Equipped with challenges

In its most recent solar energy scenario, published in September 2014, the International Energy Agency (IEA) predicted, with typical conservatism, that the global installed base of PV power will rise from 135 GW in 2013 to 1,700 GW in 2030 and further to 4,700 GW by 2050. This scenario corresponds to PV electricity contributing 16% of the globally estimated electricity demand in 2050, up from less than 1% in 2013.
For 2013 to 2030, the IEA prediction corresponds to a compound annual growth rate (CAGR) of the installed PV power of 16% followed by average growth of 5% for the following 20 years. The members of the working group that update the International Technology Roadmap for Photovoltaic (ITRPV) on an annual basis further analyzed a scenario this year in which PV power would contribute 20% of the global primary energy by 2050, requiring 23,000 GW of PV power being installed globally by 2050, five times more than the IEA predicts. The CAGR for PV installations in this second scenario is 15% for 2013 to 2050, compared to the IEA’s implied 10%.
One has to hope that both scenarios prove to be too pessimistic since they both would miss the COP21 commitments ratified in Paris last month. The actual deployment of PV power should accordingly progress at an annual growth rate closer to 20% or even 25%.
This macro forecast begs a serious question for solar production equipment suppliers: Would not an industry with end market growth of 10% year-on-year for the next 30 years, in the most conservative of all possible business outlooks, be one in which the equipment suppliers enjoy the best possible business outlook? Especially as the actual average annual growth rates will likely exceed even 20% over many years.
For German suppliers in particular, the outlook should be rosier still, as they have been able to maintain a global market share of over 50% ever since this market has grown from a niche market to a multi-billion dollar global industry.
Interestingly, there are some other facts about key PV equipment vendors from Germany that give cause to wonder if being a PV equipment supplier is not one of the toughest positions to be in after all.

Supplier tribulations

In July 2012, centrotherm had to file for an insolvency protection plan just six months after the company had achieved the highest annual turnover in its history at close to €700 million ($787 million). Despite reaching a record turnover, the operating profit of centrotherm had turned dark red in 2012 with a loss of €20 million ($22.5 million), after having reported an operating profit of €75 million ($82.5 million) in the previous year – when turnover had reached €625 million ($703 million). In the years 2009 through 2011, centrotherm had been the biggest PV equipment manufacturer worldwide based on annual turnover, which exceeded €500 million ($563 million) in all these three years.
RENA, the world market leader in wet chemical equipment for the PV industry, had to file for insolvency in March 2014 after it defaulted on its corporate bonds issued in 2010 and 2013 respectively. In March 2015, RENA was acquired by a Swiss private equity firm, enabling the company to continue operations.
In October 2014, the Schmid Group issued a $40 million (€35 million) convertible bond and placed it with Hong-Kong based private equity fund Shaw Kwei & Partners. While there are no current indications that Schmid will have difficulties to repay the bond, it is understood that the current loan will be converted into shares and not repaid. The conversion of the loan into shares will mark the first time in its 150 year history that an outsider will hold a stake in the family-owned company.
Singulus, another key PV equipment supplier from Germany, signaled in April 2015 that it would have to restructure its €60 million ($67.5 million) corporate bond issued in March 2012. According to the proposed restructuring plan negotiated with creditors over the past 12 months, the bondholders will own 95% of the new shares of Singulus once the financial restructuring plan has been executed.
Manz AG, a leading supplier of automation tools for the PV industry and sole supplier of a turnkey production technology for CIGS modules, announced in February that it has agreed to take Shanghai Electric onboard as a 30% shareholder. Despite having successfully placed a capital increase in the broader capital market raising €42 million ($47.3 million) just one year ago, Manz also increased its debt by close to €50 million ($56.3 million) last year. When expected orders did not materialize, the financial situation eroded so strongly over the remainder of 2015 that the creditors demanded Manz find a strategic investor willing to inject new capital into the company. The current capital increase, part of the transaction with Shanghai Electric, will lead to a capital injection of €80 million ($90 million). The price that the founder of the company, Dieter Manz, has to pay for winning over this strategic investor is that future decisions regarding the company’s strategy could ultimately be decided in Shanghai, not Reutlingen – its base in Germany’s southwest. Before the agreement with Shanghai Electric, Dieter Manz and his spouse owned 40% of the company, giving them effective control through qualified majority at each shareholder meeting. To win over Shanghai Electric, Dieter Manz had to agree to an “investment and backstop agreement” with Shanghai Electric that allows the Chinese company to request a voting agreement between the two parties that grants Shanghai Electric final decision should both parties not find consensus on a given issue.
Meyer Burger, in March 2014, placed a capital increase with net proceeds of CHF 76 million ($77.8 million) followed by the placement of a CHF 100 million ($102.35 million) convertible bond in September of the same year, due in 2020.
Despite a capital inflow of some CHF 173 million ($177 million) over the past two years through these transac xAdvertisementtions, a cumulative negative operating cash flow of CHF 205 million ($210 million) over the same period has presented a major challenge for the Thun, Switzerland-based company. By some reports, Meyer Burger’s CEO must spend at least as much time on investor calls explaining the company’s financial strategies on how to renew credit lines as he does on business strategy. This despite reporting a 30% order intake increase YoY for 2015.

