Solar module prices come down another 20% in just five months

Growing industry and government budget cuts force prices to drop

Solar modules prices have dropped by another 20% during the first five months of 2011. Top-brand modules are now available at $1,40 per watt and sometimes even less. Half-way through 2008, the sales price still stood at around $4 per watt. Why are prices plummeting and where will this end?

A decade of continuous growth
Last year, the global solar PV market grew an astonishing 100%. For any industry in the midst of a global economic crisis, this is not a bad result. And it was not the first time this spectacular growth had occurred - it first happened back in 2008. Only in 2009 did the global crisis hit the PV market, slowing growth down to around 15%.
Since 2001, the global PV market showed an average growth rate of 50% of new installations per year. No wonder the solar industrial players invested heavily in capacity expansion. After a decade of continuous growth, it does not look as if there is any turbulence ahead for the solar PV market. After all, governments will continue to seek sustainable energy solutions and fossil fuel independence. And as for the end user, the majority would definitely prefer clean solar energy if available at competitive prices.

Still more industry entrants
Even more stimulated by the glorious market demand figures we saw in 2010, the solar industry invested heavily in capacity expansion. This will bring down cost and sales prices, helping it to reach the holy grail of grid parity even sooner.
But, besides the rapid growth of the existing industry leaders, many new players have been attracted too by the growth figures and market forecasts. New small companies and very large (Asian) corporations have started to produce silicon, cells and solar modules. And why not? Market saturation is nowhere to be seen. It does not look as if the solar energy market will stop growing some day - apart from the odd temporary slow-down.

Government budget cuts
At the same time, governments of leading markets saw budget claims for Feed-in-Tariffs in 2010 go through the roof. In the light of general budget cuts and economic problems, Germany, France, the Czech Republic and Italy therefore decided to cut back the FiTs and other grants for 2011. The purpose of this move is to cool down the explosive market growth and excessive budget claims. Not only did they lower the tariffs (subsidies); the revised schemes mean that smaller and roof systems are favoured over big ground-mounted power plants.
The subsidy reductions are forcing the solar industry to reduce cost and system prices in order to remain attractive to its customers, ensuring it still provides an attractive return on investment. Besides, the shift from fewer large-scale power plants to more smaller-scale systems will be a more costly job in terms of sales efforts.

Governments cutting budgets to cool market growth
The result of a rapidly expanding industry on the one hand, coupled with budget cuts on the other have led to a rapid fall in prices. The industry is growing at full speed, and facing more competition in the major leading markets. Germany, France, the Czech Republic, Italy, etc. are being cooled down with seriously lower incentives. This parallel development produces a cocktail which will bring about a rapid price decline for solar modules, inverters and total solar PV systems....
In order to control further budget cuts, these countries will calculate their FiT levels for 2012 in accordance with market growth in 2011 or on solar module price development. It is even possible that these leading markets will (slightly) shrink in 2011 (Germany, the Czech Republic, Italy) compared to the record year of 2010. Although the dynamics are hard to forecast, the promising emerging markets (India, China, etc) are yet not big enough to make up for any slower growth in these leading markets. Nevertheless, with system prices going down rapidly, it might very well be that we can expect another year of global growth.

Spiral of declining prices
Of course, new markets are popping up. But governments closely follow the leading markets, introducing FiTs and incentives according to the latest market prices. In the UK, the incentives for large-scale power plants were drastically cut, even less then a year after their introduction.
Inevitably, this spiral of developments leads to (rapidly) falling system and component prices. And the dynamics are hard to control. The existing leading industry players will fight hard (i.e. lower their prices) to capture and increase their share of the market. New players will fight hard to enter the market. And if the market continues to grow substantially, governments will lower the FiTs even more in order to control the overall budgets.

Where and when will this spiral end? Well, not until solar system prices have reached a point where subsidies, grants or FiTs are no longer necessary to make solar energy competitive with other energy sources. And in some markets, this is already a close call for certain market segments. Germany and Italy, with high electricity prices, are serious candidates to reach grid parity for residential customers next year.

New era of strong growth on the horizon
Industry leaders and experts forecast that solar modules will be sold for under $1 per watt three years from now. An average decline of module prices of around 7-10% per year. Large solar PV systems and power plants could then become feasible at $2 per watt. This will lead to competitive prices for solar electricity, without any government support.
Inevitably, this development will change the business models. In the near future, solar PV systems will be sold as energy and cost saving devices - whereas currently they are sold as profit generators based on government subsidies. With regular electricity prices likely to increase, and as solar system prices continue to decline in the near future, an infinite market is appearing on the horizon. The solar industry can prepare itself for an era of continuous tremendous market growth. But first it needs to fight to get itself through the coming years.