worldwide
economy
ppvx
The Black Swan: The impact
of the highly improbable
Rogol’s monthly market commentary
If our baseline scenario plays out
through 2012 (52 GW PV annually
by 2012 with costs of under 15¢ per
kWh in many locations), the traditional electricity industry is unprepared for the consequences. Without
immediate attention and rapid
action, we are convinced that many
Traditional Electricity Companies
Are F*&$#d (TECAF).
72
A
s Nassim Nicholas Taleb points out
in The Black Swan: The Impact of the
Highly Improbable, until 1790, the European scientific establishment believed
»all swans are white« to be an unshakeable fact. That was the year naturalist
John Latham first described the black
swan of Australia, undoing an assumption based on the empirical evidence of
millions of white swans. Our question
is, could PV be the black swan for traditional electricity companies (TECs),
upsetting decades of assumptions about
electricity sources? And if so, what does
that mean for these companies?
Over the past three months, we have
interacted with hundreds of people in
the traditional electricity sector. Our intent has been, first, to get a better sense
of what is on the minds of key stakeholders in the traditional electricity sector
and, second, to understand their views
concerning solar power.
Based on these discussions, it is
clear that TEC executives in Europe
and North America perceive a broad
set of challenges that have nothing to
do with PV. It is equally clear that most
executives, regulators, investors and
analysts involved in traditional electriPHOTON International November 2008
The black swan takes flight: Most traditional electricity companies still consider PV far
too expensive to be a threat to their business. But like a black swan, solar power has
been rising quickly, growing much faster
than almost anybody believes. In consequence, Traditional Electricity Companies
could be F*&$#d or TECAF – as the name of
PHOTON's conference in December in San
Getty Images Deutschland GmbH
Francisco implies.
city are not fully aware of
the inroads that PV is poised
to make into their sector by
2012, or the implications of
that growth.
Few will dispute that TECs
face significant challenges,
now and in the years ahead.
Yet while the players within
the sector focus on a handful
of highly visible challenges
– rising fuel costs, significant infrastructure investment and regulatory changes
among them – they are seemingly oblivious to what may
well be their most serious
challenge: the potential that
faster-than-expected adoption of PV with lower-thanexpected costs will create
economic, operational and
financial challenges for traditional electricity.
This month's column summarizes what we have learned
from our recent interactions
with players in traditional
electricity, including the top
priorities for TECs and their
views on PV.
Our frank assessment is
that rapidly expanding PV
has significant potential to
disrupt TECs. Our concern is
that, unless there is sudden
recognition of PV as a black
swan, Traditional Electricity Companies Are F*&$#d
(TECAF).
What is on the minds of
traditional electricity
companies?
The first goal when we
interviewed TECs in Europe
and North America over the
last few months was to better
understand their top priorities. During our discussions,
the most common priorities
among TEC executives included:
• Relicensing existing plants.
The fleet of aging coal, oil,
natural gas, hydro and nuPHOTON International November 2008
clear power plants from the
growth period of 1950 to
1980 needs upgrading or replacement, and the requirement to obtain new operating or environmental licenses
makes the extend-or-replace
decision more distinct.
• Making significant infrastructure investments. As with
aging generation sites, transmission and distribution assets also need replacement,
exacerbated by the requirements of new technologies,
shifting demographics and
modest but relentless growth
in electricity demand.
• Demand for renewable/
clean
energy.
Regulators
and customers want clean
energy, but TECs are more
focused on wind and energy
efficiency at the moment.
• Resolving carbon regulations. Most utilities view
carbon regulation as inevitable, but making long-lived
investment decisions before
the rules are set raises investment risk.
• Addressing fuel price volatility. The trend for fuel prices
is inevitably upward bound,
but volatility swamps the
trend and challenges traditional planning approaches.
• Impacts of new technologies (smart meters, electric
cars). Game-changing technologies are crawling forward, but some could reach
a tipping point soon.
