The supply and market dynamics of the PV inverter sector continue to play-out this year as this guest blog by Ash Sharma, Renewable Energy Research Director at IMS Research, highlights the next expected supply/demand scenario.
Whilst in the first three quarters of 2010 inverter suppliers enjoyed tremendously high demand, tight supply and stable prices, a drastic reversal in their fortunes may quickly be seen as demand wanes, supply massively grows and inventory builds.
According to a new report from IMS Research, planned inverter production may exceed actual demand by more than 2 GW in Q4’10 leading inevitably to large inventory build (both in the supply chain and in inverter suppliers’ warehouses), but also many orders being cancelled.
Looking past Q4, the picture for inverter companies remains bleak in the short term. Production capacity has been massively increased, with all leading suppliers expanding facilities and many new entrants to the market. This increasing supply, however, is likely to meet falling, or at best, stable demand in 2011. Although most major PV markets are still predicted to grow in 2011 and new markets will emerge, a cloud still hangs over the future of the huge German market. Demand is weakening and it is very possible that market will fall next year from the 7-8 GW level seen in 2010.
Supply Constraints Easing
Whilst some issues in securing component supply remain (with capacitors noted as the main bottleneck currently), the severity of these shortages has eased, allowing many suppliers to increase production in the second half of 2010. Despite this, quoted inverter delivery times to new customers still averaged at 18 weeks in Q3, dropping to 12 weeks in Q4 due to the huge order backlog.
Inventory levels of inverters are now reported to be steadily building at major distributors driven by three coinciding factors:
1. The slowdown in demand from Germany due to two FiT cuts (which had the effect of pulling forward demand).
2. Double and triple ordering of inverters in the first half of 2010 as buyers panicked to secure inverters for the booming Germany market.
3. The improvement in component supply has allowed major suppliers to quickly increase their production, massively increasing supply.
As such it seems very likely that inverter suppliers will begin to see major order cancellations and large price drops in early 2011. The first quarter of 2011 is expected to be very slow for installations, and this weak demand, combined with the overhang of excess supply from the end of 2010, may lead to intense pricing pressure.
Capacity Exceeds 30 GW in 2010
Inverter production capacity has more than doubled in 2010 and by the end of the year will exceed 30 GW. Based on the expansion plans of more than 30 top suppliers, capacity is set to grow another 40% in 2011. It appears that suppliers do not want to get caught short again, as they did this year, and not be able to satisfy customers if the market surges again. However latest demand estimates predict a flattish market in 2011 and as such capacity may outstrip demand even further next year.
Although many new entrants have emerged, it is very clear that the market remains dominated by the top 15 suppliers, both in shipment terms and also in terms of available capacity.
Shift in Demand
Another major hurdle inverter suppliers may need to overcome is a dramatic shift in demand that is predicted to occur in 2011. In 2010 one of the largest drivers of industry growth was the small commercial sector in Germany which will install around 4 GW. Next year however, high growth is predicted for much larger installations in other regions such as the USA, Canada and China. In addition new markets, like the UK and India, will provide further substantial opportunities and inverter suppliers may have some real challenges shifting away from stagnating markets to capitalize on these.
Inverter industry margins remained very healthy in 2010, buoyed by strong demand and almost zero pricing pressure. Inverter gross margins are even higher than for solar modules, but as the inverter industry is a factor of six smaller, industry profits will total less than $2 billion this year.
Inverter suppliers will need to brace themselves for a sharp fall in profits in Q1’11, with IMS Research predicting the lowest level in seven quarters. A major fall in demand, coupled with intense pricing pressure and additional costs of expanding capacity will undoubtedly see a slide in gross margins amongst suppliers.
It’s clear that 2010 was definitely a good year to be an inverter supplier, but 2011 may be a very different story.