Europe-China module floor price nudges down in Q4’14, but what will happen on 1 January 2015?

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It appears the waiting is over during September 2014 for Chinese suppliers (and all other suppliers of modules to Europe), regarding the minimum import price (MIP) for the 3-month period October to December 2014 (Q4’14).

The new rate would appear (but is by no means confirmed) to be €0.52/W, down one euro cent from Q3’14, but don’t expect anything official to come out on this. While this change is on the low side (some had speculated larger cuts), the big question is: What will happen on 1 January 2015?

With regards European PV activity, it is firmly – and almost only – the UK PV market that will be doing the sums now on this one for Q1’15 large-scale deployment.
For the developers and EPCs set to unleash a Q1’15 bonanza of ground-mounted solar farms across the UK, what should they do with module supply? Take the €0.52/W price for Q4’14 or wait until 1 January 2015, hoping for a further quarterly downward adjustment from Brussels? Or is there a reason for grabbing Q4’13 MIP prices, before they go up on 1 January 2015?

This article seeks to provide some answers to this question, and speculates on what the EU might do for Q1’15 MIP rates. It also highlights the bigger issue at play: having a European reference price within a global market that works on US$ at a time when exchange rates are fluctuating considerably.

Benchmarking pricing reality on a global level

Precisely what mechanism is being used to set the MIP rates may never be fully understood. But if we go on the assumption there is a benchmarking activity going on, relative to something global, then we have probably covered as much as we need to do for now.

The perils of global PV price benchmarking. Not simply for historic reference points, but looking ahead one quarter. So let’s talk through what’s relevant in such an analysis first, as it depends on knowing who is shipping where, with what quantity, and when. And if the shipments are for one-off rooftops or multi-MW solar farms. And if the modules in question are premium silicon-based, standard or HE multi, regular mono, thin-film, and so on.

But more than the volumes, and whether on rooftops or the ground, geography matters more than anything else. Here is why:

It only needs two things to happen for global weighted average module prices to go up from one quarter to another by a large amount: China (as the largest end-market and one of the lowest ASP markets) to fall; and Japan (as the second largest end-market with one of the highest ASPs) to grow. There are various secondary factors related to lower volume markets such as the US (with higher than average ASPs) or India (with ASPs at the bargain-basement end). Or any short-term supply tightness through the value-chain.

But the key swing factor (China versus Japan end-market demand) is exactly what is going to happen between Q4’14 and Q1’15, making the global weighted ASP change the largest in the year.

So, it should be no surprise that the forecasted weighted average ASP (excluding Europe) will rebound in Q1’15. This should not be taken as any long-term upward trend, but just a quirk of seasonality and incentive rate expiration, and the shifting of supply channels around the globe.

Visualizing the pricing landscape

The attached figure seeks to explain everything you need to know about the MIP issue, on a single graph. The figure shows three lines.
 
The first line to look at is the Blue line that is extended back to Q1’13 here. This is the global weighted average of the top-20 module suppliers, factoring in geographic volumes and the prevailing end-market prices for each supplier in the different regions. Crucially, this line excludes the European shipment/ASP volumes and also tolling prices. All prices are converted to US$ and are ex-works figures. This should probably be the benchmark used by Brussels.

The second line is review is the Yellow line shown. This takes the initial MIP price of €0.56/W set in Q3’13 and then pro-rates it in US$ relative to the Blue line above. For any given quarter, using the average $:€ exchange rate should bring us back to an equivalent European MIP figure, all things being equal.
Each of the two lines above are forecast out to the end of Q2’15 also, based on forecasted global activity and pricing.

The upper (Black) line, shown on the secondary (right) y-axis scaling, gives the EU MIP (in €) with the solid part historic (including the €0.52/W figure for Q4’14) and the dashed part being a forecast, the rationale for which is discussed later in the blog below. (Note that the primary and secondary axes are not equated, but scaled to show more clearly the trends for each of the lines. Also, without trying to predict exchange rate volatility, the €:$ rate for Q4’14 onwards uses the Q3’14 rate, but more on this below.)

The big question

From a Europe perspective, it leaves developers on a sticky wicket. Buy at Q4’14 MIP rates, or take the gamble that MIP will not be increased during December 2014 effective from 1 January 2015. It’s a tough call. Or even bank on the EU using prior quarter downward trends to lower MIP on 1 January 2015. Each option is on the table, making it an incredibly hard one to call.

Until now, Brussels has not increased MIP. At best, MIP has been held firm, and then adjusted after the event. But we only have a few quarters of MIP action, so it is hardly a trend to place too much reliance on.

It could be that MIP just stays constant for two quarters at the Q4’14 rate. By this point, the global weighted average will have gone up, and then come down. But if MIP is to truly reflect the global module pricing (excluding Europe sales), then it should probably be increased in Q1’15.

Going back to the graphic, the cautious approach is shown in the upper Black line. No change on 1 January 2015, then a downward adjustment on 1 April 2015. But remember, this is simply a forecast, nothing more.

As mentioned earlier in the blog, the general consensus is that Brussels and Beijing agreed upon a Q4’14 level of €0.52/W, down from €0.53/W in Q2’14. Assuming that €:$ exchange rates do not change on quarterly average basis, then the Q1’15 MIP price would return just north of the Q3’14 level of €0.53/W, before falling sharply to €0.51/W in Q2’15 from 1 April 2015.

The key takeaway phrase however in the above paragraph is “Assuming that €:$ exchange rates do not change…” In this regard, we get to what is potentially a more pertinent issue.

The solar PV industry operates on US$ prices (especially the reporting of the Chinese companies, many of whom are listed in the US): MIP is set on € rates. Therefore, it can simply be exchange rate changes that have a greater impact on the real MIP rate. Holding Euro MIP rates fixed may sound reasonable if global averages are assumed to remain largely unchanged (in US$ terms), but a 2-3% shift in exchange rates can quickly make Chinese suppliers more or less competitive, with the rest of the supply chain having to follow the MIP levels (whether strategically pricing both above and below MIP).

If Brussels does end up holding MIP fixed at €0.52/W for the six-month period 1 October 2014 to 31 March 2015, then it could simply mean a €0.01/W downward adjustment on 1 April 2015, something that few would shout about too much, to regain alignment with global ups and downs over the six month period ahead. Assuming, that is, that exchange rates have not shifted radically from today’s rate.

While there have been plenty of areas regarding the European/China trade action that could be endlessly debated – and there has to be a degree of concern regarding the lack of visibility on rate changes now on a quarterly basis – it has nonetheless restored some stability and confidence in the European market. But as soon as Brussels chose to go down the MIP/Quota route (compared to the US route of import duties), then it was always going to be subject to scrutiny regarding how it benchmarked non-European pricing trends and (not even discussed in this blog) forecast European market volumes (for the Quota part of the equation).

What happens on 1 January 2015 may not be of great concern to developers and installers focused on mainland European PV activity, but it will certainly have a strong bearing on the UK for Q1’15 activity. Given that the UK’s ground-mount deployment may be the swing factor for the entire European annual demand during 2015, the stakes could simply not be higher.

Understanding European MIP needs clear understanding of global module pricing, referenced to global US$ values, typically one quarter out. Image: NPD Solarbuzz
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