• Internationalization. Local public utilities are being
acquired by national and
international
companies,
whose global vision may not
accommodate local needs.
• Securing low-cost financing. Increasing capital requirements, increasing risk
and a meltdown of liquidity
and credit markets make the
utility CFO's job tougher.
While not all industry
veterans focused on the
same priorities, one theme
was consistent: nearly all
interviewees,
European
and North American alike,
agree that TECs face more
uncertainty today than at
any point in the last two
decades. Underscoring this
uncertainty is a striking
lack of consensus about the
73
magnitude of the changes ahead. The
differences range from modest evolutionary change (so, »We will keep doing
what we have been doing, just a bit differently ...«) to radical transformation
(for example, »Everything will change
over the next decade. Our fuels, our
technologies, our geographic markets
and our sources of value creation ...«).
Finally, regardless of viewpoint, nearly
all agree that any prediction can just as
easily be wrong.
A traditional electricity company's
view of PV: Smaller and slower
Traditional electricity is barely aware
of PV. In fact, nearly all of the executives, regulators, investors and analysts
have been following PV from afar for
many years. However, involvement has
been muted at best; serious engagement
by TECs with PV remains the exception,
rather than the rule, and therefore perceptions of technology, scale and cost
are seriously out of date, as pointed out
in our article, Urge to converge, in June
(see PI 6/2008, p. 134).
The general assessment of PV among
TECs is:
• Scale. Most traditional industry
veterans recognize that PV is growing
quickly, but still view it as a very small
piece of the electricity puzzle. While
many say that PV is starting to attract
notice and may eventually be a big piece
of the electricity sector, nearly all expect solar to remain a side note to traditional electricity for at least another
decade.
• Cost. Almost every interviewee says
that solar power is still very expensive,
with a cost structure that is unlikely to
compete with traditional electricity –
74
particularly existing plants – for at least
another 5 years. While they believe PV
grid parity will eventually occur, very
few interviewees expect this to happen
before 2015.
• Geography. Most interviewees do
not foresee significant PV penetration
in their territories in the coming 5
years. This is true even of TEC executives in Germany, the world's largest PV
market. When asked, »Will PV penetration rapidly increase in your territory?«
the most common view was, »Unlikely
to happen here.«
Overall, our sense is that the traditional electricity sector is aware of – but
not keeping a close eye on – PV and remains for the most part unconcerned
about the speed of its growth, the competitiveness of its cost structure or its
potential to capture customers.
With TEC senior executives occupied
by more pressing concerns, we envision
a scenario in which solar power is overlooked until its impact on electricity
generation across the Organisation for
Economic Co-operation and Development (OECD) regions is significant,
disruptive and irreversible – like a black
swan.
Our view: PV coming bigger
and faster
During our discussions with TEC
executives, regulators and investors, we
shared our baseline scenario for solar
power supply, price, cost and demand.
Despite their underlying views about
PV, we find TECs to be truly receptive
to our analysis, even though it contrasts
significantly with their assumptions:
• Scale. PV remains on a trajectory
to expand from 4 GW of cell/module
production in 2007 to more than 50 GW
by 2012. In the five-year period 2008 to
2012, this amounts to more than 137
GW of new PV installations. Annually,
by 2012, this equates to one-third of all
global electricity capacity additions.
• Cost. PV's fully loaded cost (so not
the price, but cost excluding profit at
each step of the value chain) continues
to fall at a rapid rate. In many of today's markets, the levelized cost of solar
electricity is less than 30¢ per kWh and
below 20¢ per kWh in some. This cost is
on a path to fall below 15¢ per kWh in
many of the OECD regions by 2012 and
below 10¢ per kWh in certain areas.
• Geography. Although growth will
not be uniform across all geographic
areas, solar will almost certainly spread
far beyond the markets of the past, seeking new territories with high solar irradiation, robust retail electric prices and/
or ample incentives.
