COPAR FINANCE ASSET MANAGEMENT

SOLAR INDUSTRY RESEARCH REPORT

Rapid solar power technology improvements have led to plunging cost of p roduction- suggesting the prospect of grid parity within the d ecade. Against the backdrop of a volatile energy market, Copar will explore solar power generation as an investment opportunity.

THE CASE FOR SOLAR POWER

VOLATILE ENERGY PRICES
Against a backdrop of high and volatile energy prices driven by fossil fuels, the world is placing greater emphasis on alternative energy sources. Over the last 52 weeks, sweet crude oil futures contract has swung from USD76.53 on 10 April 2011 to USD114.16 on 29 April 2011 within the duration of less than 3 weeks and the average price now stands at USD97.87. Over the last 5 years, prices went as high as USD142.00 near the middle of 2008. While there is an observed shift towards natural gas as a comparatively cheaper and cleaner energy source (natural gas accounts for almost 25% of United States energy consumption), its prices are also volatile. Over the course of 52 weeks, natural gas futures averaged USD4.25 and had swung between USD2.36 to USD5.21. [Prices quoted from Bloomberg] Solar energy is widely expected to reach grid parity within this decade.

SOLAR ENERGY IS THE MOST ABUNDANT SOURCE OF RENEWABLE ENERGY AVAILABLE TO THE EARTH
- Dr. Paul Breeze

UNPOPULARITY OF NUCLEAR SOURCES

Since the meltdown of the Fukushima nuclear power plants in 2011, countries have begun to eschew nuclear energy as an alternative power source. The potential environmental costs and human costs have proven to be politically unpalatable. Germany went as far as to announce the phasing out of its nuclear power plants and estimates have suggested that it would cost the nation as much as EUR1 trillion1. This is close to two thirds of the countrys GDP in 2011 and feed-in tariffs are expected to form the bulk of this cost. Feed-in tariffs are payments to renewable energy generators and they may be understood as subsidies for a more expensive source of electricity production. At the end of 2010, Germany has the highest capacity of solar photovoltaics installation2.

THE ENVIRONMENT
China became the worlds largest energy consumer in 20093 as it moves towards becoming an economic powerhouse. (Its energy demand to GDP growth elasticity is 1.1 to 1.4.) In the course of doing so, it has incurred a tremendous environmental cost and this is proving to be unsustainable. Since 2010, China is the largest producer of solar photovoltaics and had accounted for 45% of world production at the end of 20104.

1 2 3

(Steitz, 2012) (Earth Policy Institute, 2011) (Yang, 2011) 4 (Earth Policy Institute, 2011)

SOLAR POWER GENERATION

PHOTOVOLTAICS (SOLAR CELLS)
A solar photovoltaic device, otherwise known as a solar cell, directly converts sunlight into electricity. Without moving parts (compare: wind energy electricity generation), solar cells can last for more than 30 years. Yet, sophisticated and expensive technology is employed in the manufacturing of solar cells and this has made it one of the most costly sources of renewable electricity. The highest recorded efficiency of a single (mono) crystal silicon solar cell was 42.8% and this was made possible under laboratory conditions. Practically speaking, single crystal cells are expensive to produce in bulk and the industry has mostly adopted polycrystalline solar modules or thin film (cadmium telluride or CdTe & Copper, Indium, Gallium, Selenide or CIGS make up5> 70% of the thin film market) modules in utility scale power generation. Typically, either type of solar modules is expected to last for more than 25 years. The following is a comparison table of the dominant photovoltaic technologies: Efficiency Module costs per Watt Cost per MWh (LCOE) Market Share (2015, Forecast)12 Polycrystalline Silicon 15.7% - 18% USD1.828 USD125 USD23010 42.9%
5 6

Thin Film (Cadmium Telluride) 12.6%7 USD0.729 USD100 USD14011 32.0% 55.7% <1 year

