Horseshoes, Hand Grenades & Demand Projections

Valencia, ESP (Actually, in Hong Kong right now) - The solar market is funny in that it exhibits many of the inefficiencies associated with markets that move according to artificial price signals. In this case, the artificial price signals are policy and incentive programs designed to increase deployed capacity. These range from renewable portfolio standards to tax credits to REC programs and ancillary credit markets to feed-in tariffs to something the French have that I’m not sure even they understand. Such programs play a key role in setting local prices and, by extension, determining demand in those markets.

Easy, right? Setting a feed-in tariff to EUR 0.42/kWh or an REC to $33.23/MWh, or even a tax credit to 30% of the installed cost, gives customers a somewhat known price. Combine this with suppliers moving into gigawatt scale production in 2008, easing raw material constraints, and cost-engineered process improvements, and you start to get a picture of an industry moving down the cost curve while succumbing to some strong market drivers. Among these are high commodity prices, unpredictable power markets, and growing environmental consciousness (tangible or intangible, depending on who you ask). Taking all of these variables into account, it should be relatively easy to estimate the size of the demand side and the size of the overall solar market.

Not quite. Demand side estimates range in accuracy from pin the tale on the donkey to Dick Cheney with a shotgun. Photon thinks demand will reach roughly 24 GW by 2010, outstripping supply by 80 percent. I’ve heard this estimate includes a 500 MW market in the Czech Repubic. I’d like to try whatever it is they’re smoking. Most other estimates range between 5 GW and 10 GW, which isn’t something you wouldn’t want to bet grandma’s life insurance on.

Part of the reason estimating demand is so hard is that consumer prices are still largely a function of political will. Sure, economies of scale on the producer side ought to bring down costs, which, tempered by rising demand for cheaper modules, will establish some kind of marginal price to guide producers. But if policies do too well and end up costing too much, it’s pretty easy to lower tariffs or eliminate tax credits. We’re seeing this in Spain right now, and we almost saw in it Germany. It’s possible the demand side models suppliers use fail to take this into account. Instead, they see unlimited demand prospects at a certain price level and at a steady rate of tariff declination.

The problem is that this causes a certain amount of, dare I say, irrational exuberance. Sure, I love slicing wafers as much as the next guy, but the hope that markets will materialize shouldn’t justify supply growth at 70 percent while growth on the demand side moves at 45 percent. It’s unlikely we’re going to experience another Spain-Germany-Japan trifecta like we did in the golden days of 2005. Maybe unaccounted for demand in India and China will move this market. Or maybe the Spanish could start making panels out of ham – I’ve seen 243 different kinds of ham this week in Valencia. Clearly, solar ham is the next logical step. I doubt the Spanish government would rescind that feed-in tariff.