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U.S. Solar Market Insight Report Q3 2011
December 14, 2011 (Greentech Media Research and Solar Energy Industries Association)

Introduction

Through the third quarter of 2011, the U.S. solar market installed more than 1 gigawatt (GW) of grid-connected photovoltaics (PV) on the year, far surpassing the 2010 annual total of 887 megawatts (MW). The third quarter of 2011 was also the largest quarter for installations ever seen in the U.S., supported by utility-scale project completions and rapidly declining prices for PV modules. Module prices have plummeted due to massive oversupply on a global scale. This is a result of tepid demand in leading European markets combined with substantial manufacturing capacity expansions. While this has been a boon for domestic installations, it has also resulted in an extraordinarily difficult year for PV manufacturers worldwide. In addition to uncertainty surrounding module pricing, the 1603 Treasury Program is scheduled to expire at the end of the year. Unless the program is extended, we anticipate a tax-equity bottleneck in 2012, stifling some large-scale utility, commercial, and third-party owned residential projects. In short, the U.S. PV market continues to boom, but considerable risks lie ahead. This report captures and analyzes trends in the U.S. solar market and seeks to demystify the current landscape for U.S. solar installations.

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Key Findings:

Photovoltaics (PV):

• Grid-connected PV installations in Q3 2011 grew 39% over Q2 2011 and 140% over Q3 2010 to reach 449.2 MW, making it the largest quarter in the history of the U.S. market.

• More than 1 GW of PV was installed in the first three quarters of 2011, the first time the U.S. has surpassed 1 GW annually.

• Cumulative grid-connected PV in the U.S. has now reached 3.1 GW, which is ten times the size of the U.S. solar capacity in 2005.

• After two quarters of consecutive declines, the residential market grew 21% over Q2 2011.

• The utility market alone installed over 200 MW in Q3 2011, more than the entire market in every quarter through Q3 2010.

• The non-residential market shrank substantially in Q3 2011 as a result of downturns in California, New Jersey, Pennsylvania and Arizona.

• Major questions remain regarding the shape of the 2012 market, including the impacts of the potential 1603 Treasury Program expiration, potential import duties on Chinese cells/modules, and whether module prices will continue to fall…

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Concentrating Solar Power (CSP and CPV):

• Financing was secured in Q3 for four concentrating solar projects representing over 600 MW of capacity.

• Over 1,200 MW of concentrating solar projects are under construction.

• A project pipeline of over 4,000 MW of concentrating solar projects with signed PPAs is down from 6,000 MW as the pipeline of one the major CSP developers was sold and will switch to PV.

Photovoltaics

Photovoltaics (PV), which convert sunlight directly to electricity, continue to be the largest component of solar market growth in the U.S.

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Installations

The U.S. installed 449.2 MW in Q3 2011, up 39% over Q2 2011 and 140% over Q3 2010. This makes Q3 2011 the largest quarter in the history of the U.S. PV market, surpassing Q4 2010 by nearly 90 MW. Still, growth across market segments was anything but uniform. While the utility market installed more than ever before, the residential market grew incrementally and the non-residential market shrank to the lowest level since 2010.

Today, the U.S. market faces more uncertainty than at any time in recent history. On one hand, module prices are falling precipitously and system prices have never been lower. On the other hand, the market faces substantial risks in the form of legislative, financing, political, and market barriers. We identify three key questions facing the market:

1. With major markets trending downward, how much can emerging state markets ramp up?...2. What will be the impact of potential 1603 cash grant expiration?...3. How will the trade petition impact market dynamics, both in the immediate term and if duties are ultimately imposed?...

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Adding to the uncertainty already facing the U.S. market, there is the potential imposition of import duties on PV cells and modules originating in China. To briefly recap the issue: SolarWorld Americas, Inc. and six other unnamed petitioners, representing the newly formed Coalition for American Solar Manufacturing (CASM), filed a petition with the U.S. International Trade Commission and the Department of Commerce on October 19, 2011. The petition alleges that Chinese manufacturers of crystalline silicon photovoltaic cells have benefitted from unfair government subsidies and that they have been “dumping” product into the U.S. market. It asks for the imposition of import duties of 100% or more on the wholesale cost of Chinese cells and modules. There are two questions to be asked here in relation to both the upstream and downstream segments of the U.S. solar market: one, what will be the near-term impact as the process plays out, and two, what would be the longer-term impact if tariffs are ultimately imposed? …

The makeup and size of the U.S. market in 2012 is a moving target. A number of factors that are currently in flux could substantially impact market growth for next year. We divide those factors into three major categories, with two subcategories in each. Figure 2-2 contains our assessment of the potential impact (positive or negative) that these factors could have on demand.