Market Growth Rate (2010-2015)13 34.1% Energy Payback Period14 2-4 years Table 1

Advances in manufacturing technologies mean that electrical conversion efficiencies are improving. With respect to polycrystalline silicon, GCL-Poly has reported efficiencies as high as 17%15 and Suntech Power Holdings has announced its Pluto solar cells that are proven to be more than 19%16 efficient under commercial production conditions. On the other hand, thin film (CdTe) technology has reached the 14.4%17 mark. Another important point to note is the term Levelized Cost of Electricity (LCOE). Simply put, LCOE is the breakeven cost that a power utility must charge for its supply of electricity in order to breakeven for a given cost of capital. Because it is a figure that is usually obtained on the basis of multiple assumptions, it may be better for LCOE to be expressed within a range of figures rather than a single figure. On average, electricity cost was retailing at USD100.20/MWh at the end of 2011 according to the U.S. Energy Information Administration.
5 6

(Suntech Power Holdings Co., 2010) (Trina Solar, 2011) 7 (First Solar, 2012) 8 (Suntech Power Holdings Co., 2010) 9 (First Solar, 2011) 10 (Deutsche Bank, 2009) 11 (First Solar, 2011) 12 (Moran, 2012) 13 (Moran, 2012) 14 (Breeze, 2008) 15 (GCL Poly, 2011) 16 (Z. Shi, 2011) 17 (First Solar, 2012)

The following chart plots crude oil price and retail electricity prices in the U.S.:

100 80
Oil ($/barrel)

Crude Oil & Retail Electricity Prices

120 100 80 60
Electricity ($/MWh)

60 40 20 0 1996
Oil ($/bl) Electricity ($/MWh)

40 20 0 2012

1998

2000

2002

2004

2006

2008

2010

Unsurprisingly, crude oil and retail electricity prices exhibit a very high degree of correlation of 0.94 and an adjusted R2 of 0.87. Based on simple linear regression, an average oil price of USD100/barrel would suggest an average electricity retail price of USD103.46/MWh. If oil price reaches USD150/barrel, electricity retail price could reach about USD127.55/MWh. The US department of energy estimated photovoltaic electricity prices to fall by about 4.8% year-on-year from 2007 to 201118. Assuming the upper end of the LCOE for polycrystalline (USD230/MWh) technologies in table 1, this essentially means that for every USD10/barrel increase (of up to USD130/barrel), the estimated time for polycrystalline modules to reach grid parity would be reduced by 1 year. An average oil price of USD130/barrel would suggest that polycrystalline utilities would take around 14 years to reach grid parity. In the case of thin film technologies, grid parity may be reached as soon as within the decade. Oil ($/bl) Electricity Cost ($/MWh) Polycrystalline Grid Parity (yrs) CdTe Grid Parity (yrs) $100.00 $103.46 17.1 6.5 $110.00 $108.28 16.1 5.5 $120.00 $113.10 15.2 4.6 $130.00 $117.91 14.3 3.7 $140.00 $122.73 13.4 2.8 $150.00 $127.55 12.6 2.0

Under the assumption of USD140/MWh, grid parity for thin film (CdTe) technology may be reached in as soon as 4 years. Nevertheless, CdTe thin film technology is relatively new and there are also issues pertaining to longevity, toxicity and input material scarcity that may restrict massive scale production and widespread adoption.

18

(Breeze, 2008)

PHOTOVOLTAICS PRODUCERS & INSTALLERS

Based on the latest set of data, worldwide photovoltaics production amounted to just over 24,000MW in 201019:
12,000

Annual Solar PV Production 2000-2010

10,000 PV Production (MW) 8,000 6,000 4,000 2,000 0 1998 China Taiwan Japan Germany USA Others

