1. Catching rays
Five success factors in an explosive solar
market
A report from the Economist Intelligence Unit
Sponsored by SAP

2. Catching rays
Five success factors in an explosive solar market
Introduction—abrupt decline, sharper rebound
F or nearly the entire first decade since its founding in Arizona in 1999, First Solar, like many
companies in the solar sector, rode a wave of soaring growth. Through 2008 it was expanding at a
rate of 144% and continued to capture market share from competitors with its innovative “thin film”
technology, which can produce electricity from sunlight in a wider range of light conditions than more
traditional silicon-based technology.
Last year, however, First Solar lost 43% of its market value as investors fled. There were two
consolations for the company in the midst of such a steep decline. First, the slump was widespread.
Most renewable energy companies—not only in the solar sector—shrunk in value during the same
period, and others fared much worse than First Solar. Q-Cells of Germany, for example, lost 73% of its
market value and its CEO resigned as a result. Second, at the end of the shakeup, First Solar retained
the highest market value among solar module makers, at US$9.4bn according to Nomura Securities’
renewable energy companies’ valuations list in May 2010.
Today First Solar is at the forefront of an industry that appears to be rebounding. After
unprecedented difficulties in the last two years, analysts predict a bright future. Clean Edge, a research
company, forecasts that revenues for the solar photovoltaics (PV) industry—the largest by far of the
three main solar technologies (see sidebox on the next page)—will increase more than three-fold by
2019, to US$116.5bn.
Even as it grows, the sector retains a “pioneering spirit”, says Jerry Stokes, vice president for
strategy for Suntech Power of China, which is number two on Nomura’s valuations ranking, at
US$1.6bn. There are an estimated 1,000 new technologies being researched, any one of which could
become the next big thing and potentially sideline current sector leaders. The industry rankings
have already seen plenty of reshuffles in recent years and more could be on the horizon. In order to
survive and prosper, solar companies must successfully adapt to evolving government policy, reduce
production costs, drive innovation, and scale up quickly or find a lucrative niche—all the while staying
abreast of the fast-changing technologies in the sector.
1 © The Economist Intelligence Unit Limited 2010

3. Catching rays
Five success factors in an explosive solar market
Solar technology—photovoltaics light cooling (SHC). Solar PV has grown by an average
the way of 40% a year for the past decade, with cumulative
installed capacity standing at 14 gigawatts (GW)
at the end of 2008, up 6 GW on the previous year,
The world market for photovoltaics (PV), which according to the International Energy Agency (IEA).
directly converts sunlight into electricity in PV cells, As of early 2010, PV provided just 0.1% of global
is the largest of the three main solar technologies. electricity generation; but PV’s share of global
The others are concentrating solar power (CSP) power generation will rise to 5% by 2030, the
and solar thermal collectors for heating and IEA forecasts.
2 © The Economist Intelligence Unit Limited 2010

4. Catching rays
Five success factors in an explosive solar market
Success factor 1:
Adapting to changes in government policy
G overnment subsidies, which determine the level of demand for the modules that solar companies
sell, drove growth before the slump. Now, in the aftermath of the downturn, government policy
remains the single most important factor sustaining the industry. In Canada and Europe subsidies
primarily take the form of “feed-in tariffs”—for every kilowatt hour of electricity fed into the grid, the
provider receives a taxpayer-funded subsidy that is substantially higher than the market price. In the
US, rather than providing a feed-in tariff, the government gives a direct cash grant or a tax credit for
30% of the solar power installation cost. Asian countries, including China, have approved subsidies
and forecasters expect them to increase as governments attempt to meet ambitious renewable energy
targets. For the moment though, Asia is mainly a location for production and export rather than a
source of domestic demand for solar power.
The IEA believes such incentives will be phased out eventually as prices for electricity generated
from solar become competitive with other sources of electricity—a condition known as “grid parity”.
The IEA reckons this will happen in some countries for residential and commercial systems as early
as 2015. “The support mechanisms from governments will over time become more passive, probably
linked to granting access to the grid and selling electricity back into the grid, but the premiums for
doing that will be going away,” says Mr Stokes of Suntech.
Indeed, subsidies in the leading solar countries have recently come under pressure. This is mainly
because the cost of crystalline silicon modules fell 30-50% in the last year, which in turn led to much
lower installed costs for solar plants. These prices fell from an average of US$7 per peak watt in 2008 to
just above US$5 in 2009, and as low as US$3 for some utility-scale projects (defined as providing peak
power of 200 kilowatt peak hours or more), according to Clean Edge. As a result, the subsidies, set at a
time when prices were higher, suddenly looked over-generous. In Germany, which has led the industry
for the past decade, the government plans to reduce feed-in tariffs by 16%. In Spain, module demand
fell 87% after the country put a cap on feed-in tariffs; the government is also proposing a further 30%
cut in subsidies for existing solar power plants.
Solar company executives acknowledge that reducing feed-in tariffs is a logical response to price
declines, and a trend which is likely to continue. Clean Edge forecasts another 60% decline in average
installed solar PV prices, to US$2.11, by 2019. “Governments have been reacting very rationally,” says
3 © The Economist Intelligence Unit Limited 2010

