PHOTON Consulting

Solar Annual:

Four Peaks (2008)


Michael Rogol | Mark Farber | Hilary Flynn | Martin Meyers | Scott Paap | Christopher Porter | Joshua Rogol | Joonki Song


The 2008 edition of Solar Annual is a complex snapshot of a sector in transition. On one side of the picture, the sun is still brightly shining: Solar power companies appear likely to continue their relentless climb in volume (+68% CAGR), revenue (+60% CAGR) and profit (+61% CAGR) from 2007 to 2012. With a strong demand environment, only modest price declines (-7% CAGR) and continuing cost reductions (-7% CAGR), it appears likely that operating profit margins for the overall sector will remain above 30% through 2012.

Yet even as the sector continues to expand at an impressive pace, there are clouds that have started to cause concerns about the rapid pace of ascent. First, it appears likely that the % YoY volume growth for the overall solar sector and for many solar companies will decline in the coming years (i.e., circa-triple-digit YoY growth in 2009-2010 declining to double-digit rates 2011-2012). Second, the strong pricing environment of the last four years (i.e., 2008 global weighted average module prices are 14% above 2005 levels) is likely being replaced by price declines (albeit at modest YoY rates of 6 to 11% from 2009-2012). Third, cost reductions throughout the supply chain are being hampered by the rising price of inputs such as electricity, metallurgical silicon, glass, aluminum, construction and engineering. Fourth, as the scale of solar grows, there is increasing risk of saturation in key solar markets and/or of backlash from traditional electricity players.

For nearly all solar companies, vertical integration has been the most important strategic direction for the last three years. We believe that the increasingly complex outlook for solar combined with potential saturation/backlash in key markets will push this to a new level. In the coming years, the strategic imperative for most solar companies will be to develop electron- level strategies (i.e., at the far downstream of the sector) in order to develop defensible market positions. Already, the six largest pure play solar companies (measured by market capitalization as of June 2008) are aggressively pursuing electron-level strategies. We expect many others to follow.

This year's report provides a closer look at "Four Peaks" the sector will encounter in the coming few years, and the six companies (First Solar, Q-Cells, REC, SolarWorld, SunPower, Suntech) that are best positioned to continue ascending despite the downside risks.

Key points

The Four Peaks

  • Peak #1: Volume growth
    Supply expanding 13X from 4GW in 2007 to 52GW in 2012, but % YoY growth rate will slow beyond from 2009
  • Peak #2: Price
    Strong demand environment driven by low interest rates, rising grid prices and policy support makes price crash unlikely, but prices declining 7% CAGR 2007-2012 including -11% YoY in 2009
  • Peak #3: Profit margin
    Solar cost reductions continue at a -7% CAGR 2007-2012 and OP margin remain >30%, but tight areas of supply chain reduce pace of cost reductions and lead to profit margin contraction from 2009
  • Peak #4: Electricity
    PV is rapidly penetrating electricity markets and will achieve noticeable share by 2012, but the expansion may hasten saturation and/or backlash from traditional electricity players
  • Peak players: 6 "solar sisters"?
    Six companies are pulling away from rest of the industry by pursuing strategies at the electron level, each possessing realistic potential to achieve more than $6bn in revenue and $1.5bn in operating profit by 2012: First Solar, Q-Cells, REC, SolarWorld, SunPower and Suntech.

Other companies covered in this report

Applied Materials, ATS, BP Solar, Canadian Solar, Centrotherm, China Sunergy, DC Chemical, Dow Corning, EDF, Elkem, Ersol, E-ton, Evergreen/EverQ, First Solar, Fluor, GCL, Gintech, Globe Metallurgical, Green Energy Technology, GT Solar, Hemlock, HHI, Isofoton, JA Solar, JACO, Jetion, JFE, Jinglong, KCC, Kyocera, LDK, M.Setek, MEMC, Mitsubishi Electric, Motech, Neo Solar, Nexolon, Nitol, NorSun, Oerlikon, PV Crystalox, Q-Cells, REC, Renesola, RSI, Sanyo, Sharp, Siliken, SMA, Solarfun, Solaria Energia, SolarWorld, Solon, Sumco, SunEdison, SunPower, Suntech, Timminco, Trina, Wacker, Wafer Works and Yingli.

Executive summary

The solar power sector continues its rapid ascent. In volume terms, the sector is on a path to grow from 3.9GW of cell/module production in 2007, to more than 7GW in 2008, 14.7GW in 2009 and at least 52GW by 2012. This equates to a 68% CAGR, with significant upside potential for both silicon and thin film production. Despite this very fast growth rate, we con-tinue to see strong demand drivers (low interest rates, rising grid prices, ongoing policy expansion) and expect only 7% compound annual price declines for global weighted average system and module prices. The combination of rising volumes with modest price declines means that solar sector revenue is poised to expand from $27bn in 2007 to $274bn by 2012. With increasing economies of scale and incremental improvements in manufacturing process, cost reductions will continue at a pace that enables solar sector operating margins to remain above 30% through 2012. The result is a sector operating profit pool that will expand rapidly, from $8bn in 2007 to over $86bn by 2012 (61% CAGR). Given the volume, revenue and profit outlook, we reiterate the view from our 2007 report that solar power represents Big Things in a Small Package.

While solar's rapid ascent will continue, we also recognize that the sector is approaching four 'peaks'? within the next three years. These four peaks... Click here to read the full executive summary (.pdf)