10,852

4,248 3,639 2,169 2,022 1,115

2000

2002

2004

2006

2008

2010

Year

2012

Chinas photovoltaic production essentially went through a compound annual growth rate (CAGR) of 143% from 2005 to 2010 and accounts for almost half of total worldwide production at the end of 2010. Based on the latest set of data, worldwide photovoltaics installation amounted to about 16,600MW in 201018:
8,000 7,000 Installed Capacity (MW) 6,000 5,000 4,000 3,000 2,000 1,000 520 0 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 Year Germany Italy Czech Republic Japan United States France China Others

Annual Installed Solar PV Capacity

7,408

2,321 1,490

In terms of installed photovoltaic capacity, Germany remains as the leading country with an additional 7.5GW installed in 201120. On 9 February, 2012, Chinas National Energy Administration announced plans to develop 3 gigawatts of solar capacity within the year21. This represents a doubling of capacity from 2011 and a 6-fold increase from 2010. An Auriga LLC analyst has also suggested that the 3 gigawatts plan may be an underestimate and installations may reach as much as 7 gigawatts in 2012 in China19. In Europe, however, budget deficit problems have already seen Spain cease renewable subsidies for new solar plants22 and there is considerable uncertainty in the region regarding prospective solar subsidies.

19 20 21 22

(Earth Policy Institute, 2011) (UBS Investment Research, 2012) (Cao, 2012) (Dicks, 2012)

RISE OF CHINESE COMPANIES

From 2007 onwards, Chinas photovoltaic production began to overtake the rest of the countries in volume. Generally, the key companies belong to one of the following market categories: Category Commodity Crystalline-Si Description These companies rely on standard technology and manufacturing processes to achieve the lowest cost positions in the market. Often, they set up partnerships to establish highly vertically-integrated wafer plants. Presently, the current oversupply of polysilicon has depressed the spot price and firms occupying this space should capture a larger proportion of the declining raw material cost advantage. Notably, Chinese firms in this segment tend to rely more on labor rather than automation in manufacturing processes. Companies occupying this segment tend to have a greater efficiency rate in their modules power conversion. There Notable Companies Yingli Green Energy Trina Solar JA Solar GCL-Poly Energy LDK Solar

Proprietary Crystalline-Si

Suntech Power

Commodity Thin Film

is a stronger downstream focus and this strategy enables the companies to better capitalize on brand and technology advantages. Upstream processes tend to be outsourced. Companies in this segment tend to be smaller as BestSolar Co. compared to its counterparts in the other 3 categories. Manufacturing scale remains small and the current market oversupply suggests that products in this category may not be cost-efficient. Aiming to be the global leader in cost-efficiency balance, these companies engage in businesses that typically involve large-scale solar farm developments. From a power generation perspective, such large-scale developments tend to be more economical for proprietary thin film technologies versus end-consumer rooftop deployments. There are two notable forms of technology employed in this space: Cadmium Telluride Copper-Indium-Gallium-Selenide (CIGS)

Proprietary Thin Film

No known Chinese companies in this space but notable ones include: First Solar (USA) Showa Shell (Japan)

Recent developments in international trade suggest that developed countries are considering imposing tariffs, quotas and even punitive trade measures on anti-dumping accusations against Chinese companies. While demand in Europe has generally weakened, such measures imposed by the USA could be potentially damaging

to the industry. This is especially so considering that the solar industry is still struggling to arrive at a point of cost maturity whereby it can compete economically with other forms of power generation- renewable or otherwise. The industry also appears to be consolidating rapidly23. In 2010, the top 6 global manufacturer was estimated to own about 25% of market share. In 2011, the top 6 was estimated to account for 55% to 60% of market share. Typical in the power generation industry, achieving large economies of scale is a necessary condition for profitability. As an example, using the Herfindahl-Hirschman Index (HHI) as a proxy for market concentration, the HHI for the U.S. market suggest that the industry tends to be highly concentrated and participants have considerable market power. Out of 32 states, 22 states have a HHI of 1800 or more24. Similar market dynamics are also expected to apply to China.

23 24

(Back, 2012) (U.S. Environmental Protection Agency, Office of Air & Radiation, 2010)