Why The Solar Industry Could Face Headwinds In The Near Term

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The solar industry could be poised for some difficult quarters ahead, amid weaker demand for solar panels and potential pricing headwinds. The utility-scale sector could also face some challenges, amid stronger competition and weaker contracting activity. Below we review some of the key factors that are likely to impact solar companies in the near term.

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Declining Panel Demand, Led By China 

China saw its solar installations soar to about 13 GW during the first half of 2016, as developers rushed to complete projects prior to a drop in the country’s feed-in-tariffs on June 30, 2016. However, this is likely to lead to a sharp decline in PV installations during the second half, with the metric expected to fall by as much as 80% in Q3 according to IHS. Installations in the U.S. could also see some pullbacks, amid the extension of the U.S. investment tax credit beyond December 2016, which allows developers longer-term time horizons to complete projects. While markets such as India are expect to see strong growth (127% per GTM, with about 3.8 GW expected to be commissioned in H2), this should be more than offset by the declines in China.

Solar Manufacturing Capacity Growth 

Solar manufacturing capacity expansion has also been robust. Manufacturing capital expenditures in the photovoltaic sector are projected to hit a five-year high of about $5.3 billion in 2016, marking an increase of 60% from the lows of 2012. For instance, solar cell and module production capacity in China and Taiwan is projected to reach 76.5 GW and 80.4 GW at the end of this year, surpassing the global PV installation forecast of between 65 GW to 69 GW. [1] This, coupled with weaker projected demand for the second half of the year, is likely to put pressure on the pricing and margins for most solar panel manufacturers.

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Utility-Scale Solar Slowdown

The utility-scale project development business is also facing some headwinds. Uncertainty around the extension of the U.S. investment tax credit (which has now been extended) caused a build-up of projects during 2015 and the first half of 2016, while reducing demand for H2 2016 and 2017. Pricing in the power plant business is also likely to be impacted by stronger competition from independent power producers and smaller players, with new PPAs being signed at record low levels. The April 2016 bankruptcy filing of SunEdison, the world’s largest renewable energy developer, is also likely to have raised IRR expectations for solar power projects, impacting the rates investors are willing to pay for new projects.

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Notes:
  1. Solar industry set for renewed oversupply and shakeout, PV Tech, June 2016 []