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After 2012, the market is even more difficult to predict, particularly in light of potential tariffs on Chinese cells/modules. The impact of these tariffs would depend on their magnitude; small tariffs might have a negligible market impact, while large tariffs would drastically alter the makeup of the supply picture. In addition, by 2013 the larger Chinese manufacturers would have time to shift some manufacturing capacity to other countries (Taiwan, Philippines, Malaysia, and the U.S. are all possibilities) and continue serving the U.S. market. In recent years, the U.S. market has been driven primarily by the non-residential sector, which accounted for over 50% of total installations through 2008. However, the utility sector has been gaining ground (28% market share in 2010) while residential remained relatively steady around 30% of total installations. In the longer term, the U.S. market has the potential to share three vibrant, growing market segments, each contributing a meaningful share of total demand.

Residential installations grew 21% quarter-over-quarter in Q3 2011…Non-residential installations fell 24% in Q3 2011…Utility installations grew 325% over Q2 2011, by far the largest growth of any segment…

The U.S. PV market remains relatively concentrated in a few key states, although the market has been experiencing rapid geographic expansion over the past few years.

Whereas California accounted for around 80% of total installations in 2004-2005, by 2010 it was less than 30% of the national market. Figure 2-4 examines the state of market diversification. California’s market share in Q3 increased to 44% as a result of its strong showing in utility installations. Meanwhile, New Jersey lost substantial share as its market shrank while the rest of the national market grew. On the whole, the top seven states increased their share from 81% in Q2 to 89% in Q3.

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Installed Price

Quarter-over-quarter, the national weighted-average system price fell by 14.4% from Q2 2011 to Q3 2011, from $5.20/W to $4.45/W. The average price is heavily impacted by the large volume of utility-scale systems installed July through September…RESIDENTIAL system prices fell by 2.7% from Q2 2011 to Q3 2011, with the national average installed price decreasing from $6.41/W to $6.24/W…NON-RESIDENTIAL system prices fell by 4.9% from Q2 2011 to Q3 2011, from $5.20/W to $4.94/W…UTILITY system prices declined for the seventh consecutive quarter in a row, dropping from $3.75/W in Q2 2011 to $3.45/W in Q3 2011…

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Manufacturing

In general, the persistent global wafer, cell, and module oversupply and inventory buildup have had the following impact on manufacturers:

1. Starting in Q3, plant utilization rates have been lowered significantly.

2. Significant amounts of existing capacity have been taken offline, either temporarily or permanently. In conjunction with this, a number of firms have announced worker layoffs.

3. For the most part, capacity expansions that were planned for 2011 and 2012 have been placed on hold, postponed, or canceled.

4. In an attempt to generate short-term cash flow and stay solvent, many lower-tier manufacturers have been selling products on the spot market at prices below cash costs, which has placed more established producers, especially those in high-cost locations, under severe pressure. The free-fall in prices has resulted in significant margin erosion and heavy net losses for most manufacturers in Q3; wafer and cell firms have been most adversely affected, although module manufacturers have struggled as well.

5. Some less competitive plants have been closed, and a number of smaller, less established firms have exited the market.

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In short, the manufacturing industry has entered a consolidation phase…

The cooling off of historically prominent feed-in tariff markets (Germany, Italy, France) in 2011 has forced manufacturers to look towards other regional markets for sales, and as a relatively mature market that has been growing rapidly in recent quarters, the U.S. is at the top of most manufacturers’ lists…

Domestic module production in Q3 2011 amounted to 316 MW (capacity utilization of 62%), 5% below Q2 2011 output of 332 MW and 4% below Q3 2010 output of 329 MW…

Domestic inverter manufacturing capacity continues to climb upwards, which, as usual, necessitates the warning that manufacturing capacity is a poor gauge for the actual growth of the U.S. inverter industry. Owing primarily to the completion of Siemens’ annualized 850 MWac facility in Illinois, quarterly U.S. inverter manufacturing capacity jumped from just under 1.4 GWac to 1.5 GWac from Q2 to Q3…Production jumped to 439 MWac for the third quarter, implying a utilization rate of below 30%...

Venture capital and general investment continues to pour into the distributed optimization space…

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Market Outlook

Our 2011 installation forecast has been revised downward from 1.8 GW to 1.7 GW. As we had anticipated, Q3 installations in the U.S. were propped up by a number of utility market completions. However, the downturn in major commercial markets (California, New Jersey, and Pennsylvania) occurred slightly faster than we had anticipated. While the residential market looks to be stable for Q4, the commercial market continues to experience woes in larger states. We continue to anticipate a boom in utility installations in Q4 that will drive annual growth up to 89%, but we no longer expect a doubling of the U.S. market.

