IHS Markit currently maintains its 181 GW installation forecast for 2021. Our down case scenario for 2021 is 156 GW (down case still 9% growth Y-o-Y) with demand spill over to 2022 and uneven impact of higher costs across different markets.
The current environment poses a significant threat, but it is too early to tell what the consequences will be since the solar industry has faced other crisis before (e.g. COVID-19 in 2020) and showed extreme resilience and continued growth despite all challenges.
Module costs will remain high in 2021
The price on module raw materials started to rise in July 2020 and has significantly impacted module costs from Q4 2020. Market expectation was that production costs would decline from the second quarter of 2021, dropping module quote prices, but we have seen just the opposite. The supply chain is experiencing further price peaks for some materials in Q2 2021 including polysilicon, copper, or steel, among others. The rise of raw materials is putting additional pressure on module makers who are only passing part of this higher cost into customers and adjusting utilization rates to control the rise of materials due to an overheated market.
In this high-price PERC environment, we are seeing a revival of demand for multicrystalline BSF, a technology that was being phased out, and that has seen its demand and prices increase in some utility markets (e.g. India, Middle-East) and even in C&I applications. The IHS Markit view is that this increase in demand and prices for BFS multi is a short-lived phenomenon triggered by extraordinarily high PERC prices and multi will continue its phasing out in 2022, remaining a product for some niche markets due to lower efficiencies.
Freight costs have multiplied and will not decline this year
While the trade imbalance between China and Western markets is not a new phenomenon, the rapid surge in goods demand in Western markets from very low demand during lockdowns to high demand during relaxations of COVID-19 restrictions and reopening of economic activity has caused serious challenges to logistics. Freight costs have increased 3-4 times in the last 3 quarters for shipments from China to Europe or the Americas and IHS Markit projects the situation will not dramatically improve this year.
This is a global phenomenon that is impacting all industries (semiconductors, automotive, consumer electronics…). The most recent IHS Markit global survey of manufacturers found that the stretching of supply chains in the last quarters has extended delivery times to the highest level in more than 20 years of data availability with delays being most pronounced in Europe, United States, and Taiwan. Solar PV is one of the most impacted due to the high concentration of manufacturing in China. Freight costs and long lead times might challenge solar project completions in 2021, delaying projects to 2022. Higher freight costs are also impacting other system components like trackers, which are a high-weight and low-value component, with final impact on total system CAPEX.
Prices, procurement cycles, and impact on solar PV system CAPEX
In this high-price environment that started in Q3 2020, international developers are putting off procurement in the hope that equipment and freight prices will be lower in 2022. Extreme volatility in raw materials, module prices and freight costs are not helping manufacturers nor developers to close contracts whose terms change on a weekly basis. Given long lead times, if procurement is delayed beyond the summer, the risk to the 2021 installations outlook will become a reality.
In previous years, if demand slowed down around the summer and inventories grew, this triggered a price decline that quickly reactivated the procurement process. This year, however, even if inventories start growing and manufacturers would be willing to scarify margins, this would still have a small impact on the total module cost for a developer. Module costs for a developer will still be high due to the unchanged high cost of freight that will remain flat or could even increase in the second half of the year with the reactivation of economies in Europe and the United States.
High component and high freight costs are having a direct impact on CAPEX and project IRRs, which is expected to continue in H2 2021. This could be the first year where global average solar CAPEX might not decline after major Y-o-Y reductions in the last decade. Although developers are trying to delay procurement as much as possible, there is a significant part of the project pipeline under PPA contracts or schemes that require completion in 2021. In some cases, developers are accepting lower IRRs than originally forecast. In others, EPCs might decide to pay penalties for project delays – which could represent a lower cost than proceeding with building on time in the current price environment. The final decision depends on a variety of factors (company type, contract terms, possibility to lower other CAPEX contributors, etc) and cannot be generalized.
Europe and India are the main markets at risk of underperforming
IHS Markit forecasts that Europe and India are the regions that are at a higher risk of underperformance. Europe faces the highest risk of being the most impacted by high component pricing, costly shipping, and long lead times since regional market growth hinges on the progression of the highly sensitive utility-scale segment and many contract negotiations and shipments are now paralyzed. The US market is at a lower risk since it is less price sensitive, but it is also being impacted by long-lead times and the surge in freight costs and higher prices that could push some project completion to 2022.
Finally, despite a low-connection first quarter, mainland China—unburdened by shipping challenges—should stay on course to grow on a Y-o-Y basis. However, IHS Markit remains cautious that additional module price increases, some recent bidding prices reached higher than 1.70 RMB/W, could put at risk the 2021 installation forecast that is strongly skewed to the second half of the year.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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