Source of the problem

The significant challenge facing all of these companies, and demonstrated by these financial hardships can be summarized in one single graph: the dramatic quarterly changes in order intake of the German PV equipment manufacturers (see graph, p. 82).
In 2009, a year considered tough by many German PV equipment vendors, overall order intake for PV equipment reached €1.2 billion ($1.35 billion). The following year this figure increased by 140% to around €3 billion ($3.4 billion). In 2011 it fell back to €1.2 billion ($1.35 billion), representing a YoY decline of 60%. The following year (2012) order intake for German PV equipment manufacturers fell once more by more than 50% to less than €600 million ($675.5 million). Unfortunately, 2012 did not mark the bottom of the trough; this was reached in 2013, with new orders declining by another 40% to less than €400 million ($450 million).
Q3 2013 marked the absolute low point for equipment vendors. Order intake in that period was less than 5% of the quarterly value achieved just three years prior. Though there was a slight recovery in the two succeeding quarters, traces of hope were extinguished by another three quarters of sequential declines.
It took until Q1 2015 for demand for PV equipment to pick up on a sustained basis. Aggregating the order intake of 12 months together and comparing order intake on a 12 month rolling basis Q4 2015 marks the third consecutive quarter where order intake has been on the rise.
The last time that German PV equipment vendors experienced such a positive order trend was in Q2 2011, some five years ago. The key problem for the capital goods companies was that during the boom in demand in 2010 and 2011, the production capacity ordered was sufficient to satisfy end market demand until 2015.
After four years of underutilization, it wasn’t until 2015 that the global PV industry returned to high utilization rates. Faced with ever-increasing demand for the next few years, manufacturers could no longer postpone investments in new production capacities.

Asian competition

Besides customers going into a spending freeze for almost three years, further challenges have arisen. At the end of the last decade, when the first investment rush by new Asian entrants to the PV market came to an end, Western PV equipment suppliers still had a global market share of above 80%, exceeding 90% for some key equipment.
With PV’s growth, China’s central government encouraged domestic capital goods suppliers to capture more market share. Today, if building a new wafer, cell or module production line with mainstream technology, it can be entirely sourced from Chinese vendors. Some Chinese PV manufacturers that focus on the domestic market have adopted an investment policy where the percentage of tools sourced from outside of China is falling rapidly.
Interestingly, the largest PV manufacturers in China still spend more than two thirds of their capital expenditures on equipment sourced from Western suppliers. These manufacturers cite advantages in the uptime and yield of the tools as well as savings in the materials consumption. These factors, combined with superior service levels, reportedly outweigh most of the initial capex savings Chinese equipment might grant.
Based on total cost of ownership (TCO) calculations, all Western equipment suppliers claim to be at least on par with Asian competitors. In many instances they even report economic advantages over the lifetime of the fab with their equipment. If the demand outlook makes solar cell and module manufacturers sufficiently confident to reach a high utilization level, obviously TCO arguments have a good chance of getting prioritized over capex.
These advantages are a key reason why Western equipment manufacturers still have more than 50% global market share despite the fact that more than 80% of global PV capex is spent by Chinese or Taiwanese companies.
A second argument that helped Western suppliers maintain a lead in global market share is if a company is looking to upgrade technology to the latest standards, this type of equipment was only available from Western suppliers. These processes include selective emitter technology, PERC upgrades for cell lines, multi-busbar technologies for modules, and diamond wire saws.
Looking at recent announcements regarding investments in heterojunction technology (HJT), it is noteworthy that the competitive landscape looks a little different. Since 2008, Roth & Rau has been developing this technology for commercialization in cooperation with a Swiss research institute in Neuchâtel, to have production tools ready for the market by the time patent protection expired in 2013. When Meyer Burger, which had acquired Roth & Rau in 2011, began marketing its technology, it realized there were more competitors offering HJT tooling than it had anticipated.
When bidding to supply Silevo with a PECVD tool for the a-Si deposition step for its New York State cell fab, Meyer Burger did not only have to compete with the usual suspects such as Applied Materials but also Jusung from South Korea and Archers Systems from Taiwan.
Based on the limited information available today, it appears that for its initial capacity ramp, Silevo has ordered its PECVD tooling from Archers Systems. Archers was also named by Neo Solar Power, at the beginning of April 2016, as the supplier for its initial investment in a 500 MW Taiwanese HJT line.
As of today, Meyer Burger has two customers for its HJT technology and is in advanced negotiations with interested cell manufacturers. So while the Western PV equipment manufacturers haven’t lost their edge, they might have lost their exclusivity.

