29 July 2009 00:00 [Source: ICB]
Imminent structural changes in the photovoltaic industry will benefit chemical suppliers ready to adapt
Alexander Keller & Thorsten Ploss/Roland Berger Strategy Consultants
SUNSHINE: ENVIRONMENTALLY friendly, unlimited and free. Developing this seemingly ideal energy resource to generate electrical power has always been the goal of the photovoltaic (PV) industry. But nothing is really for free, and the high investment costs associated with PV cells, along with their very low efficiency, has prevented the technology from being cost-competitive on a standalone basis.
The PV industry's growth has so far been limited primarily to countries providing attractive subsidies. Most of the world's installed capacity is found in Germany (42%) and Japan (21%), countries that, from the perspective of sunshine, are not the best suited for solar power.
However, a step-change in the economic competitiveness of PV cells is imminent.
Industry observers had estimated that "grid parity" - the point when solar electricity becomes equal to or cheaper than electricity from conventional sources - would not be achieved until 2020, but ongoing developments in PV technology and rising prices for fossil fuels have shortened this timeline, and some experts now believe that grid parity will be realized before 2015. Grid parity will differ by country, and will depend largely on each country's sunshine duration, along with the development of fossil fuel prices. Nevertheless, continued progress in PV technology means that grid parity is not far away.
GERMANY AND JAPAN HAVE AN EDGE
Considering the overall size of the PV markets in Germany and Japan, coupled with the mid-term grid parity potential, it is expected that PV cell production in those two countries will be very strong going forward (together they currently account for 44% of global production). PV producers such as Germany's Q-Cells, as well as Sharp and Kyocera, both Japanese, are already recognized by industry experts as technology leaders. Emerging countries such as China have also discovered opportunities in PV production, however. Chinese companies represented 29% of global production in 2007, of which 98% was exported.
As a major supplier to PV producers, the chemical industry stands to benefit from the development of the PV industry. Chemicals such as ethylene vinyl acetate copolymer (EVA), polyurethanes (PUs), other plastics and adhesives make up between 20% and 50% of the total material costs of a PV panel, with conventional crystalline silicon technology on the low side and newer thin-film technology on the high side. Furthermore, chemicals contribute to efficiency and effectiveness increases in PV production.
Analysis of the PV industry shows that suppliers to it will face two structural challenges:
Demand and production growth will move to Asian markets over the short term, in particular to China, which will shortly become the leading PV-producing country
Over the medium term, PV production will shift from conventional to thin-film technology.
To be more explicit on the first point, Asia (excluding Japan) held a global share of 2.8% of yearly PV installations in 2007, but it is expected to have a share of more than 40% of PV installations by 2030. This growth is expected to be driven by the strong, growing economies of China and India. China, for example, intends to spend €3.2bn ($4.5bn) over the next five years to supply 2m households with PV systems. India's federal government aims to supply electricity to 18,000 remote villages via renewable energy.
The other upcoming structural change is the shift from conventional silicon to thin-film technology. Film had less than a 10% market share in 2007, but it is already expected to achieve a 25% market share of new installations by 2013, and a 35% market share by 2030. This increase in thin-film market share is additional to the predicted double-digit annual growth rate for the global market throughout the forecast period. Well-known companies such as Sharp and Showa in Japan and Best Solar in China announced the development of thin-film capacities of more than 1GW each to become operational by 2010 to support this growth.
THIN-FILM IS THE NEW FRONTIER
The rise of thin-film technology presents a major opportunity to the chemical industry. It will have important consequences in terms of requested product portfolio, application technology and expected development support.
The high overall growth rates of the PV market, coupled with the increasing share of thin-film technology and the higher volume of chemicals consumed in thin-film production, indicate a potential market for chemicals of €3.5bn (silicon) and €7.4bn (thin-film) in 2030, well above the estimated 2007 market size of €260m (silicon) and €100m (thin-film).
Furthermore, technical issues in thin-film PV are creating challenges to which the chemical industry can contribute significantly. The improvement of the deposition process of the absorber layer (speed, quality, thickness), avoidance of moisture ingress (especially for flexible applications), innovative transparent conducting oxides or generally improved module packaging design (including resilience in outdoor applications) are but a few examples of opportunities for the chemical industry, both to improve the use of existing materials, as well as to introduce and develop new ones.
The challenge for the chemical industry is to understand how to address these two structural challenges and take part in the PV industry's growth.
ASIAN EXPORTS TO REMAIN HOME
Chemical suppliers will need to follow the PV industry as it grows in Asia. However, the shift in PV production will be unlike previous shifts of production to Asia. There will be fewer opportunities to follow established (Western) customers moving to serve growing Asian markets. There are already established Chinese players who will shift their current exports to domestic sales and do everything to use their local advantages to capture the Chinese growth. One such Chinese player is Suntech, already one of the top three global PV suppliers. Approaching, keeping and developing these experienced customers, in competition with local Asian chemical competitors, will be a critical success factor for Western chemical companies.
The shift from conventional to thin-film technology will need to be understood and properly developed. Silicon producers already understand PV as a market. They have switched from treating PV-grade silicon as a by-product of other activities, to building up capacities exclusively for the PV market. Chemical companies that likewise adapt and address the PV industry as a target market on its own will benefit. Appropriate adaptations include targeted marketing, portfolio development, application, and research and development support, and key account management. Companies that successfully address these issues will be frontrunners, able not only to capture the biggest share of the growing market, but also to sustainably differentiate themselves from their competition.
The Western chemical industry is at a crossroads, with huge opportunities in PV, but big strategic choices and structural challenges. Actions taken in the coming years will determine their success or failure in this potentially multibillion-euro market.
The PV industry and its suppliers can look forward to tremendous growth, but they will have to address significant changes:
Alexander Keller, partner at Roland Berger Strategy Consultants, heads the global Chemicals Practice Group, advising chemical companies on a broad range of management topics, both strategic and operational.
Thorsten Ploss, a partner at Roland Berger Strategy Consultants, has worked for over 11 years in strategy consulting, cost optimization and reorganization.
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