Wednesday, May 8, 2013

Solar PV Manufacturing in 2012 - A Business Horror Tale


First Solar's PV Plant near Toledo, Ohio

Background - A Business Theory of Stuff
There is a balance required between makers of stuff and the customers for their stuff, especially stuff like PV panels is considered (in other words, stuff that is used to make other stuff). If the balance gets too out of whack, the arrangement falls apart, people lose their jobs, businesses go  bankrupt and probably out of business. Keep the balance and things can be great, and make the world a better place, too. If the price charged for these "capital goods" is too high, the customers who would hopefully buy this "stuff that makes stuff" won't buy as much, or maybe none at all. After all, they are buying this stuff to make other stuff, and THEIR customers will only pay so much for the product (in this case, electricity made by PV panels). As prices drop for the PV systems, more people should be able to buy PV panels, all other things being held constant.

However, if the price of generated electricity also drops, then the sales of PV panels at a constant price/cost to make them will drop, as the customers for these systems generally cannot get their potential electricity customers (ratepayers) to pay more, especially if those customers could go elsewhere to buy their electricity. Even if the customers restrict themselves (or are restricted to) only renewable energy, there are lots of options for this electricity - in NY State those would be onshore wind, biomass, biogas, tidal and new hydropower. And if customers for the PVs cannot borrow money to pay their debts back over a long term at reasonable rates, well, that also puts a stop to things in pretty dramatic fashion. One reason that lenders might stop their lending would be if previous loans made stop being repaid - for example, if the price paid by electricity customers drops and thus less revenue from sales of electricity is the result of this electricity price insecurity. It is surprising how fast the money tap can get turned off if there is a pattern of loans not being repaid in a sector such as PVs. The same also applies to PV manufacturers as well as customers for them, as a capital intensive industry such as PV manufacturing runs on a sea of debt which (hopefully) gradually gets repaid. It is not a cash only business and if the perceived risk of loan default (or actual risk) rises, well so does interest rates, and the loan term gets shorter. This raises the cost of money, and thus the cost to make PVs and also install them.

The ideal combination for PV manufacturers is a high price for electricity, and lots of customers (those able and willing to pay the desired price, and possibly more than that). On the other hand, the ideal combination for customers is cheap PV prices and/or lots of subsidies that effectively lower the net price of these systems so that they seem cheap, even if somebody (or somebodies) gets stuck with the tab. Since the price (in theory) reflects both the manufactured product cost and the installation cost (plus profits, assuming there are any), and customers really don't care which one adds how much (but instead, its is the sum of them that is the main refrain) all that matters is the final installed price. Installers would want high electricity prices, low manufactured product prices and lots of customers with money, or at least those with access to to lots of subsidies. Unfortunately, in the US, most subsidies are tax avoidance based, which means that the richer you are, the more subsidies you can take - a bit of reverse Robin Hood syndrome if there ever was one.

                   
                                    Touring First Solar's Plant in 2006

                                       Discussion - OK, No More Theory
In the US, the average PV company is really a PV installer company, with 9 employees. Almost all "PV employment" in the US is installation based, and they can often do other work in other related areas (light construction, electrical) which they might have to do when things in the PV business are less than optimal. What is unique is those who manufacture the products. To do this cost efficiently, these are large scale factories costing at least $50 million each (and often many times that) - such operations cannot be the small business that installers can be. Such operations foster a supply chain with many times the number of jobs and economic influence of the PV assembly facility. The processes to convert materials into semiconductors and then make photovoltaic systems out of them often involves lots of toxic and high purity conditions, and many silicon PV systems need silver metal wires of the "top side" to collect current generated by absorbed light photons. Lately some of the banks which financed significant quantities of Chinese PV manufacturing factory construction for silicon based PVs have been gaming the silver market (PVs have replaced photography as a major user of silver) - quite a cute trick, and it is little wonder the term "bankster" (gangster + banker) is back in vogue.

Recently the magazine "Renewable Energy Focus" (March/April 2013) had an eye-opening article about the state of PV manufacturing worldwide. It turns out that the huge overcapacity of PV manufacturing in China (partly originating from loans Goldman Sachs and JP Morgan gave to Chinese manufacturers of PVs - something like $3 billion in ~2007) has crashed the PV market in most of the world, and also driven most of the manufacturing part of the business from Europe (as intended) and a lot of it from the US (China did intend on pretty much complete destruction of the US PV manufacturing sector, similar to what happened with shoes and cellphones) out of business/caused their factories to be shuttered. And with rampant overcapacity based on China's assumption that they would dominate the world PV industry, then work backwards on the entire PV supply chain industry and that everyone already in the business would fold up and go away/move to China, prices crashed. PV became a buyers market. In such an arrangement, it's like musical chairs, and when the music stops, only a few will remain - often those who are the biggest and/or who can count on governments (in China, many PV makers are state or City owned) for cheap loans, grants, loan forgiveness and other subsidies, like free factories so that there are no loans needed. Meanwhile, all costs - especially R&D and wages for employees - get slashed in the desperate efforts to stay afloat. This is a variation on the "Burn Rate" problem - can the money in the bank/initial capital/any new loans last long enough until prices can rise above production costs? Major losses have been the rule since 2010….