Lessons learnt

Some industry observers have already identified signs of overheating in capital spending, a worrying sign if production capacity is to increase in step with future demand, and past equipment supply booms and busts are to be avoided. According to data aggregated by Solar Media’s Finlay Colville, announcements for cell production capacity expansion overthe past 12 months cumulatively exceeded 27 GW, with a similar order of magnitude having been announced regarding module production capacity expansions.
Talking to German equipment vendors, they caution that there is an important difference between expansion announcements and actual orders. In many cases, GW capacities are announced, to be realized over two to four years. Equipment vendors say that it is not uncommon to negotiate with a customer that has announced a GW expansion, whereas the current order will only cover some 300 MW. However, none of the equipment vendors see signs that the current order inflow will result in any excess capacities anytime soon.
Looking at recent auction results for large-scale solar conducted in Germany, Mexico and India in 2016, it is obvious that at today’s production costs PV electricity in Central Europe can be generated at $0.075/kWh, whereas in sunnier regions, LCOE of between $0.035 – $0.045/kWh is achievable. As such, PV has reached parity with onshore wind: a significant milestone for the industry.
With all the advances in efficiency that PV equipment suppliers have up their sleeves, these costs could be lowered by another 25% – 30% over the next 10 – 15 years. Taking into account further BOS savings, as well as on the construction and O&M side, it is not unrealistic to set the goal by the end of the next decade for PV’s LCOE to drop by another 50%.
While this would be an impressive testament to the validity of the price learning curve, it would equate to average module efficiencies having to hit the range of 20% – 22%. Such high conversion efficiencies would require average production lines to operate at levels representing today’s record lab results, a formidable challenge for the industry.

Storage: the next frontier

For the global energy transition to become a reality at competitive costs, storage has to be deployed as well. Depending on the technology employed and size of installation envisaged, today’s storage costs range anywhere from $0.13/kWh to $0.40/kWh for a chemical storage system, essentially via batteries.
Storage, therefore, is the field where the greatest savings can be achieved in absolute terms. If it were possible to cut these costs by more than half, then the resulting LCOE scenario would be a compelling one. For residential installations the overall PV LCOE would be in the range of $0.20/kWh (including 50% storage) and possibly in the range of $0.05 – $0.10/kWh for large-scale systems, in the MW range, with 25% storage capacity. With these LCOE levels, power from solar, wind, biomass, and hydro combined could transition the entire electricity generation system.
Manz AG is betting on lithium-ion technology to play the dominant role in the future storage mega-markets for mobility and stationary storage, whereas Schmid foresees redox flow batteries as the technology of choice. Both companies have stepped up efforts in storage technology. It should come as no surprise if other members of the leading PV equipment supply chain come forward with plans to play an active role at this next frontier some time soon. Only, that is, if they manage to weather the storms through which PV has them maneuver.