The general reaction to this forecast
among nearly all interviewees can be
summed up as, »I never thought about
PV in those terms.« They do not convey either disbelief or disagreement,
but instead generally concede that our
view is plausible. Although it often differs significantly from their own views,
TEC executives and analysts are open to
our analysis because it agrees with other
evidence that they observe and because
they recognize the analytical rigor behind our forecast.
PV: A black swan?
If this scenario of PV growth plays
out, it is clear both to us and to many
whom we interviewed that traditional
electricity companies would face significant challenges in several key areas:
PHOTON International November 2008
Discussing a potential black swan:
PHOTON's 1st TECAF Conference
In order to have an open dialogue and
to draw attention to the potential for
disruption that PV holds for TECs, PHOTON's 1st Traditional Electricity CompaPHOTON International November 2008
Jochen Tack
• Economic challenges as solar displaces
revenue, constrains profits and possibly
brings negative network effects;
• Operational challenges as the penetration rates of PV rise in specific markets; and
• Financing challenges that result
from greater uncertainty and less predictability.
The overall point is that we are concerned that the rapid rise of PV may have
significant, negative, unexpected consequences for many traditional electricity
companies. In other words, we believe
that PV is a black swan for traditional
electricity companies – an unforeseen,
unprepared-for event with large consequences.
In addition, other distributed energy
suppliers (non-PV distributed generation,
energy efficiency, storage and controls) and
other centralized renewable energy suppliers (primarily wind and solar thermal
electric) are making substantial progress
on both customer and utility sides of the
meter. The convergence of PV and these
other sectors with traditional electricity
will certainly increase complexity. Some
offerings, such as smart grid technology,
will help TECs cope with these challenges, while others, such as unconstrained
charging of plug-in hybrids, will make
them substantially worse.
This is not to say that traditional
electricity companies cannot or will not
react. In fact, we expect many of them
to adjust, a view echoed by many of our
interviewees. Specifically, many TEC executives point to three factors that moderate the concerns they may have about
the growth of PV and other potential
disruptions:
• History. Traditional electricity companies have a long history of institutional survival.
• Change. There are a broad set of
technical, economic and regulatory fixes
– temporary or permanent – that could
enable TECs to adapt. TECs have a long
– albeit shallow – track record with many
of these fixes.
• Ultimate power. The societal need to
keep the lights on gives TECs a strong
hand with regulators and customers.
Strong penetration by solar into the traditional electricity sector carries the possibility for repercussions on both the customer and utility side of the meter. How
traditional electricity addresses the solar
challenge will make all the difference.
Solar vs. coal costs: Most utilities view carbon regulation as inevitable, but making long-lived investment decisions before the rules are set raises investment risk. The costs for solar investments
are rather easy to predict – and are already much lower than generally anticipated.
nies Are F*&$#d (TECAF) Conference
will convene on Dec. 4, 2008 in San Francisco. This first-of-its-kind event will be
a much-needed platform for deeper discussion on these key issues.
The irreverent title was chosen deliberately, not to offend, but to underscore
what we believe is the urgency of the
challenge facing TECs in the coming
five years. Representatives from the PV,
other distributed energy supply, TEC,
regulatory and customer communities
will gather to present their viewpoints,
air their concerns and debate their positions on these vital matters.
Program topic areas have been selected
to address the implications that five-year
PV growth, costs and penetration rates
hold for TECs; the potential impact on
TECs; and perspectives on the growth of
PV and other distributed energy options
from both the customer and utility sides.
There promises to be numerous opportunities for formal and informal debate and
discussion among all the parties involved
in this event.
It is our hope that PHOTON's 1st TECAF
Conference, by involving all parties with
a stake in electricity supply, demand,
price and cost, will be an important first
step in igniting more in-depth discussion,
deeper analysis and, above all, action.