5. Catching rays
Five success factors in an explosive solar market
Mr Stokes. He adds that, by and large, governments have been transparent about their plans, which
is key to strategic planning. “There is a predictable outlook for the way in which they are enabling
markets to start moving forward,” he says.
The road to grid parity may well be bumpy, as governments gradually extricate themselves from
the market, but when it arrives, demand will rise significantly, according to a spring 2010 report, The
New Solar Market, written by Pike Research, a clean-tech research company. “As the solar power price
approaches that of fossil fuel power… an enormous amount of worldwide power demand becomes
available to drive the production of solar cells/modules,” the report says. Until then, however, the
industry will need continued government support, including R&D incentives and well-managed, if
somewhat depleted, subsidy programmes.
© The Economist Intelligence Unit Limited 2010

6. Catching rays
Five success factors in an explosive solar market
Success factor 2:
Slashing production costs
A s the industry emerges from the slump, the “primary differentiator” for solar companies is the
individual module’s cost per watt ratio ($/W), according to Pike Research. A number of factors
contribute to ever lower ratios, chief among them are moving manufacturing operations to low-cost
countries such as China, Taiwan, Malaysia and the Philippines, using low-cost materials (or driving
down prices through negotiations with suppliers), engineering breakthroughs, and the advantages
of scale.
First Solar leads the industry at 81 cents per watt, through its “thin film” cells, which use cadmium
telluride rather than silicon. Its ratio is projected to drop to 75 cents per watt by the end of 2010
and the company plans to reduce it to 60 cents within the next five years. About two-thirds of First
Solar’s production in is Malaysia, according to Pike. Elsewhere in the industry Q-Cells is shifting
manufacturing to Malaysia with a planned 500 MW of capacity, to put it back in contention on cost.
Others plan capacity increases and/or large-scale shifts in production to Asia. Solar World, based in
Germany, wants to reduce its costs 10% per year for the next three years. As a result of the laser-like
focus on cost, Pike concludes, “The market for solar modules looks much more like a commodity market
than it did just 12 to 18 months ago.”
5 © The Economist Intelligence Unit Limited 2010

7. Catching rays
Five success factors in an explosive solar market
Success factor 3:
Innovating in a commodity market
I n addition to lowering production costs, solar companies are putting a heavy emphasis on RD. First
Solar doubled its RD spend from 2008 to 2009, from US$33.5 million to US$78.2 million, bringing
RD spend to a ratio of 3.8% of sales. Suntech has research partnerships with the University of New
South Wales and Swinburne University in Australia.
The IEA keeps tabs on about 1,000 different solar technologies and is “neutral” about any particular
one’s prospects. Currently, crystalline silicon (c-Si) modules still account for about 80% of sales, with
thin films making up the rest, although thin film is expected to make rapid inroads in the next few
years. Emerging technologies include advanced thin films and organic cells. The Economist reported
last year that Nanosolar in the US is developing cells produced from copper, indium, gallium and
selenium, which could be cheaper. Researchers at the University of California are trying to develop
cells made from organic chemicals. Solar thermal power, which uses solar power to produce steam, is
currently the poor cousin to PV because of more complicated permitting and infrastructure, but it could
make a comeback if its shortcomings were resolved.
Sector leaders are always on the lookout for new technologies that they can add to their portfolio
or identify as potential competitive threats. Mr Sohn of First Solar outlined the company’s three tests
for any new solar technology to be considered competitive. First it must cost less than $1 per watt in
order to make it worthwhile to produce on a wide scale and meet return on assets targets. Second, the
cost of capital in putting the technology in place must be attractive for potential financing. The third
test requires that “energy payback time” must be at least less than a year. In other words, the module
produced with the new technology must “pay back” the energy it took to produce it within 12 months,
or else it isn’t considered cost effective.
Mr Stokes of Suntech compared innovation to a running race. “The people who are in a chasing
pack actually have to put in some incredibly fast lap times in order to catch up in terms of scale and
reliability.” He adds, “If new technologies can compete and get into the leading pack, it will mean that
costs have come down and it will be truly global, and there will be space for several companies.”
6 © The Economist Intelligence Unit Limited 2010

