By Gerard Wynn
LONDON, Oct 9 (Reuters) - Solar market fundamentals driven by demand in Asia remain strong, meaning installed capacity should continue to grow at current rates and could accelerate given expected breakthroughs in residential electricity storage.
Until recently, equity investors did not necessarily feel the benefits of market growth, as this was driven by lower module prices and over-capacity which in turn have crushed manufacturing profit and triggered bankruptcies.
But now, stabilising prices have begun to cheer investors, as margins recover.
There is still over-capacity, however, meaning module prices could resume their downward path.
Sector growth will depend on a range of factors including Asian demand, a continued fall in module prices, and lower installation costs, while a breakthrough in battery storage for residential systems could see solar power undercut utility tariffs, in a possible electricity market game-changer.
Chart 1: (page 9)
Chart 2: (page 25)
Module prices fell around 80 percent from 2008-2012 but top manufacturers report that they have now stabilised.
China-based manufacturer, Canadian Solar, noted a "stable average selling price (ASP)", in its second-quarter report.
Yingli reported that ASPs rose 4 percent in the second quarter compared with the previous three months.
Hanwha Solar reported ASPs of $0.66 per watt in the second quarter, unchanged quarter-on-quarter, and up from $0.6 in the final three months of last year.
Annual average prices are still down, year-on-year: Hanwha Solar reported a full calendar year ASP of $0.72 in 2012, which will fall this year.
The reason for the price stability is Asian demand, and in particular Japan, one of the most lucrative markets in terms of average selling price (ASP). (See Chart 1)
The outlook for module prices partly depends on manufacturing over-capacity, which was responsible for the dramatic price falls from 2008-2012, and which is slowly being eroded.
Demand this year will be 35-40 gigawatts (GW), compared with manufacturing capacity of about double that, at 60-70 GW.
Declining manufacturing equipment investment points to slowing capacity growth: such investment will probably reach a low of $1-2 billion this year, down from a peak of $14 billion in 2011, said a study published last month by the European Commission's research arm, the Joint Research Centre (JRC).
Another reason for stabilising prices is that falls have run ahead of reductions in manufacturing costs.
According to the JRC study, "PV Status Report 2013", the solar photovoltaic industry has broadly followed a "learning curve" where prices fell 20 percent for every doubling of production volume. (Chart 2)
There is evidence that price falls have recently run ahead of that curve, and manufacturers are struggling to keep pace.
Jinko Solar, for example, shows slower cost cuts quarter-by-quarter over the past year.
The company reported that raw material silicon costs were now stable, putting the focus for further cost cutting on "in-house production of certain auxiliary materials and more efficient use of other consumable materials in the production process; continuous improvements in operating efficiency and technological advancements".
Besides modules, full solar system costs include other equipment, financing costs, installation labour and permitting.
Because of lower module prices, these are now a smaller portion of the total.
Further reductions in installed costs will therefore depend on those other, balance-of-system (BoS) items.
"The cost share of solar modules in a PV system has dropped below 40 percent in a residential system and below 50 percent in a commercial system, so the soft costs have to be targeted for further significant cost reductions," the JRC study said.
The fact that residential system costs in the world's most mature market, Germany, are now less than half that in Japanese and U.S. markets, at below 2 euros versus more than 4 euros per watt, is illustrative of the scope for further falls in BoS costs in emerging markets.
On the demand side, growth in Asian markets and especially China and Japan will underpin global demand given a fall in the dominant European market.
Japan has set an official target for 28 GW of installed PV capacity by 2020, compared with 6.6 GW installed at end-2012.
The country seems likely to exceed the target, given that more than 20.9 GW had received approval as of the end of May, under a new incentive scheme.
Coupled with growth in China, that will replace an expected decline in market leader Germany, which has added 7-8 GW annually for the past three years.
The global annual installation market is therefore likely to grow in line with recent rates of around 5 GW annually.
Further growth could be seen with larger cuts in installed costs.
For example, at present, residential solar generation costs are below utility tariff rates in many European countries, but peak solar generation does not coincide with peak electricity demand, meaning households still depend on incentives to sell their surplus electricity to the grid.
Lower battery storage costs - as expected in the next five to 10 years - would break that dynamic and make solar PV electricity the cheapest option, allowing households to break away from utilities.