Sector fundamentals:
Four peaks at work
The central theme of our recently released annual report Solar Annual 2008:
Four Peaks is that the solar sector's fundamentals remain strong but that there
are increasing risks. One of these risks
75
– peak #4: electricity – stems from potential backlash by TECs against solar
power. We are convinced that PV will
create significant challenges for many
TECs and that some will eventually fight
back against distributed PV. However, as
discussed above, the challenges from PV
remain low on the TECs' priority lists
and a backlash appears unlikely until at
least 2012. While there are longer-term
risks from PV for TECs and longer-term
risks of backlash against PV, the fundamentals of the solar sector remain quite
strong for now. More specifically:
• Supply. In contrast to the macroenvironment's impact on other sectors
(for example, on automobiles, LCD TVs
and mobile handsets), we continue to see
signs of robust supply growth in the solar
sector, with no signs of widespread supply weakness that would significantly
slow solar's projected expansion into
the traditional electricity sector. This
does not mean that all solar companies'
expansion will occur as planned, but
that we continue to observe aggressive
growth by a broad set of solar power
companies, sometimes aided by strategic
partnerships and/or cash infusions from
global conglomerates, chemical companies, roofing materials players, energy
producers and even some TECs seeking
76
to enter the solar sector. While there are
many companies that will seek to raise
capital, we are convinced that most will
succeed in doing so. Without ruling out
the potential for a small number of solar
company failures, we are convinced that
the bulk of solar firms will continue to
succeed in securing cash from customers, financiers and/or partners.
• Demand. Although the demand environment remains complex, underlying long-term trends have not shifted.
Lower consumer confidence and reduced
industrial activity will have an impact
that must play out for the short term. On
the other hand, utilities in Japan, the US,
and European countries other than solar
strongholds such as Germany and Spain
are developing PV Request for Proposals
(RFPs) and otherwise moving their solar
strategies closer to reality – all of which
support the continued expansion of PV.
We continue to believe that the majority
of industry analysts over-react to negative factors and do not place enough emphasis on positive elements. While the
demand environment is less conducive
to analysis for the time being, we hold
onto our belief that strong customer economics across a broad set of markets will
continue to drive very strong demand for
PV systems.
• Price. Despite concerns in the larger
economic environment, utilities provide
strong protection against a true price collapse in the PV sector. In the short term,
TECs will experiment by purchasing PV
in relatively small volumes at fairly high
(so near global weighted average) system
prices, a scenario that makes significant
price decline in the next two years unlikely. In 2009 and 2010, we continue to
expect around 10-percent year-on-year
(YoY) price declines for global weighted
average system and module prices. This
expectation takes into account higher
interest rates that have the potential to
push down prices and stronger incentives
in new markets that could push them
up. On balance, the high internal rates
of return for end-customers in a broad
set of markets suggest that it is unlikely
that prices will decline much faster than
around 10 percent YoY and that slower
price declines (around 5 percent YoY) are
plausible.
• Cost. PV cost remains far below
price, making it hard for TECs to observe the true cost of solar power. In
contrast, our rigorous benchmarking
of companies throughout the solar supply chain finds the cost of solar typically at 20¢ to 30¢ per kWh, a range
already competitive with a significant
PHOTON International November 2008
PHOTON International November 2008
77
Getty Images Deutschland GmbH
volume of traditional electricity. While this true cost is
not apparent in the marketplace, it represents a latent
ability to substantially lower
prices as need be in order to
sustain market growth. As
cost continues to decline, PV
will be competitive with an
even greater percentage of
grid electricity in 2009 and
2010. Many companies will
achieve faster cost reductions
through vertical integration
and by entering into longerterm feedstock contracts,
resulting in greater than
10-percent compound annual
cost reductions through 2010.
While the cost of capital may
increase as a result of the curNew dawn for nuclear?: While many utilities are looking into constructing nuclear power plants, the process of
rent credit crunch, we expect
financing, licensing and construction takes many years. In contrast, PV plants typically move from concept to
that financing costs will recompletion in under 12 months.
main low relative to operating
profit for most companies.