8. Catching rays
Five success factors in an explosive solar market
Success factor 4:
Scaling up through mergers and partnerships
B ig players can spend more on RD, negotiate more favourable terms with suppliers, and drive cost
reductions through economies of scale. Customers also gravitate to larger companies. “Especially
for large commercial and utility-scale projects, end customers increasingly prefer one-stop shopping,”
the Pike report says. “They prefer companies that provide project development, engineering,
permitting services, financing and other services instead of just modules.”
A recent spike in the price of silicon left lasting memories, and so large companies are moving to
control, through acquisitions and partnerships, their entire “value chain”—from the raw materials
that make up the modules right through to the end product. From 2004 through 2008, as production
couldn’t keep up with demand for polysilicon, prices soared from about US$30 a kilogram to a peak
above US$400 a kilogram. As the silicon shortage eased, prices dropped through 2009 and were at
about US$50/kilogram in spring 2010. As a result Suntech has made investments in Asia Silicon in
China and Nitol in Russia, and others have made similar moves.
Consolidation will become increasingly important and acquisitions and mergers will increase.
As First Solar’s acquisition of NextLight takes it further into the large-scale plant market, so
MEMC Electronic Materials’ US$200m acquisition of SunEdison last year moved it from pure wafer
manufacturing into solar project ownership. SunPower’s US$277 million acquisition of SunRay
expanded its solar development business beyond the US to Europe, while Spain’s Fotowatio gained a
US foothold buying MMA Renewable Ventures.
7 © The Economist Intelligence Unit Limited 2010

9. Catching rays
Five success factors in an explosive solar market
Success factor 5:
Getting in the “utility-scale” game
L arge, utility-scale solar PV power plants began to mushroom in 2008 and their number and
capacities are expanding rapidly; consequently, the share of PV accounted for by larger-scale
projects will increase substantially. Currently, the Olmedilla de Alarcón plant in Spain, completed at
the end of 2008 by Nobesol, is the world’s largest solar PV plant with capacity of 60 MW, according to
Denis Lenardic, an independent researcher who tracks PV power plants (See Top ten table on page 14).
Since 2008, approximately 2,000 PV power plants with output above 200 kilowatt hours (kWh) were
built, of which more than 1,000 solar parks had output capacity above 1 MWh. The scale of building in
2008 represented a breakthrough for large solar PV plants, as they accounted for more than half the
total capacity of PV plants installed worldwide, according to Mr Lenardic’s data. Utility-scale plant
projects are on the drawing board or in development throughout Europe, China, India, Japan and the
United States, and they’re growing not only in number but in scale.
First Solar is developing the 550 MW Topaz Solar Farm in San Luis Obispo County, about 250km north
of Los Angeles, California—currently, the largest solar PV project that is at the advanced planning
phase. The project is part of First Solar’s wider move into utility-scale development, which included a
deal earlier this year to acquire NextLight, a utility-scale PV specialist, for about US$250m.
On an even grander scale, First Solar signed a memorandum of understanding with the Chinese
government last year to build a solar development at Ordos City in Outer Mongolia; planned ultimately
to have capacity of 2 GW by 2019, it is starting with a demonstration plant of 30 MW to be built this
year. Also, First Solar has joined the ambitious North African Desertec project that aims, amongst
other things, to supply 15% of Europe’s electricity by 2050 via solar and wind power generated in the
Sahara desert.
“Many large customers weren’t especially keen on buying modules from us,” Mr Sohn explains. “They
were very interested in buying solar power plants that had hundreds of thousands of modules in them.”
Sohn says that moving into utility-scale development hasn’t changed the fundamental business model
of the company, which focusses on selling the modules. “The module technology is what differentiates
the company,” he says. “These are enabling activities rather than changes in the business model.”
Not all solar companies have chosen to directly build plants. Suntech, for example, is involved
through partnerships with construction companies, general contractors and engineering firms. “We
8 © The Economist Intelligence Unit Limited 2010

