The globalising solar industry is at a transformative point, benefiting from big technological gains and beset by big geopolitical fights. As the industry develops over the next decade and beyond, who will win, who will lose and how will those shifts play out? PES investigates…
To illuminate the potential contours of tomorrow’s global solar industry, Stanford University’s Steyer-Taylor Center for Energy Policy and Finance and the German Federal Ministry for the Environment brought together some 20 top global solar executives in summer 2013 for a day-long workshop at Stanford. They probed a critical but little-asked question: As the solar industry continues to globalise, which parts of it will occur in which parts of the world?
To answer it, the group conducted what they believe is a first-of-its-kind exercise: a tightly structured yet freewheeling discussion with industry leaders that sought to chart in detail how, in four different scenarios, the solar industry might develop between now and 2025. The scenarios differ sharply among each other. Each paints a plausible picture of what the solar industry might look like 12 years from now.
The question at the centre of the workshop – Who will do what in the solar industry of the future? – carries increasingly high stakes both for the industry and, as solar power grows, for the world. Today, solar power is a slice of the global energy pie.
Yet its costs are falling, and its penetration in many parts of the world is rising. That is prompting investors, business executives and policymakers to consider the prospect that solar energy could start to meaningfully affect both their corporate bottom lines and their national energy mixes. But how?
The group at the workshop included executives from around the world and across many sub-sectors of the industry. They lead companies based in China, Germany, Italy, Korea and the U.S. They lead companies that produce polysilicon, solar panels, inverters and other components; that lease solar systems to consumers; that finance solar installations; and more.
Solar, also known as photovoltaic, or PV, power, accounted for just 0.3% of global electricity generation in 2011, according to the International Energy Agency (IEA). It represented somewhat larger slices of total electricity production in a few countries: Italy generated 3.6% of its electricity from PV; Germany, 3.2%; and Spain, 2.5%, according to IEA figures for 2011.
Even those small numbers represent significant growth for solar power in recent years. Behind them are massive changes transforming the industry – changes that raise the possibility that solar power could become a significantly bigger portion of the global energy mix.
Solar-panel prices fell by between one-half and two-thirds in the two years ending September 2012, according to the International Renewable Energy Agency. That price drop, moreover, is quickening, because the bulk of reduction came in the single year ending September 2012, when panel prices fell between 30% and 40%, the International Renewable Energy Agency says.
The drop in prices has occurred largely because the industry built too much manufacturing capacity too quickly; that produced a glut of solar panels on the global market, forcing manufacturers to cut both the prices they were charging for their panels and their internal costs in order to stay competitive. The price drop is producing two very different results.
For consumers, at least in sunny places with high conventional electricity prices, it is making solar more economical. For the solar industry, particularly for solar-equipment manufacturers, it is causing an uproar: Many companies are going bankrupt, and those still around are having to scramble to get more efficient.
So the future contours of the global solar industry are very much in flux. Globally, Germany, the United States, Italy and China, in that order, had the most solar-power capacity at the end of 2012, according to REN21, a global public-private network that monitors renewable energy trends.
China, though, is adding solar capacity faster than any other major country. China’s solar-power capacity doubled in 2012, and China is widely expected soon to become the world’s largest solar-power generator. The Chinese government announced earlier this year that the country intends to increase its installed solar-power capacity more than fivefold, to 35 gigawatts, by 2015. (Capacity represents the amount of electricity that the installed base of solar equipment could generate under optimal conditions; generation, the metric in the IEA figures at the start of this section, is the amount of electricity that installed equipment actually produced.)
The dollars pouring into solar power also are rising. In 2012, according to REN21, $140.4 billion of what the group calls “new investment” poured into solar energy – far more new investment than any other renewable energy source received. Between 2004 and 2012, according to REN21, new investment in solar power increased more than 11-fold – a significantly steeper increase than for any other renewable energy technology.
