TODAY’S STUDY: HOW THE U.S. CAN COMPETE IN SOLAR MANUFACTURING

Assessing the drivers of regional trends in solar photovoltaic manufacturing

Alan C. Goodrich, Douglas M. Powell, Ted L. James, Michael Woodhousea and Tonio Buonassisi, September 2013 (NREL/MIT via Journal of Energy and Environmental Science)

Abstract

The photovoltaic (PV) industry has grown rapidly as a source of energy and economic activity. Since 2008, the average manufacturer-sale price of PV modules has declined by over a factor of two, coinciding with a significant increase in the scale of manufacturing in China. Using a bottom-up model for wafer-based silicon PV, we examine both historical and future factory-location decisions from the perspective of a multinational corporation. Our model calculates the cost of PV manufacturing with process step resolution, while considering the impact of corporate financing and operations with a calculation of the minimum selling price that provides an adequate rate of return. We quantify the conditions of China's historical PV price advantage, examine if these conditions can be reproduced elsewhere, and evaluate the role of innovative technology in altering regional competitive advantage. We find that the historical price advantage of a China-based factory relative to a U.S.-based factory is not driven by country-specific advantages, but instead by scale and supply-chain development. Looking forward, we calculate that technology innovations may result in effectively equivalent minimum sustainable manufacturing prices for the two locations. In this long-run scenario, the relative share of module shipping costs, as well as other factors, may promote regionalization of module-manufacturing operations to cost-effectively address local market demand. Our findings highlight the role of innovation, importance of manufacturing scale, and opportunity for global collaboration to increase the installed capacity of PV worldwide.

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Broader Context

National energy strategies are often driven by stakeholder perspectives on energy security, environmental priorities, and economic benefits. Since the global economic slowdown of 2008, economic benefits have been an increasingly important factor influencing national policies, especially for renewable energy technologies such as solar photovoltaics (PV) that have demonstrated strong commercial growth and hold promise for substantial market opportunities. Using an industry validated bottom-up cost model, we identify the economic factors for recent changes in solar PV supply chains – the rising prominence of China, surpassing industry growth rates in all other regions. We find that the current advantage of a Chinese PV module factory is not related to factors intrinsic to China; but rather, it is built from economies-of-scale and related supply-chain advantages, which we argue, could be equalized. We also find that further innovations and supply-chain developments could significantly reduce the cost of solar energy, resulting in more widespread PV deployment and global opportunities in manufacturing. These findings are of broad importance to policy-makers and other industry stakeholders, as they provide quantitative evidence for regions to pursue collaborations that leverage one another's asymmetric strengths for mutual benefits.

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Introduction

The photovoltaic (PV) industry continued growing rapidly during the recent economic downturn. Over the past decade, the compound annual growth rate (CAGR) of the entire sector was 52% (Fig. 1). Sustained module price reductions have coincided with this trend (Fig. 1).‡ Over the same period, Chinese module shipments had a CAGR of 123% (Fig. 1). Deployment and manufacturing trends have differed. In 2011, 70% of the world's PV modules were installed in Europe (which originated only 7% of global shipments), 9% in China (63% of shipments), and 6% in the United States (3% of shipments).1,2,6

Still, PV contributes little to global energy generation and has harnessed a fraction of its vast potential. PV deployment could be accelerated by further reducing module and system prices, and grid-integration bottlenecks. With innovations in these areas, the volume of modules manufactured in the coming decades could eclipse the number produced to date. Thus, we emphasize that a long-term perspective, rather than spotmarket price data, is necessary to benchmark PV technologies.

Factory-siting decisions in a global industry

Today's PV industry and supply chains are global. Manufacturers may be headquartered in one country but operate in many others. Of firms with U.S. operations or headquarters, more than 90% of manufacturing capacity resides outside the U.S., i.e. these companies may be characterized as global. However, of PV companies operating or headquartered in China, more than 99% of manufacturing capacity is domestic; such firms are therefore best characterized as Chinese companies.

In this study, we adopt the perspective of a multinational firm evaluating locations in the U.S. or China for a PV manufacturing facility.§ The analysis does not characterize a specific manufacturer, but rather uses reasonable national values for inputs. We acknowledge the variability of intra-country parameters, and use them to inform our uncertainty analysis (S1, Tables 11 and 12†). We analyse wafer-based crystalline silicon (c-Si), which currently holds a dominant and growing market share of over 85% in the PV industry. We posit that manufacturers of c-Si PV products may seek differentiation based on price, performance, and reliability, and that price is the current key competitive differentiator between U.S. and China located manufacturers. We assume equivalent technology levels and conversion efficiencies for standard technology products originating in both the U.S. and China, and posit that technology diffusion has historically occurred via equipment vendors and learning (R&D) networks with global reach. These links enable manufacturers, regardless of location, to have strong ties to leading research institutions, license key technologies, purchase state-of-the-art equipment and processes, and acquire technology firms.

