Official 2010 PV installation figures for Germany show a booming market with almost 7.4GW installed, an increase of 75% compared to 2009. Once again Germany was by far the largest PV market last year. However, for the market to prosper in 2011, against a backdrop of lower feed-in tariffs, prices much drop fast, according to Henning Wicht, PV analyst at IHS iSuppli, in a presentation at the SEMI PV Fab Managers Forum, held in Berlin earlier this week.

According to Wicht, the ground-mounted market typically requires an ROI for investors of approxiamtely10% to make that sector of the German market attractive to kick-start projects. Based on the German FiT, the cost per watt would now need to be at least €2/W to make investment viable.

In respect to the residential sector, an ROI of 8% is sufficient for homeowners to see the payback benefits of installing PV of roofs. This would require a €2.7/W price to ensure market development for small <30 kW residential systems.

Wicht noted that he was concerned that prices simply weren’t falling sufficiently for the market follow a similar installation trend as seen in 2010, when the second quarter was the peak for installations.

There is weak demand for PV installations in the first quarter, noted Wicht, projecting installations of 450MW for the period.

In his presentation to a packed audience at the event, Wicht pointed to a disconnect within the supply chain that is making it impossible for cell/module manufacturers to cut prices sufficiently to get the market going for the all-too-critical midyear installation cycle.

The problem is that margins are thin for the cell/module producers, while polysilicon/wafer producers are holding on to bumper profit margins. Wafer prices have remained flat as tight supply has continued into 2011.

As chart 1 shows, cell producers are suffering from margins of 4% in general, while module manufacturers fare little better at 5%. However, polysilicon producers are holding on to margins in the 50% range, while ingot/wafer producers benefit from margins in the 20% range.

The market research analyst noted that cell and module production can ramp and add capacity much faster than the upstream elements and that cell and module capacity would reach approximately 40GW in 2011, while the global market is expected to see installations reach approximately 21GW. About 10GW of new wafer and cell capacity is likely to come onstream this year, but the slower ability to ramp wafer production generates the supply disconnect.

This is exacerbated by the use of long-term wafer supply contracts that simply are not flexible enough to match supply and demand requirements on end-product pricing needs.

The problem isn’t being resolved as the major wafer suppliers have all expressed that demand remains strong and pricing remains flat to slightly down in the first quarter, based on comments executives have made during quarterly conference calls in the last few weeks.

Something needs to give for the German market to recover—and it will need to be the polysilicon/ingot/wafer segment.

A price correction in time for the summer installation cycle is looking increasingly unlikely, according to Wicht, but this doesn’t mean the German market isn’t going to recover to 2010 levels.

In contrast to many market and company projections that expect installations to fall in Germany as a consequence of strong FiT price declines, the IHS iSuppli analyst believes that wafer prices could come down as a result of the lower levels of installations in the peak months, giving greater downward pressure on pricing for the second-half of the year and in particular the fourth quarter.

The projections are that from October onward, installations will be significantly higher than the levels seen in the same period last year, which characterised a significant decline in demand after revised FiT pricing was implemented.

These figures have been supported today by the Bundesnetzagentur in Germany. The new data show that 2010 PV installations actually fell far below forecasted rates of 9.5GW installed.

According to the market researcher, the fourth quarter could see installations of approximately 3GW in Germany, compared to approximately 1.3GW in 2010. Overall installations could match those of 2010, coming in at approximately 7.1GW.

Therefore, system prices in Germany should reach €2.0/Watt by midyear for large installations and €2.6/W for residential systems for growth to return. Module prices would be expected to drop to €1.1/W - €1.5$/W range.

Of course, should the current rigid supply chain in the wafer segment continue, the pricing patterns and demand scenarios will be negatively affected. However, in 2012 the significant over capacity expected in the wafer segment should lead to an end of the rigid wafer pricing regime.