Last year, the top 10 PV makers in the world (sales = $US 13.6 billion) lost $US 2.1 billion making 14.4 GW of capacity (or a delivered electricity production rate of about 2.4 GW).  Most PV companies no longer have much equity left in them, and those in the supply chain also face a lot of hard decisions - like whether to jettison the sales to PV makers, because of the downward pressure on prices. In the US, with around 3 GW of installations done in 2012, only made 777 MW of panels were made, while Europe, where around 12 GW was installed (especially prominent rates of installs in Italy and Germany), only 960 MW was made, down from the 2.6 GW made in 2010. Meanwhile China made over 12 GW of PV panels and yet only installed (or was forced to "eat" 4 GW) - Taiwan was also a major exporter (often China by proxy) of 5 GWs worth of capacity - see http://www.pv-tech.org/guest_blog/top_10_pv_markets_in_2012. What has been astounding to many has been how fast places like the US have flipped from PV self-sufficiency (116% in 2010) to significant importer (76.5% imports/23.5% made in USA), while recently constructed factories get shut down. In Europe, over 92% of the PVs installed were made elsewhere; about 5 years ago that was a major growth industry in Europe. Such is the power or de-facto slave labor coupled to "free factories" that the government of China will often construct. The PVs were supposed to be exclusively an export business; domestic electricity in China would be supplied by lower cost coal and hydroelectric sources.

The 2012 total world supply made was 24.5 GW, with sales averaging around $21 billion, and losses of at least $4 billion. Many of the companies (often government run companies) making them were already deep in debt when they started production in the last few years - and the no profits scenario means they are now even further in the hole, and their debts will likely NEVER be repaid. So if you are a banker and want to lose money, loan to PV manufacturers and those closely tied to it. The Venture (alias Vulture) Capitalists funding start-ups have also succeeded to losing enormous piles of money - an estimated $3 billion just in the US for non-silicon based PVs, with 9 out of 10 start-ups in the CIGS and CdTe PV segments failing (Solyndra was one of those). Oh well, that's why tax write-offs were invented - so rich people don't have to pay taxes, since paying taxes is just for the "little people", as Leona Helmsley so diplomatically put it.

In many ways, the PV business shares a lot in common with the North American natural gas industry of recent times - overcapacity results in a buyers market, and until excess capacity is worked off, prices of the product are way below the cost to produce the product. But the PV losses are chicken feed compared to the AT MINIMUM $160 BILLION lost by the natural gas industry in the US in the last 4 years. So, no wonder companies like Siemens, Shell, BP and Bosch have bailed on PV - they don't like losing money, and they have judged that profitability and the PV business are not going to be synonymous for some time. The natural gas industry can absorb these losses because the oil business is still enormously profitable - average world cost of production is less than $30/bbl, world exports are 36 mbd, world price is $100/bbl, profits are roughly $2.5 billion PER DAY just for the exported material, and probably the same for oil made in countries that consume more than they produce, like in the US. Many methane producers are also oil producers, too, and so temporary losses in one segment can get buffered by extreme RENTIER profits in the other. But most PV companies don't have that luxury. And besides, the natural gas glut in North America is rapidly disappearing, and those losses could be made up in one "good" year...see http://www.resilience.org/stories/2013-05-05/patient-contrarians-the-natural-gas-market-isn-t-what-it-seems.

Still, a stand alone business segment doing $20 billion/yr in sales can't afford to lose $4 billion/yr for very long. And this is in one of the most subsidized forms of electrical generation for non-Feed In Tarriff  (non-FIT) countries. Many are asking why they should subsidize a foreign country like China and Taiwan while unemployment levels are still way past obscene in their own country, like the USA. After all, when we in the US import PVs we also import poverty and unemployment. Besides, on an unsubsidized basis, it costs nearly 50 c/kw-hr to make PV electricity in NY State, and the prevailing price for generated electricity is between 3 to 4 c/kw-hr. So what if domestic manufacturing adds 5 c/kw-hr to the unsubsidized price - no one will notice the difference in the quantity of subsidies needed to bring PV electricity prices down to 3 to 4 c/kw-hr, anyway.

Like the wind energy and auto industries, PV is capital intensive, and most of the jobs involved in making them are with the supply chain, but that's what pays the bills, and every PV manufacturing job has a multiplier effect similar to the specialty chemical/pharmaceutical industries with which they have so much in common. High skilled, value added, with still room for improvements in quality and performance, but unless the PV manufacturing industry in the US regains profitability, that's just money thrown down a rat hole. PV also tends to displace peak (natural gas sourced) electricity, especially in the summer, when profits to coal and nuke users are at their highest. And if you want to discourage pollution based electricity from continuing to ruin our climate, the best way to do it is not via regulation but by trashing the profitability of pollution based generation owners.

