy was budgeted with relatively small shares of 0.4 gigawatts for PV and 0.5 gigawatts for CSP. The government put in place significant incentives to promote the technologies. The most potent of these incentives were guaranteed prices per kilowatt-hour (so-called feed-in tariffs, or FITs) and the provision of financing options. For wind energy, FITs resulted in an average selling price of 8 to 10 euro cents per kilowatt-hour from 2006 through 2008; for solar energy, the average selling price was a significantly higher 43 to 45 euro cents per kilowatt-hour. (By comparison, the average market price for conventional power was 4 to 6 euro cents per kilowatt-hour during the period.) Although the scheme largely produced the intended effects for wind energy, for solar energy it proved too generous. New PV installations soared, jumping from 24 megawatts in 2005 to 100 megawatts in 2006 and 600 megawatts in By September 2007, the government realized that it was about to overshoot its solar targets and it put on the brakes, declaring that new regulations (specifically, lower FITs and a cap on the size of new installations) would go into effect within a year. This, however, only reinforced the short-term frenzy: 2,500 megawatts of PV capacity were installed in 2008, and 17 CSP plants, mostly at the maximum, 50-megawatt limit for subsidies, were committed to or were under construction. Ultimately, Spain accounted for 43 percent of the 2008 global market in PV, and almost 85 percent of the CSP megawatts planned or under construction by the end of 2008 globally was based in that country. The Spanish government s decisions regarding its solar policy have had significant ripple effects: The currently installed PV capacity reached about 3.2 gigawatts by the end of 2008 and will produce about 4.8 terawatt-hours of electricity per year. This could require about 1.8 billion in annual cost subsidies, or 45 billion over 25 years. The cost of CSP capacity will come on top of this. Although the boom did create jobs, the sustainability of those jobs remains unproven. The 2-gigawatt reduction of demand in Spain thus far in 2009, coming on top of the global economic downturn, has upset the global PV market. It has caused Europe to be flooded with cheap PV modules since the end of 2008 and has sent shock waves across the global value chain. Spain s lesson shows how critical it is for governments to fine-tune their incentive policies to the local business case for solar energy and how painful a later correction can be. At the same time, it demonstrates the kind of business disruptions that solar-energy stakeholders must be prepared for during the subsidy-driven period of the next several years. markets such as China, whose renewable-energy targets today still focus on hydroelectric and wind power, and India, whose government has ambitious targets for solar energy but historically has struggled with implementation. By 2015, in locations that have high electricity prices and favorable conditions for the adoption of solar energy (for example, California, Italy, and Japan), PV prices will have dropped below residential grid parity. At that point, subsidies can gradually be phased out, but favorable regulation that ensures full grid access for distributed solar energy will need to continue. On the basis of this potential for increasing economic viability, PV could continue to thrive and reach roughly 360 gigawatts of installed global capacity by 2020, producing 500 terawatt-hours of electricity annually which is still only 2 percent of global demand. Whether unsubsidized solar energy, in the form of either PV or CSP, will be fully competitive by 2020 as a generation technology, including the cost of grid access, remains uncertain and will depend on