Factories in the U.S. and China have access to the same manufacturing technology. Consequently, most factories are considered to provide globally competitive product quality, although “problems of uneven product quality” have been reported for some manufacturers.11 Furthermore, although some manufacturers may differentiate products based on performance, reliability, and appearance, the vast majority of manufacturers produce “off-the-shelf” technology.

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MSP elucidates factory-location decisions and future trends

Following our conclusion that price is currently the key competitive differentiator between U.S. and Chinese manufacturing locations, we use Minimum Sustainable Price (MSP) to predict factory location decisions. MSP estimates the long-term market-clearing price12 for the product assuming competitive equilibrium, or—the minimum price of modules that will provide an adequate rate of return for a company.To calculate MSP, we begin with a bottom-up cost model developed and refined in consultation with industry (S1, Methods; S3, Validation Table†) for each manufacturing step. With acknowledgement of the time sensitive results contained in this analysis, we note that our historic analysis depicts first half 2012 (1H 2012) input values and results. This snapshot in time of rapidly changing metrics (i.e. manufacturing costs and prices), offer insights into the factors that have led to the regionalization of manufacturing described above (see Fig. 1).

MSP is calculated within our models using generally accepted discounted free cash ow methods and is the price that provides an internal rate of return equal to the firm's weighted average cost of capital (WACC)12–14,16,17 (S1, Methods†). To validate these models, we provide a side-by-side comparison of the model results (inputs adjusted to represent Q4 2012) to the costs and prices reported by a leading c-Si manufacturer for fiduciary purposes (S3, Validation†). If a company does not provide a return commensurate with perceived risk, the company risks damaging its valuation and could incur everhigher equity costs, potentially limiting growth.

We analyse MSP in two stages: first, we examine factors that have contributed to historical regional differences in MSP between U.S. and Chinese factories, distinguishing between indigenous factors and those that can be reproduced elsewhere.

We note that Chinese wages are no longer the world's lowest, suggesting that the additional factors investigated in this analysis may drive regional MSP differences.19–22 This “baseline scenario” considers today's standard c-Si technology and analyses factors driving China's recent rise in PV manufacturing (Fig. 1). Next, we consider the effects that technology, scale, and supply-chain development can have in shaping future factorylocation decisions by evaluating MSP for U.S. and Chinese factories under an “advanced technology” scenario…

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Conclusions

Today's PV industry faces a pivotal moment of market oversupply, spurring discussion about long-term investments. Using an industry-validated, bottom-up cost model, we evaluate current (first half 2012) and future siting costs for c-Si PV manufacturing facilities in the U.S. and China, considering the possible roles of advanced technological innovation and supplychain development. With today's technology, we estimate that a 2-GW Chinese factory enjoys a 23% MSP advantage over a 500-MW U.S. factory. The root of this difference is not the sum of indigenous factors (labour, inflation, equity country-risk premium). Instead, the major differentiators are scale and supply-chain advantages. Regional incentives including provincial subsidies, tax holidays, and low-cost debt may be key enablers for rapid scaling, but they affect MSP less directly.

We calculate that innovation could reduce the MSP by 40–50%, while increasing conversion efficiency by 50% (relative). This MSP is low enough to compete without subsidies in large parts of U.S. and Chinese markets, potentially resulting in high PV demand. This could encourage industry growth and spur dramatic scale-up if regions facilitate supply-chain development and access to capital. In this advanced-technology scenario with a highly developed supply chain, MSPs of PV module production in China and the U.S. approach parity.

Given the potentially disruptive impacts of technological innovation and supply-chain development on factory siting decisions, and the need to serve a global customer base, we emphasize the importance of establish manufacturing facilities and R&D networks worldwide, in order to incentivize and maximize global innovation efforts, to lower costs, and to create shareholder value. Because of module shipping costs, local manufacturing could have advantages in future U.S. and Chinese markets. Already today, there is evidence of this shift in downstream fabrication steps, including module assembly.

No PV technology has yet achieved our advanced-technology scenario's combination of cost and performance results; thus the PV industry would be well served to continue innovating toward an MSP that eliminates the need for demand-side subsidies. Such innovations and future outcomes may be best facilitated through collaboration and open access to all markets. In a growing global industry, in which 99% of potential PV panels may not have yet been made, a long-term perspective may be needed to inform critical investment decisions during this temporary period of PV oversupply.

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