10. Catching rays
Five success factors in an explosive solar market
have truly excellent partners,” says Mr Stokes. “It doesn’t make sense to roll out a strategy that goes
around what those guys are doing.”
And utility-scale projects are not without risks. Financing, for example, is becoming an even
more challenging issue for companies as scale increases, according to Karl-Heinz Remmers, CEO of
Solarpraxis, a German solar module manufacturer. “The financing volumes for [utility-scale] projects
stretch to several hundred millions of euros. As a result, the financing volumes equal those of the
traditional energy production segment,” he says.
Illustrating the point, an US$840m solar project saw its financing unravel in spring 2010 after the
US Department of Energy declined loan guarantees. The plant was meant to begin construction this
year under the leadership of Signet Solar, a California-based solar company, at a site called Rancho
Cielo near Albequerque, New Mexico, with planned peak capacity of 600 MW, which would have made it
the world’s largest.
9 © The Economist Intelligence Unit Limited 2010

11. Catching rays
Five success factors in an explosive solar market
Conclusion—struggle for survival
O f the estimated 190 major cell and module manufacturers globally, the Pike report identifies
17 “top competitors” that are well placed to survive in the future: Canadian Solar, Yingli Green
Energy, Q-Cells, China Sunergy, Kyocera, SunPower, JA Solar, Sanyo, E-Ton, Solarfun, Sharp, Gintech,
Suntech Power, First Solar, Motech, Trina Solar and Neo Solar. These top competitors have a capacity to
produce all of the 10.1 gigawatts of solar demand globally in 2010. A further 80 manufacturers in “tier
2” will survive if they make adjustments to $/W ratios, and the third tier, about 90 companies, will find
it increasingly difficult to compete.
It’s not a foregone conclusion that the biggest players will force out all of the smaller ones. There
are factors other than scale at work—such as unique technology that could result in a step-change in
efficiency levels, as well as factors like financial backing. If the market expands as predicted, there will
be room for smaller players to find a technological niche and stay afloat by ruthlessly exploiting it. But,
it seems inevitable that, as the Pike analysts conclude, “2010 could very well develop into a struggle to
survive for the remaining solar manufacturers.”
Overall, it would be wrong to assume that the changes of the last few years have set a stable pattern
for what is to come. Rather, they underline the influence of factors such as the pace of technological
innovation, changing government policy and the volatility of pricing. “The leaders will be companies
that are responsive to market opportunities and the routes to market,” Mr Stokes says. “Those who do
not have that are going to fall off to the back of the race.”
10 © The Economist Intelligence Unit Limited 2010

12. Catching rays
Five success factors in an explosive solar market
Emerging capacity: Demand grows Asia—planning for domestic capacity
across the world China and India have set specific industrial policy
goals to become leading solar manufacturing
While just four countries—Germany, Spain, Japan countries. Right now, China and India are mainly
and the US—have dominated the industry, with exporters, with little domestic demand.
a combined share of 80% of total capacity (and However, the IEA also expects Chinese domestic
therefore demand) at the end 2008, several other demand to increase substantially in the coming
countries are gaining momentum due to various decade from its low current base. The government
government support schemes. Although subsidies is encouraging solar systems to be built into
are expected to be phased out at some point in the new buildings, and supporting large-scale PV
future when “grid parity” is achieved, government installations in desert areas, such as First Solar’s
support remains the single biggest factor Outer Mongolia project. To encourage this, the
determining whether a particular country will foster government began providing a subsidy of RMB
growth in solar. Here is a summary of some of the 20 (US$2.93) per watt for building-integrated PV
market trends in Europe, Asia and North America, (BIPV) projects in early 2009. According to the
all of which, to varying degrees, are forecast to rise IEA, the 2010-2020 national targets for solar PV
sharply in the next decade. (400 MW and 1,800 MW, respectively) are likely
to be increased substantially, perhaps more than
Europe—a maturing market doubled for this year and by more than 20-fold for
In Europe, Italy’s subsidies could push solar the 2020 target.
installation demand above 1 GW this year, putting India, too, already has a significant PV industry: ten
it ahead of the US. Pike Research expects Italy’s vertically integrated manufacturers making solar
solar demand to grow by 20% a year through 2013, cells, solar panels and full PV systems, plus dozens
even as it plans to reduce subsidies in 2011. Growing of other smaller companies. According to the IEA,
solar demand also is coming from France, the Czech this group supplies about 200 MW of new capacity
Republic and various other EU countries. each year, though PV capacity remains very low at
Solar capacity by geography 2008-2020
(MWe)
North America Asia Europe
20,000 20,000
18,000 18,000
16,000 16,000
14,000 14,000
12,000 12,000
10,000 10,000
8,000 8,000
6,000 6,000
4,000 4,000
2,000 2,000
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Note. North America: US Canada. Europe: 23 European countries plus Turkey. Asia: China, Japan, Philippines, South Korea, Taiwan, Australia, New Zealand.
Sources: Historical data from IEA; Economist Intelligence Unit forecasts.
11 © The Economist Intelligence Unit Limited 2010