The workshop’s four scenarios revolve around two key factors likely to significantly influence the structure of the global solar industry over the next decade and beyond. One is the level of penetration of solar energy in overall power markets. The other is the extent to which national markets in the solar industry are open or closed – both to the participation of foreign-based companies and to the integration of solar power, regardless of who produces it, into the national energy mix.
The level of penetration of solar energy in power markets depends on a number of factors, such as the extent of government subsidy, the price of fossil fuels, the price of solar modules and the nature of regulations governing solar deployment. Those factors, in turn, depend on various sub-factors, such as regulation around fossil fuel production, improvements in the efficiency of solar cells and constraints on carbon emissions.
One rationale in picking a metric as broad as solar’s total power-market penetration was that it gave workshop participants the latitude to take into account their views on all of these – and other – factors. Another rationale was that this workshop’s goal wasn’t to assess what level of power-market penetration solar might achieve. (Plenty of market analysts are trying to do that.) Rather, as noted above, the workshop’s goal was to assess what the structure of the global solar market might look like under different potential levels of overall solar penetration.
The extent to which global trade and national markets in the solar industry are open or closed takes into account such specific issues as tariffs, local-content rules and other restrictive trade policies imposed by governments.
It also considers differing levels of government subsidisation of the solar industry, since differences in subsidy levels across geographies tend to skew the global market (for good or for ill, depending on one’s point of view). And it includes regulatory requirements within individual countries that act as international barriers to the solar trade; some countries, for instance, have costlier requirements for local-government approval of solar projects than other countries do.
The goal in this workshop was not to pass judgment on whether such policies are good or bad. As with the first metric, the goal was to assess what the global solar market would look like under different potential levels of market openness.
The intersection of those two factors – the level of market penetration and the extent to which markets are open or closed – produced the workshop’s four scenarios: Global Sun, Solar Systems, Sunblock and Total Eclipse.
As workshop participants divided into four groups, each of which sketched one of the scenarios, they were asked to consider a number of key cross-cutting questions:
What roles do the major industry players – notably the U.S., China and Germany – play in each of the scenarios? As technological innovators? As manufacturers? As deployers? And within each scenario, how does each country’s role change between now and 2025?
How is innovation likely to differ across the different scenarios? How is it likely to change over time?
Who are the key industry players in each scenario: Incumbent utilities? Incumbent solar firms? Oil and gas majors? Electronics companies? Any entirely new entrants – and if so, who?
How do companies in the solar industry organise themselves across scenarios? Do they integrate vertically and globally? Or are there lots of local players?
What happens to the price of solar power under each scenario?
Between now and 2025, does the world stay in one scenario? Or does it move from one to another – and, if so, in what sequence?
What followed is a sketch of what the group thought the global solar industry would look like in 2025 under each of these four scenarios. For each scenario, this report seeks to tell a story: the broad economic and political forces that would be necessary for the scenario to occur; the results of the scenario for companies in the solar industry; and the results of the scenario for individual countries that play in the global solar industry.
Conclusion
The solar industry is quickly growing and globalising; the fights over the industry now raging among companies and countries are plain signs of the high stakes. Today, the prevailing narrative of this industry transformation is that it’s a zero-sum game: Some countries will win; others will lose; and the spoils will go to the ones that best guard their turf.
The report, and the Stanford workshop on which the report is based, suggests that, at this point, the prevailing narrative is too simplistic to be of much strategic use. The reality of the solar industry’s transformation is less certain and more complex. The spoils in the globalising solar industry are still very much up in air. They’ll likely go to the companies and countries that are smartest about identifying their comparative advantages – and about structuring their policies and financial mechanisms to act on those strengths.
The workshop’s core conclusion is that the global solar industry will develop based on a pattern of “glocalisation.” That conclusion belies a claim, heard often in industry and policy circles, that China has “won” the solar game and that other countries – the U.S., Germany and others – have “lost” it. Unquestionably, in solar energy as in many other industries, China has distinct advantages in manufacturing goods at low cost.
