by Shayle Kann
September 25, 2015

Shayle Kann and the GTM Research analyst team give GTM Squared members insight into our internal discussion and debate on the latest business developments across solar, grid, and energy storage markets in this monthly column.

Shayle Kann Senior Vice President, Research: GTM Research solar team, great work last week at Solar Power International. The tradeshow was back in California (after a few years in the wilderness of Dallas, Orlando, Chicago and Vegas) and as big as ever.

I've found the evolution of booths at that conference to be reflective of the market. In 2010-2012, the show was overrun with huge booths from Chinese module manufacturers even we hadn't heard of. Today, those companies have all disappeared and been replaced with a much bigger presence from balance-of-systems companies (so many racking systems!) and downstream players (SunEdison went full bore).

What did you all learn last week?

MJ Shiao Director, Solar Research: Supply-chain concerns were the top thing on everyone's mind. Modules are always the first, and it's a shared concern -- unlike inverters, racking and installation, module capacity is virtually shared across all market segments (i.e., residential and utility guys are basically competing after the same allocation). Tariff-free module capacity is the constraint.

Jade Jones, any thoughts on what that supply-demand balance looks like?

Otherwise, capacity isn't necessarily a concern for other PV hardware -- lead times are the bigger issue, especially since developers have to consider the potential for interconnection backlog to delay COD. That being said, I hear that in some markets, portable toilets may be in short supply.

P.S. I've also heard that the negotiated settlement talks on module tariffs aren't dead.

Jade Jones Senior Analyst, Solar: Yes! A negotiated deal would be great right now. A benefit to the U.S. downstream, Chinese suppliers, and hopefully U.S. poly producers if they are bundled in. (See below for upstream thoughts.)

Despite healthy global supply-demand levels, supply availability in the U.S. for 2015 and 2016 is getting tight. U.S. antidumping and countervailing duties on Chinese suppliers (currently 30.61 percent for most suppliers) limit not only how low module prices can go, but how much these companies can allocate to the U.S. While the U.S. is a relatively high-priced regional market, it offers comparatively low margins for Chinese suppliers. Though the U.S. was once a market where module buyers had more leeway for downward price negotiation, strong demand pull-in is allowing suppliers to have an increasingly stronger influence on module price trends. Suppliers have more ability than ever before to dictate price trends and prioritize clients.

MJ Shiao Director, Solar Research: Jade Jones -- so what does actual tariff-free capacity look like for next year?

Jade Jones Senior Analyst, Solar: It's actually not about tariff-free capacity at all. Major U.S. suppliers see 2015 and 2016 and know demand for T1 supply will be strong enough to sell out. It's about what suppliers are willing to allocate to a low-margin market. Some sources noted there is no way China's suppliers would allocate close to 50 percent; it will probably be around 30 percent. That would be ~9 gigawatts for the U.S. market. Then there is a large group of suppliers that should roughly make up for the rest of U.S. demand for 2016, but only if you assume some prioritization of U.S. demand. It's pretty tight, though. And you can talk about tariff-free supply, and there are some small non-China, non-Taiwan suppliers trying to enter the market, but how much supply will come from those producers depends on U.S. buyers’ willingness to buy from firms that typically have not supplied for the U.S. and are unlikely to pony up the big dollars for testing. I reckon it will be a very small percentage.

Cory Honeyman Senior Analyst, Solar Markets: Echoing that theme of supply chain concerns, at SPI, this issue was particularly relevant for utility-scale solar developers in the U.S. Procurement folks at developers and EPCs are rushing to finalize orders for hardware, and need orders for modules to be shipped by no later than Q1 of 2016 to keep 2H 2016 project completion dates on track.

In addition to supply-chain concerns, a theme that came up just as often in my chats with folks was project M&A heating up like never before, and the landscape's shift from a seller's market to a buyer's market. Several months back, developers with late-stage contracted pipelines had the upper hand given that YieldCos and deregulated independent power producer arms of utilities were still mostly snatching up projects at COD, and the clock wasn't ticking so fast with the federal ITC cliff. But the larger IPPs are taking on more development risk by buying a higher volume of projects in the preconstruction phase. That willingness to provide earlier-stage development capital, and the closing timeline for developers to secure financing ahead of the scheduled dropoff of the ITC, has enabled long-term asset owners to become a bit more picky in terms of which pipelines they acquire from here on out.

Speaking of the federal ITC, I had a lot of great chats with people about the evolving world of project finance once the federal ITC drops from 30 percent to 10 percent for all segments besides direct-owned residential. Across the board, people are pretty tight-lipped or unsure about what happens post-2016. But the three takeaways on my mind from those conversations were that tax equity suppliers are going to need a much higher volume of projects to finance portfolios with a 10 percent ITC (in other words, is developer consolidation inevitable?); some developers are hoping large institutional firms currently providing tax equity enter the cash equity market for solar by tapping into pre-existing investment vehicles with longer investment horizons, and lastly, everyone is excited to repair their marriages in 2017 after working crazy hours over the next 15 months. [Editor's note: I hear that.]

Scott Moskowitz Analyst, Solar: On the utility BOS/inverter side, there's a lot of grappling both in terms of lead times, as well as product pricing for specs on 1,500V systems. For the latter, we continue to hear that overall system price savings compared to 1,000V are around $0.04-$0.05 cents per watt out of ~$1.50-$1.60 stack. For supply, EPCs mention locking up all inverter orders for 2016 by January, but the vendors are expecting deals to trickle into late Q1 and early Q2.

Cory Honeyman, we're with you in it being a buyer's market out there. Larger developers/EPCs with long-term deals sewed up could have significant leverage in acquiring smaller players that need to lock in component supply. At any rate, electrical BOS suppliers that sell combiners and transformers to inverter vendors are coming to terms with the realities of meeting these accelerated 2016 timelines while also filling their 2015 orders. Component supply (fuses, enclosures) is the main concern, but so far, it doesn't look like it's been a major issue.

On the residential side, outside of the module supply concerns MJ Shiao mentioned, things were a bit quiet. There were a few announcements for new smart and AC module partnerships and much interest in small and lighter inverters.

Adam James Senior Analyst, Solar: In addition to the supply side, one reaction to dynamics in the U.S. is that companies are showing an increased drive for global diversification. In particular, Latin America has definitely emerged as an attractive region for expansion, with high growth potential and more stability than other emerging markets. For example, SolarCity announced that it will be entering a new international market every year, and several U.S.-based developers are now actively pursuing pipeline in Mexico, Brazil, Chile and Central America.

Many companies are very excited about the issuance of new market rules in Mexico two weeks ago, which has opened up the wholesale market to competitive generation.

Nicole Litvak Senior Analyst, Solar: A few notes on the distributed generation side of things, aside from what Cory Honeyman already mentioned about financing. There appear to be a number of EPC acquisitions in the works (that is, commercial developers acquiring EPCs) to make sure developers have the staff and resources necessary to build out their pipelines before the end of next year. There are definitely going to be some EPCs that make bank in late 2016 off of developers left without construction capabilities who still have projects to build at the last minute. The question is, is it worth it to acquire a whole company of employees that could be left twiddling their thumbs in less than 18 months?

Meanwhile, there were plenty of software nerds still trying to tackle the beast that is residential customer acquisition -- everything from lead generation to system design to utility bill-data collection to pricing and proposal generation, plus a few new "Expedia of solar"-type companies, though all seem to be pretty small at this point.

Click here to learn more about the latest solar research from GTM Research. You can read bios for the analyst team here.