In the last four years, the solar PV industry has seen cumulative installed capacity increase sixfold, significantly increased regional shipment diversity and, as an important catalyst to this growth, has seen module prices drop more by than 50 percent. As solar becomes more mainstream, thought leaders in the module performance and reliability space urge caution and stress the importance of module quality to the larger solar PV community.
The Effect of a Larger and More Diverse PV Market
GTM Research estimates indicate that more than 80 percent of today’s cumulative capacity was installed between the years of 2010 and 2013. That means that the bulk of solar PV projects have been in the field for less than five years. With module technologies and process recipes changing every year and a constant stream of new suppliers in the space, the risk of having an asset with a 25-year performance warranty is still not clearly understood.
Since there isn’t strong historical field performance data (and because most field failures are not reported to the public), the consequence of PV’s exponential growth opens up various questions for investors looking to reduce risk beyond project finance and risk allocation measures.
Does the module brand being purchased have a meaningful track record of reliability and durability? Are today’s standard tests, such as IEC and UL certification, sufficient for understanding long-term reliability? And are today’s “plain vanilla” modules ideal for the increasingly diverse array of climates in which they will be installed?
As shown in the graph below, modules are increasingly being sent to more diverse regions. For example, the share of annual demand held by China, Japan and the U.S. grew from 13 percent in 2010 to 56 percent in 2013; this is compared to years prior, when the majority of shipments went to major demand centers in the EU. It is also notable that emerging markets (those outside of China, Japan, the EU and the U.S.) will represent over a quarter of annual installations in 2017.
Source: GTM Research
Reliability testing facilities have proven that modules degrade at different rates given the climate; degradation levels for a given module will not be the same when it is exposed to extreme humidity, as in Latin America, compared to when it is exposed to damp, cold conditions, as in the U.K. Increasingly diffuse demand poses a challenge to the idea that standard modules are interchangeable from project to project, and reliability leaders are pushing investors to question whether one module brand performs better than others in specific environmental conditions.
Implications of Pricing Trends
Along with progressive demand dynamics, the past few years have seen meaningful price declines for modules. While the 57 percent drop in the module spot price from 2010E-2013E has helped projects become more financially bankable, there is considerable uncertainty about the effect this has had on module quality. Although leading PV suppliers have bounced back to profitability over the last several quarters, the question remains: has continuous pressure to reduce selling prices forced suppliers to cut corners at the expense of long-term performance? And on a related note, are more expensive modules necessarily higher quality? In other words, to what extent do intra-firm module selling prices provide guidance in assessing module quality?
The graph below shows the ASP differential for public Tier 1 Chinese module suppliers from Q1 2011 to Q3 2013. It illustrates that the variance in module prices has only decreased over the past several years, with the standard deviation decreasing 70 percent. With a lack of variance in selling prices, it is problematic to assume that higher-quality modules are always sold at a premium, or vice versa.
Source: GTM Research
Whether correctly or not, manufacturing tiers today are to a great extent defined by profitability. Those module firms that were able to rapidly reduce manufacturing costs and lower prices in keeping with market dynamics have been able to survive the pressures of overcapacity. While cost reductions are undoubtedly of crucial importance to supplier competitiveness and profitability, there is a flip side to this equation: one of the easiest ways to reduce costs is to adopt cheaper, lower-quality materials. While profits are recorded in the here and now, the consequences in terms of subpar energy yield and product failure might not be experienced until a few years into the future -- and a black eye related to product quality is the last thing the solar market needs as it marches toward securitization.
For more on module quality, join us at Greentech Media’s Solar Summit in Phoenix, Arizona April 14-16 as we open up the conversation about the dangers of the existing "cost-first" mentality in the downstream sections of the industry, the importance of due diligence in module vendor selection, and the challenges and opportunities in mitigating quality risk.
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Jade Jones is an analyst at GTM Research, where she covers the upstream PV manufacturing space. Her most recent report is Global PV Pricing Outlook 2014: Value Chain Trends, Global Drivers and Regional Dynamics. She will be publishing a report on module reliability later this year.