PPVX – deep drop reflects higher
• Profit. With both prices and costs
expect them to show expanding operating
risks but ignores core fundamentals
declining roughly 10 percent in 2009 to
margins in 2009 and 2010. With an oper2010, we continue to expect the operatSo far, 2008 has been a year of deating profit margin above 30 percent for
ing margin for the overall sector to remain
clines for solar stocks. The overall PPVX
the overall solar sector, it is clear that PV
very high, particularly in comparison to
is down 39 percent since Jan. 1, with a
is more profitable today than most aspects
decline of 24 percent month-on month
TECs. As many companies realize fasterof traditional electricity and appears likely
(MoM) in September.
than-industry-average cost reductions, we
to remain so in the coming years.
a service from
October 1, 2008
4,082
Company
Price 10/1/08 since 1/1/08 since 9/1/08 Country Industry
Canadian Solar
Centrotherm Photovoltaics
Conergy
Energy Conversion Devices
Ersol Solar Energy
E-Ton Solar
Evergreen Solar
First Solar
Gintech Energy
GT Solar
JA Solar
LDK Solar
Manz Automation
Meyer Burger
Motech Industries
PV Crystalox Solar
Q-Cells
Renesola
Renewable Energy Corp.
Roth & Rau
SMA Solar Technology
Solarfun Power Holdings
Solargiga Energy Holdings
Solaria Energia y Medio A.
SolarWorld
Solon
SunPower
Suntech Power
Trina Solar
Yingli Green Energy
PPVX
-30.6 %
-50.1 %
-75.3 %
73.1 %
53.5 %
-0.3 %
-68.0 %
-29.3 %
-46.9 %
-25.6 %*
-54.7 %
-36.1 %
-27.9 %
-42.2 %
-42.4 %
0.8 %
-39.3 %
-42.1 %
-61.8 %
-60.9 %
-1.9 %*
-67.7 %
-14.0 %*
-81.9 %
-26.4 %
-56.2 %
-44.2 %
-56.4 %
-57.3 %
-71.5 %
-38.9 %
$ 19.53
€ 37.46
€ 6.05
$ 58.25
€ 110.14
$ 212.00 TWD
$ 5.52
$ 188.91
$ 169.50 TWD
$ 10.85
$ 10.54
$ 30.02
€ 118.98
241.40 CHF
$ 141.50 TWD
£ 1.54
€ 59.40
£ 2.86
105.50 NOK
€ 24.93
€ 54.86
$ 10.53
$ 2.52 HKD
€ 3.89
€ 30.47
€ 31.30
$ 72.80
$ 35.87
$ 22.95
$ 11.02
4,082
The PPVX began on Aug. 1, 2001 with 1,000 points and
is calculated weekly using the Euro as its base currency. It
includes 30 stocks listed on the market in different countries. To be included in the PPVX, more than 50 percent
of a company's sales in the previous year must have come
from PV products or services.
Index calculation: The PPVX is a weighted index so that
the stocks of a few highly capitalized companies do not
exert too much influence. It is divided into six classes, with
different weighing points (WP) based on the companies'
market capitalizations.