13. Catching rays
Five success factors in an explosive solar market
home at less than 5 MW. North America—growth in the absence of federal support
The government has set various targets to generate The United States has the potential for very
electricity from solar: up to 50 MW of capacity by substantial growth, even in the absence of federal
2012 via incentives for large solar power plants of legislation in support of renewable energy. Several
INR 12 (US$0.25) per kWh for PV power (maximum states—particularly California, which has mandated
10 MW per state). The current five-year plan that 33% of electricity come from renewable sources
(through 2012) also includes financing aimed at by 2020, up from 20% in 2010—have encouraged
research and development. The government has set demand. In Canada, Ontario has led the way with a
ambitious aspirations of achieving 1 GW domestic 50% feed-in tariff for solar power installations. Pike
capacity by 2017 and 20 GW by 2020, though Research says political and economic factors may
something closer to 25% of those aims seems increasingly direct some of the new solar production
more realistic. capacity away from Asia to the US and Canada.
Top ten utility-scale solar PV power plants
Abbreviations:
GM - Ground-mounted photovoltaic system
TRAC - Tracking system
POWER LOCATION DESCRIPTION CONSTRUCTED
Parque Fotovoltaico Olmedilla de
Spain, Nobesol
Alarcón
60 MW Olmedilla 2008
(Castilla-La Mancha)
GM
Germany, Solarpark Straßkirchen Q-Cells International
54 MW Straßkirchen
GM 2009
Germany, Solarpark Lieberose juwi
53 MW Turnow-Preilack
GM 2009
Spain, Parque Fotovoltaico Puertollano
Iberdrola Renewables
50 MW Puertollano
2008
(Castila-La Mancha) GM
Portugal, Moura photovoltaic power plant ACCIONA Energia
46 MW Moura
(Alentejo) GM, TRAC 2008
12 © The Economist Intelligence Unit Limited 2010

14. Catching rays
Five success factors in an explosive solar market
RGE Energy
Solarpark Köthen
Germany,
45 MW
Köthen 2010
GM
to be completed soon
Germany, Solarpark Finsterwalde Q-Cells International
42 MW Finsterwalde
GM 2009
Germany, juwi
Solarpark Waldpolenz
Brandis
40 MW
2007
GM
2008
Planta Solar La Magascona La
Spain,
Magasquila
34.5 MW Trujillo 2008
(Cáceres)
GM, TRAC
Spain, Planta Solar Arnedo T-Solar
34 MW Arnedo
(La Rioja) GM 2008
Source: Denis Lenardic, pvresources.com
13 © The Economist Intelligence Unit Limited 2010

15. While every effort has been taken to verify the accuracy
of this information, neither The Economist Intelligence
Unit Ltd. nor the sponsor of this report can accept any
responsibility or liability for reliance by any person on
this white paper or any of the information, opinions or
conclusions set out in this white paper.
Cover image - © Jim Parkin/Shutterstock

16. LONDON
26 Red Lion Square
London
WC1R 4HQ
United Kingdom
Tel: (44.20) 7576 8000
Fax: (44.20) 7576 8500
E-mail: london@eiu.com
NEW YORK
750 Third Avenue
5th Floor
New York, NY 10017
United States
Tel: (1.212) 554 0600
Fax: (1.212) 586 1181/2
E-mail: newyork@eiu.com
HONG KONG
6001, Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Tel: (852) 2585 3888
Fax: (852) 2802 7638
E-mail: hongkong@eiu.com
GENEVA
Boulevard des Tranchées 16
1206 Geneva
Switzerland
Tel: (41) 22 566 2470
Fax: (41) 22 346 93 47
E-mail: geneva@eiu.com
FRANKFURT
Bockenheimer Landstr. 51-53
60325 Frankfurt am Main
Germany
Tel: (49) 69 7171 880
E-mail: frankfurt@eiu.com