Global PV demand during 2014 is set to represent a new phase of growth for the solar PV industry. Not just because end-market demand is now forecast by NPD Solarbuzz to grow significantly to reach 45-55GW, but because the fundamental issues driving end-market demand appear to be shifting away from legacy demand constraints.
In part, this is being driven by the increased viability of solar PV across a wider range of global markets, compared to previous years. But simply assigning this to global grid-parity or end-market demand elasticity fails to capture the mechanics that are behind end-market growth in the solar PV industry today, and through 2014.
Solar PV industry demand – on a global or macro basis – is a combination of system pricing levels, government and utilities favouritism for solar PV, and the collective scale and flexibility of the leading suppliers and developers to exploit short-term revenue opportunities.
Historically, in the solar PV industry, demand forecasts were largely derived by adding up the sums of the individual served addressable markets (SAMs), with the total addressable market (TAM) set mainly by the specific constraints pertaining to a select group of countries: whether Germany, Italy or China reached start-of-year projections was often the deciding factor in final annual deployment.
During 2013, this restriction has mostly been removed. A striking example of this can be seen through the changing role of European solar PV demand, and in particular the second-half softness in the ground-mount segment that was exacerbated by the EU/China trade case. It is particularly noteworthy that full-year global solar PV demand for 2013 will still end up above forecasts at the start of the year, despite the fact that the legacy dominant driver behind global PV deployment levels (Europe) will have been relegated to a contributor to overall annual figures.
However, the most important factor behind the new growth forecasts is the ability of suppliers and project developers to adjust solar PV deployment between different countries and regions, providing strong upside in markets that are conducive to near-term solar deployment; and these firms ability to drive supply and project development rapidly across different continents at short notice.
In the past, the effectiveness of the supply-chain to rapidly adjust to regional demand opportunities was restricted largely to Europe, with supply being shifted between countries such as Spain, Germany and Italy at short notice. Indeed, the solar PV industry then was largely segmented between upstream manufacturers and downstream developers/installers. Moreover, another limiting factor to rapid regional diversification came from the status of distributors and resellers that effectively acted as a barrier between the supply and demand sides.
However, as margins were eroded at the supply side in 2011 and 2012, an increasing number of suppliers diversified into downstream activities. Furthermore, leading tier 1 suppliers have also got far more connected with the end-market (through flexible framework supply agreements with key project developers). This now provides increased upside potential for end-market deployment figures.
Therefore, what will differentiate 2014 from previous years is that the supply-chain now has a far more global reach, in terms of targeting short-term opportunities in markets that have no predetermined annual cap in place. This significantly opens up the ability to drive higher levels of PV installations than seen in the past.
Adding to this increasingly attractive TAM are strong SAMs, such as China and Japan. The risks that were previously attached to FIT-heavy European market figures are still valid within some of these new end-market segments, but the level of this risk is now substantially reduced based upon the system cost declines over the past couple of years and more creative strategies from installers and developers.
As a result, NPD Solarbuzz has recently upgraded its annual forecast prediction for 2014 to 45-55 GW. This is still underpinned by the individual demand predicted across over 100 countries tracked, but now has a much stronger supply-driven upside that will ultimately be allocated as the year unfolds across a subset of end-markets that the leading supply/demand companies focus on.
Therefore, while grid-parity and end-market elasticity will certainly have a role to play at the regional level, global end-market demand sizing during 2014 will be influenced far more by the effectiveness of suppliers to produce the 50 GW of modules to the market that upstream data is suggesting, and the rate to which project developers or installers can fulfil short-term opportunities across a wide range of countries.
Ultimately, while this suggests that 2014 will be strongly production (or supply) led, the final limitation of 2014 end-market deployment may simply come down to the readiness of the supply side to manufacture 50 GW of market-qualified products (and the ability of project developers to manage this level of products over a 12-month period).
As such, the focus on effective capacity and utilization rates will come under severe scrutiny during 2014. Previously, we had been forecasting generic supply/demand equality when end-market confidence in a 45 GW annual market was reached. Based on the new demand factors unfolding, this situation is likely to emerge far quicker than previously assumed.
Over the next few months, the true meaning of effective capacity - from poly to wafer to cell to module - will be fully exposed. This will finally put to bed the spurious nameplate capacity data that has been propagated within the industry, often suggesting that the industry has been tooled up to supply a level of 60-80 GW of solar PV modules Ingot/wafer capacity will be added based upon perceived tightness within higher efficiency driven end-markets, new cell capacity will come online within Taiwan (potentially hybrid lines that are a combination of new and secondary tools), and module capacity will be added at short notice (with minimal CapEx) by leading c-Si suppliers.
In addition to the specific bankability, market-readiness and financial-health of the several hundred suppliers that had been contributing to the 60-80 GW nameplate figures, the end-market applications will certainly have an immediate filtering effect on these somewhat academic and historic nameplate capacity metrics.
For example, end-market regions and application segments (whether rooftop or ground-mount) will quickly expose the supply constraints at the mono/multi stage, or the efficiency and panel ratings within each of these technology types. Tightness in supply is therefore likely to emerge at the technology level, with segments demanding mono modules or high-efficiency multi wafers being firmly under the spotlight first. Whether mono demand can be shifted to multi, or for how long tier 2 (tolled) capacity can supply market tier 1 panel specs is yet to be determined.
Furthermore, the phasing of end-market demand during 2014 will also expose some of the supply-side limitations. In the past, the solar PV industry generally saw a strong decline from year-end Q4 demand figures and the start of the following calendar year in Q1.
In 2014, this demand cycle will also change, primarily driven by Japan (and other countries) on 31 March fiscal year funding cycles, such as the UK. During the past few years, demand in Q1 has declined by up to 30-40% from Q4 highs. At the start of 2014, this figure is forecast to be far less severe and as low as 20%.As a consequence, the historic production declines (and inventory build) seen at the start of the calendar year are not likely to be repeated next year. One can imagine a 6-month period during Q4’13 and Q1’14 that is essentially an extended year-end quarter, with strong calendar year-end Q4 pull from China and the US transitioning quickly to strong fiscal year-end pull during Q1 from Japan and the UK. The importance of this occurring during Q1’14 when 2013 annual returns are released cannot be underestimated.
The net result of all these changing dynamics is therefore set to thrust the solar PV industry into new and unchartered waters during 2014. And as investor confidence returns - backed up by improving operational metrics at the supply side - the return of CapEx and longer term optimism could be visible as early as the first quarter of next year when year-end 2013 figures are reported, 2014 guidance is provided and strategies (not tactics) are outlined by leading tier 1 suppliers.