A capitalization of less than €50 million ($71.5 million) has
1 WP; between €50 million ($71.5 million) and €200 million ($285.9 million), 2 WP; between €200 million ($285.9
-39.8 %
-19.8 %
-39.5 %
-22.5 %
8.7 %
-25.2 %
-41.5 %
-31.7 %
-30.0 %
-13.9 %
-40.9 %
-41.4 %
-17.1 %
-26.8 %
-21.4 %
-13.1 %
-13.0 %
-44.8 %
-37.4 %
-28.2 %
-8.4 %
-33.4 %
-28.0 %
-13.2 %
-13.7 %
-26.3 %
-25.4 %
-25.0 %
-29.8 %
-38.8 %
-23.7 %
CN
DE
DE
US
DE
TW
US
US
TW
US
CN
CN
DE
CH
TW
GB
DE
CN
NO
DE
DE
CN
HK
ES
DE
DE
US
CN
CN
CN
Modules
Production equipment
PV systems
Amorphous modules, batteries
Cells, modules
Cells
Cells, modules
Thin-film modules
Cells
Production equipment
Cells
Wafers
Production equipment
PV wafer saws
Cells
Ingots, wafers
Cells
Wafers
Silicon wafers, cells, modules
Production equipment
Inverters
Cells, modules
Silicon, ingots, wafers
Modules
Wafers, cells, modules, wholesale
Modules, systems
Cells, modules
Cells, modules
Wafers, cells, modules
Wafers, cells, modules
* included as of April 7 (Solargiga), June 27 (SMA
Solar Technology), July 24 (GT Solar International)
million) and €800 million ($1.1 billion), 3 WP (Canadian
Solar, Conergy, E-Ton, Evergreen, Gintech, Manz, Meyer
Burger Technology, ReneSola, Roth & Rau, Solarfun Power,
Solaria, Solargiga, Solon, Trina); between €800 million
($1.1 billion) and €3.2 billion ($4.6 billion), 4 WP (Centrotherm, ECD, ErSol, GT Solar, JA Solar, LDK Solar, Motech,
PV Crystalox, SMA Technology AG, Yingli); between €3.2
billion ($4.6 billion) and €12.8 billion ($18.3 billion), 5 WP
(Q-Cells, Renewable Energy Corp., SolarWorld, SunPower,
Suntech Power) and greater than €12.8 billion ($18.3 billion), 6 WP (First Solar).
If the stock price of a company under- or overperfoms the
»critical« market capitalization level for a certain weighing class for a minimum of four weeks, the weight factors
shift because the company is down- or upgraded.
250%
200%
(levelized)
150%
100%
Nearly all stocks were down monthon-month, with many declining 40 percent or more, including: ReneSola (-45%
MoM), Evergreen Solar (-42% MoM),
LDK (41% MoM), JA Solar (41% MoM),
Canadian Solar (40% MoM) and Conergy (40% MoM).
Only one company was up in September: Ersol registered a 9 percent gain
on the back of the acquisition by Bosch.
Furthermore, as we go to press, further
declines and enormous volatility continue to rack international finance and
solar markets.
The drop across the sector was driven
by a broad set of macro-concerns that
pushed down stock prices across all equity markets. The decline by solar stocks
was even more pronounced than many
other segments of the equity markets
due to:
• A move away from high volatility
stocks (solar stocks have high beta);
• Concerns about rising interest rates
driving down solar system and component prices;
• Limited debt market liquidity raising concerns about system financing
hence system and component prices;
• Falling consumer spending raising
concerns that spending on solar systems
would also decline;
• Concerns about expansion plans
for some solar companies, raising worries that some customers will not receive
deliveries as expected; and
• Concerns about financing of some solar companies to a point that raises questions about the survival of some players.
These broad ranging concerns had a
considerable impact on solar stock prices. Basically, the decline in solar stocks
reflects an assessment that many solar
companies now face higher risks. While
we agree that there are important risks
facing the sector – this is a central theme
in our Four Peaks report – we are also
convinced that fundamentals of the solar sector remain strong.
In our view, discussed in last month's
column, Safer than a government bond
(see PI 10/2008, p. 80), customers will
continue to pursue PV systems as a substitute for grid electricity, especially because PV is seen as such a safe asset. As a
result, it appears most likely that strong
solar growth will continue. Assuming
our view of strong solar sector fundamentals continues to play out and that
this growth continues, it is not the future
prospects of PV companies that worry us
most, but instead the potential for PV to
become a black swan for TECs.
Mark Farber, Michael Rogol
50%
78
January
February
March
April
May
June
July
August
September
The authors work for PHOTON Consulting. Mark Farber
is responsible for convergence research, Michael Rogol
is the managing director.
PHOTON International November 2008