13 Solar Storm 11 changes in general energy prices, climate change realities, and the regulation of carbon emissions and nuclear energy. It will also depend on the emergence of further fundamental innovation within the solar industry. The Photovoltaic Industry s Structure and Current Dynamics The PV industry can be divided into upstream, midstream, and downstream markets, each with its own characteristics, business models, and levels of profitability. Upstream and midstream markets are characterized by global competitors that are focused on PV; most of these companies have enjoyed large profit margins over the last several years. Downstream markets are characterized by companies that are more regional in nature, many of which are not focused exclusively on PV. Most of these regional businesses have lower capital requirements and historically have had lower margins than their upstream and midstream counterparts. The rapid growth of the PV market over the last few years has led to high prices and a resulting fast buildup of global capacity along the entire value chain, including the entry of aggressive Chinese competitors. This trend was bound to produce overcapacities, which indeed occurred in 2009, and the situation has been exacerbated by the sudden restriction in the Spanish market and the global economic crisis. As a result, the entire upstream PV value chain has had to manage a sudden shift from focusing on secure supplies and maximum production output to fighting for differentiation and sales volume. Companies build-out plans have been scrapped, and for many cell, module, and equipment manufacturers, the first two quarters of 2009 were their worst in years. The near-term outlook remains shaky, with even polysilicon providers expected to be affected. At the same time, downstream participants in subsidized markets have seen their margins increase, leading many upstream companies to initiate a buildup of capacity in this segment. While marginal PV contenders are now severely threatened, even strong market participants such as Q-Cells and BP Solar International have started to restructure, with the former raising cash from sales of an equity stake in REC Solar and both Q-Cells and BP Solar closing high-cost production lines. It is thus mandatory for every current and future market participant to seek answers to the fundamental questions summarized in the next section. Key Issues for Current and Future Solar-Market Participants The solar industry s current backdrop is complex. There is clearly a very strong underlying logic for solar energy over the medium and long terms; simultaneously, much of that growth is contingent on government policy, and there is a glut of capacity in the market at the moment. Thus industry participants and potential entrants face difficult choices as they contemplate their next moves. Current solar specialists need to focus on how to get through the current period and, at the same time, define a viable long-term business model and manage the transition. Large, utility-scale projects, in particular, will require new consortia models and cooperation among stakeholders in order to manage both risks and financing, which individual companies will be unable to cope with independently. Such cooperation among, for example, cell and module producers and system integrators is already occurring. Global technology companies, such as ABB, General Electric, Intel, Mitsubishi, Samsung, and Siemens, whether already focused on energy or pursuing it as a secondary line of business, need to be equally clear on their future points of differentiation and on their business model. As part of that effort, they should consider leveraging the currently low stock-market valuations of solar specialists to make strategic acquisitions. Utilities need to decide whether they can afford to make a strong commitment to solar energy, given the heavy reliance on government subsidies and the potential for a resulting political backlash. Conversely, they need to decide whether they can afford not to make that commitment, because doing so could hurt their image and relationship with the government as well as potentially pave the way for new competitors.

14 Solar Storm 12 Given that upgrading to a smart grid seems to be a necessity either way, utilities also need to find a way to pay for that. Oil and gas companies need to decide whether they want to be in the solar business for real. 7 Most of their moves to date have been small in size and have seemed motivated largely by the potential for brand enhancement. This is unlikely to remain a viable strategy. Finally, governments and regulators need to define and quantify their true priorities, whether those priorities are related to environmental protection, job creation, or energy security, and to shape their programs accordingly. They must balance the seemingly high cost of solar energy with the less tangible but severe potential risks of climate change related to fossil fuels or the risks associated with nuclear energy. To then launch an effective program, governments will need to have a thorough understanding of solar technologies and cost positions, and of industry structure and dynamics, as demonstrated by Spain s experience. The solar-energy industry s long-term prospects appear strong. But success for individual industry participants is far less certain and will hinge to a large degree on how they navigate the current market turbulence. Companies must pick the right strategies from the development of a technology road map to the choice of markets, business models, and partners and execute flawlessly, whether seizing an M&A opportunity or driving down the cost of operations. Admittedly, this will pose considerable challenges. But the ultimate prize is vast and will more than justify the effort and investment. 7. This refers primarily to international majors. National oil companies act more as government arms than as businesses in the solar industry.

15 Solar Storm 13 About the Authors Philipp Gerbert is a partner and managing director in the Munich office of The Boston Consulting Group. He is a core member of the Energy & Environment practice, as well as a topic leader in energy technology. You may contact him by at Holger Rubel is a partner and managing director in the firm s Frankfurt office. He is a worldwide coleader of BCG s sustainable development sector, with a focus on sustainable technologies. You may contact him by at Acknowledgments The authors would like to thank Gerrit Amthor, Gunar Hering, Jan Justus, Christian Panofen, Thomas Seemann, and Thilo Stelzenmüller for their contributions to the writing of this White Paper, and also Balu Balagopal, Maurice Berns, Daniel Lopez, Petros Paranikas, and Rend Stephan for their valuable comments. The authors would also like to thank Gary Callahan, Angela DiBattista, Gerry Hill, and Sharon Slodki for their editorial and production assistance. The Boston Consulting Group (BCG) is a global management consulting firm and the world s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit The Boston Consulting Group, Inc All rights reserved. 10/09 Rev. 11/09

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