On the whole, the U.S. remains one of the strongest growth markets for PV. This is reflected both in the numbers and in the chatter from global suppliers, distributors, and developers, all of whom are bullish on near-term U.S. demand – if concerned about the risks already mentioned. By the end of 2011, the U.S. market has the potential to nearly double its global market share.

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Concentrating Solar

Concentrating solar includes both concentrating solar power (CSP) plants, which convert thermal energy to electricity, and concentrating photovoltaic (CPV) systems. Whereas CSP systems concentrate sunlight to heat water or another fluid that subsequently generates steam to power a turbine, CPV systems focus the sun’s light on a photovoltaic cell to generate electricity directly. In the U.S., concentrating solar experienced a burst of project activity in California in the 1980s, and then went quiet for two decades. But there is great potential for concentrating solar in the U.S., which is reflected in the project pipeline of more than 6 GW (both with and without PPAs) that is now under development. Should the growth of concentrating solar continue, the U.S. could once again be at the top of the global market, retaking the title from Spain, which has led all others in installations in recent years.

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Installations

While there were three CPV projects completed in Q2 2011, in Q3 2011 there were no CPV or CSP projects completed. However, during the quarter, there was additional progress on several of the large concentrating solar projects under development.

While there were no concentrating solar installations in Q3 2011, some significant developments occurred:

• Solar Trust of America sold its 2.25 GW CSP pipeline to Solarhybrid – who plans to use PV for the four projects

• Several concentrating solar projects closed DOE loan guarantees in Q3 including:

• 250 MW Mojave Solar trough CSP project

• 110 MW Crescent Dunes tower CSP project

• 250 MW Genesis trough CSP project

• 30 MW Alamosa CPV project

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Outlook

In 2011, it is expected that 57 MW of CSP and CPV projects will come online in the U.S., down from 78 MW in 2010. Most of the capacity expansion will come from the 30 MW CPV Alamosa Solar project and 5 MW CSP University of Arizona Solar Tech Park project.

It should be noted that we have significantly reduced our concentrating solar forecast in light of the announcement that Blythe would be switched from trough to PV for economic reasons. The dramatic improvements in PV panel costs has put trough at a significant cost disadvantage, and puts many of the planned trough projects at risk, as they may be difficult to finance or fail to receive regulatory approval.

2012 should see the completion of at least one of BrightSource’s Ivanpah towers, and in 2013, several large plants are scheduled to come online. In later years, greater uncertainty regarding financing, permitting and approvals surrounds the pipeline. The current pipeline of concentrating solar projects is over 6,000 MW, of which more than 4,000 MW have signed PPAs.

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Solar Heating and Cooling

The solar heating and cooling (SHC) category comprises two distinct markets: solar water and space heating (SWH) and solar pool heating (SPH). The domestic SWH market has grown on an annual basis since 2004. The SPH market hit a peak in 2006, and while it shrank significantly from 2007-2009, it made a slight recovery in 2010 with indications that this upward trend will continue through the end of the year.

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Market Update

As 2011 unfolds, it is the commercial side of the SWH industry that has been carrying the mantle. Despite generous residential incentives, including the relatively new CSI Thermal initiative in California, it has been business owners recognizing the value of solar thermal. In particular, users of large quantities of hot water, such as hotels, food processing facilities and universities, have been seeking out SWH applications.

As mentioned in previous iterations of the SEIA/GTM Research U.S. Solar Market Insight report, third party ownership of SWH systems has been an emerging trend. A few SWH development firms have pushed heavily into the space, recruiting investors to fund projects and then selling the hot water to an end user at a lower rate than natural gas, heating oil, or propane can provide. Massachusetts, which released a pilot residential program earlier in the year, has now implemented a pilot commercial program that will fund a feasibility study up to $10,000 with no requirement to actually install the system. Construction grants up to $30,000 came online late in Q3. With the 30% ITC still available, increased interest from states, and SWH systems fulfilling some states’ RPS goals (AZ, MD, NC, NV, NY, and Washington D.C.), we should see continued growth in the non-residential SWH market.

Interest in the domestic market is also growing amongst foreign manufacturers, which is a good sign for improving market health. Established European players and Chinese start-ups have had a greater presence at U.S. tradeshows. Chinese manufacturers, in particular, have been importing a large quantity of evacuated-tube collectors, touting the technology as superior to flat-plate collectors, which have remained relatively unchanged since the 1970s. In practice, the relative merits of each technology are project specific. U.S. installers have been slow to adopt these foreign products, preferring to source components from a small group of domestic manufacturers that owns a lion’s share of the market.

The main competitor to SWH, however, is the price of natural gas. For as long as the price of natural gas remains low, it is difficult for many to see the long term value in installing a system.