Too bad, because PVs are very popular, even if they are presently inconsequential with respect to the delivered electricity made (on average, less 1 GW delivered from 6.7 GW installed in the US) - http://en.wikipedia.org/wiki/Solar_power_by_country#United_States. Done correctly (where "economic leakage" via imports is minimized), they can be very economically stimulative, but when it comes to renewable energy, we in the US alway seems to be willing to screw up a wet dream, so to speak. So far, PV is but a nuisance to the nuke, coal and natural gas sourced generation industry in the US, unlike wind turbines (20 GW delivered from 60 GW capacity). Wind has become an extreme pest to the natural gas business, displacing over 1.5 trillion cubic feet/year of gas consumption, depressing prices for gas as well as profits for nuke and coal burner owners via the Merit Order Effect in many states. In fact, PV can function as a great diversion, and if the subsidies that used to go or otherwise would go to wind and biomass get diverted to PV, count that as a temporary victory for the polluters, where lots of tax avoidance barely translates into any avoided natural gas usage.

Of course, PV may also become a major pesky factor for natural gas based electricity generation owners. Part of the reason the the incentives for the wind industry were targeted by Republicans plus pollution sourced generation owners and fossil fuel suppliers in particular (actually, they tend to be one in the same) was that wind WAS being effective in replacing their products and in particular keeps natural gas prices low/profits via the Merit Order Effect low (high natural gas prices give rise to amazing profits for nuke and coal burner owners far in excess of just the cost of production). That's why Koch Industries (plus "friends") and the politicians that have rented/bought fought so hard to get rid of incentives just for wind and biomass at the end of 2012, but left the PV ones in tact until 2016. As it is, the wind incentives are set to expire at the end of 2013, and there looks to be no leverage on hard-core Republican ideologues who do pay attention when the oil and gas industry gives them their marching orders.

But, in the US, lots of renewable energy advocates are all heart and little brain, and seem to be really bad at strategic thinking. They don't seem to get that if the PV industry in the US is not based on making PVs here, much of the economic clout and the political force that the money making from PV profits can bring will never happen. Or that PV innovation actually requires a profitable business to pay for the R&D. Or that communities with jobs making PVs also tend to be communities that support the renewable energy effort. Or that basing PV installations on huge subsidies that only apply to the super-rich is just asking for it when the even super-richer decide that pollution based profits reign supreme, because there is way more of them. The same can be said for the wind  industry, too, but at least 75% of the wind industry components were locally sourced last year, and this year it might be close to 100%, since China and Vietnam can't dump wind turbine towers here anymore. In fact, the US may export more wind turbine stuff (supplying lots of installations in Canada and Central America for 2013) than is imported, a first. And unlike PVs, wind turbines cost a lot of money to transport, so local manufacture makes more sense.

Anyways, keep in mind that manufacturing is a bit like a complex forest ecosystem, with lots of local interdependencies. And as Peak Oil keeps pumping up prices for anything transport related, locally made tends to be the smarter way to go. Plus, the customers for PV and wind based electricity have to have income, which means that need to have jobs, and the fairy tales about free trade don't seem to produce much else but further income inequality (a feature from the point of view of those designing US trade policies) and depressed wages/income and wealth for the vast majority of the people in this country. One person's wages are another person's job via the demand for goods and services that comes from having more than just survival wages for an income.

                          
Photo of a CdTe panel being manufactured, and an American actually employed making it


                                                        The Wrap-Up
So if you want renewable energy to thrive in this country, maybe you ought to start with making them here, first, and put these snake oil dreams of "too cheap to meter" and "grid parity PV" where they belong - with the hype that early nuke proponents used. PV will never be cheap - all the labor, energy and materials (as well as the storage needed to buffer times when the sun is blocked by clouds are it's nighttime) that go into them actually does cost, and those costs need to be repaid, or at least paid by someone or by all of us via taxes. But over time it might be cheaper than it already is, or might not. And PV is going to be more expensive in places that are not a desert than where it is a desert - just like wind based electricity is cheaper in windy places and pricier where it is not so windy. It's only a problem when deception is used to hide the costs, and where the scale of deployment is large enough that the money bleed for imports plus the deception of what it really costs finally can't be swept under the proverbial rug anymore. After all, when $10 billion of PV installs requires $7.5 billion in avoided taxes (for starts) and it's the choice of whether to do renewable deployment or to fund school operations and pay for the construction of a sewage system that qualifies an area for the term "civilized", maybe something has to change.

Just remember the "Macro Model" - your income is my employment, my wages are the basis for your job. Paying the real cost of renewables is not as much of a problem as it is made out to be, especially if the economic leakage (imports) is minimized, and not maximized. And you might get less of some forms and more of other renewables, but electricity is electricity, after all. And hey, no one ever said "it's ponies and unicorns for everybody". But like Jagger and Richards did so eloquently state -

"You can't always get what you want,
But if you try sometimes you just might might find
You get what you need".

Top image: http://www.firstsolar.com/en/Press-Center/Media-Library
Middle image = http://www.toledofreepress.com/wp-content/uploads/2012/07/SolarFSWorker.jpg
bottom image = http://www.toledoblade.com/local/2007/02/14/First-Solar-posts-1st-profit-in-20-year-history.html - Factory Tour, First Solar, Toledo, Ohio


1 comment:

Jackson Buddy said...


Really very informative about solar photovoltaic
keep sharing.

photovoltaic

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