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First Solar says it can weather solar module market glut

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


First Solar says it can weather solar module market glut

Despitefears of a glut, First Solar Inc.is running its production plants at full bore with the aim of producing 24%more solar modules than it did last year. They are not alone. Companies acrossthe solar industry are boosting manufacturing capacity to feed a growingmarket. The danger, though, is that supply will outstrip demand and collapseprices.

"Manufacturershave acknowledged the growing overcapacity … though they still announcedcapacity expansions, citing growth from efficiency improvements and highercapacity build outside China," Credit Suisse analyst Patrick Jobin wrotein a March client note. "We appreciate the need for capacity expansionoutside China, especially as the [investment tax credit] extension improves thelong-term demand outlook in the U.S., but we believe the timing and magnitudeof new capacity builds may exacerbate oversupply and pressure margins."

Manufacturersanticipate the average selling price of solar modules will fall by as much as10% in the second half of the year, Jobin said. However, "these pressuresare only partially reflected in Street estimates and could prove to [be] morenegative than many expect," he added.

Tobe sure, manufacturers that supply the U.S. market stand to profit fromCongress' decision to extend the 30% investment tax credit for five years. Thepolicy certainty and continued financial support are expected to drive healthydevelopment for years.

Inthe near term, though, the extension created a cliff in the market. Developersexpected the incentive to expire at the end of this year so they packed thecountry's pipeline with projects that, in many cases, cannot be delayed due tothe terms of power purchase agreements. As a result, GTM Research solar installationsshooting up by more than 119% this year to 16,000 MW. That is likely to befollowed by a reset in the market in 2017, GTM Research senior solar analystCory Honeyman said, with installations falling to about 10,000 MW.

"Inthe U.S., the ITC extension has led to an increase in overall opportunities,but customers continue to work through revisions to project timing, which hasled to some temporary delays in new contracted bookings," First Solar CEOJames Hughes said on an earningscall April 27.

Nevertheless,with its plants running at 100% capacity utilization during the first quarter,up 13 percentage points from a year ago, First Solar expects to increasesolar-module production to 3,100 MW this year from 2,500 MW in 2015. CompetitorCanadian Solar Inc.is even more aggressive, planning to ramp module production by more than 32%this year to 5,730 MW, according to a recent SEC filing.

FirstSolar CFO Mark Widmar, who takes over as chief executive in July, acknowledgedconcerns about oversupply, particularly in 2017. While the company "maynot have as much resilience or robustness of demand" next year, themultiyear extension of the ITC "clearly" will drive increased demandinto 2020, Widmar said. "[We] believe we have a very strong,differentiated technology and a cost advantage that will weather those types ofpotential disruptions around supply and demand," he added.

Onan earnings call in March, Canadian Solar executives said the company isfocused primarily on boosting wafer and cell capacities, which should improvemargins. The company has not reported first-quarter earnings.

"Soeven if some of the overcapacity does happen, as some other solar peer[companies] indicated, our strategy will make us better prepared for that thanour competitors," Canadian Solar President and CEO Shawn Qu said on thecall.

CreditSuisse calculated that the solar industry is planning to add about 10,000 MW ofnew solar cell capacity to "an already oversupplied market." Demand,meanwhile, is only expected to increase by about 6,100 MW, the firm said.