Solar industry in the midst of another huge supply glut

Solar equipment prices are crashing in China. Polysilicon prices have dropped 30% in a month (refer), wafer prices by 20% (refer) and similar reductions are seen across the value chain. Landed module prices in India have dropped by nearly 15% in the last six months and negotiations for deliveries in Q1-2017 are happening in the range of USD 0.36-0.38/ Wp. Analysts say that price reductions are likely to continue through September (refer). The primary cause is excess supply. International module manufacturing capacity is believed to have crossed over 100 GW. In contrast, global demand is estimated at 70 GW for 2016.

Supply glut is likely to continue for a year and possibly longer as China is unlikely to grow out of trouble this time
Smaller manufacturers and those that are unable to invest in newer technologies will struggle to survive
Indian project developers will see a major windfall but notwithstanding major government thrust on domestic manufacturing, the country will find it difficult to attract large investments in a technology driven industry that has seen two major global supply gluts in the past five years

Such a large supply glut has been caused by a mix of increasing supply and depressed Chinese demand since July of this year. After adding a peak capacity of 20 GW in H1/2016, China’s solar project capacity addition is likely to slow down to about 10 GW in H2/2016. BRIDGE TO INDIA’s discussions with Chinese suppliers at REI Expo earlier this month suggest that domestic Chinese demand may not pick up until after the Chinese New Year (or February 2017).

The last major supply glut of 2012-13 ended with China shoring up domestic demand. But the prospect of that happening again is highly unlikely because of constrained Chinese fiscal position. Also, the China solar sector is now substantially bigger (3.5 GW in 2012 compared to almost 30 GW expected in 2016), so a similar growth boost is simply not possible.

Current oversupply is likely to result in severe financial stress for module manufacturers and lead to bankruptcies and consolidation. Most tier-1 suppliers should survive the downturn because of their stronger financial position and superior technology. Many of them are upgrading to higher efficiency technologies like PERC (passivated emitter rear cell), multi/heterojunction, bifacial panels, etc. The smaller players will face much greater difficulties.

Indian project developers are reaping a bonanza out of this turmoil. Tariff bids that seemed aggressive in past now seem very attractive. For example, projects with tariffs of INR 5.17-5.72/kWh for 2,000 MW tender in Telangana, completed in August 2015 when module prices were about USD 0.45/Wp, will be procuring modules at current prices and will see substantial jump in returns.

But the impact on domestic manufacturers will be very damaging. The Indian government is keen to promote domestic manufacturing (refer) and as much as 2,500 MW of new domestic capacity is expected to come up by next year through new facilities and expansions. However, global supply glut and steep fall in prices do not portend a healthy environment for new investments in the sector.