China’s low-cost manufacturing, indeed, has brought products to the world – among them, solar panels – that otherwise probably would have remained the pricey purview of a very niche consumer segment.
Nevertheless, global solar-industry executives who participated in the workshop agreed that no one country has won this industry. The “glocal” view of the solar industry’s growth suggests that many markets around the world have critical – and potentially profitable – roles to play in the industry as it progresses.
The “glocal” view of the solar industry’s future suggests a number of takeaways:
Manufacturing of solar panels is likely to concentrate among a handful of global players. Some workshop participants thought those global players would be headquartered either in China or in other Asian markets where manufacturing costs are even lower than in China. Other participants said that firms based in the U.S. or Europe might be among these dominant global solar manufacturers, but that if they were, they probably would do much of their manufacturing in less expensive parts of the world.
Wherever they’re based, these solar-manufacturing oligarchs will conduct their business globally: doing whatever processes they decide are most efficient to do in whatever markets.
Today, it appears the most efficient way for these companies to structure their global solar-panel-manufacturing operations is to do most of that work in low-cost markets, particularly those in Asia. In some cases, they then ship those components for final assembly in end markets, either because the companies have decided that those markets have enough solar demand to justify domestic module-assembly factories or because the governments of those countries have imposed rules requiring that solar modules be assembled within their borders if the modules are going to be sold there.
A number of wild cards could change this calculus about where in the world it’s most profitable for a global solar manufacturer to place its production. Among them: regional differences in energy prices, raw-material costs and wages; global transportation costs; and technological advances that reduce the need for factory-floor labour or that radically change the kind of photovoltaic device that the market wants.
Manufacturing is today the most hotly debated piece of the solar industry. But it’s only one piece. The business of turning sunlight into electricity involves a broad range of activities: research and development, early commercialisation of new technologies, large-scale manufacturing, financing, marketing, and solar-project installation and maintenance. Each piece offers real opportunities for smart companies to make money – and for smart countries to play to their comparative advantages.
These conclusions raise several important questions for policymakers:
What conditions in a particular country – solar market size, government regulations, cost and quality of labour, and others – might lead one of the global manufacturing behemoths to place some of its operations there?
Which countries have advantages in which parts of the solar business beyond manufacturing – for instance, in parts of the industry that bear on technological innovation? How are countries’ comparative advantages in innovation – whether early research and development or later manufacturing process advancement – shifting? Who does what sort of innovation most economically efficiently? Who is likely to have what sort of innovation edge in a decade? How far do policymakers want to go to try to shape the answer?
If a country leads in parts of the solar industry other than manufacturing, how does it monetise that leadership? How, for instance, does it calculate the economic benefits of domestic solar work if that work doesn’t produce domestic factory jobs?
These are fundamental and controversial questions. As they hang above the global solar industry, the industry continues to change. As a parting exercise in the Stanford workshop, participants sketched out how they saw the industry changing over the next dozen years: whether the industry would move from one of the scenarios to another, and, if so, in what order. One conclusion expressed what the executives at least hope will happen to the sector on which their companies depend: They predicted big growth.
Beyond that, the wrinkles were instructive. The workshop participants decided the world today is in Sunblock. Solar power is a tiny portion of the global electricity mix, and it’s facing high barriers to global growth.
By 2025, the participants said, solar power will account for more than 8% of global electricity generation – a massive jump from the 0.3% it represents today – regardless of whether countries maintain or lift the barriers that now constrain the industry. Most participants hoped for the low-barrier world of Global Sun rather than the high-barrier world of Solar Systems.
And most predicted that, if significant barriers remain, the industry will find a way to work around them. But for the open access of Global Sun to emerge, countries will have to shift from today’s game of erecting barriers to an approach in which they frame, develop and exploit their comparative strengths. That, the participants agreed, is a tall order.
PES would like to thank the Center for Energy Policy and Finance at Stanford University and the German Federal Ministry for the Environment.
