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Cheap solar is back, or is it?

Jan 25, 2023

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Money Matters: How to Finance Your Rooftop Solar Energy System | Department of Energy — DOE

This weeks article is a continuation of the solar conversation from last week. I touched on how polysilicon prices have been falling sharply over the last few months. The chart I refer to was shared in the tune that it was good to see the prices returning lower, however I raised the question as to whether the price reduction is truly positive for the space. It is possible that the reduction in demand of solar panels could be part of the reason which is not a great sign. You can read the very brief solar section in this piece too see the chart and the sources.

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Consumers

First, we should distinguish the difference between polysilicon and the final product which is solar panels. There may be different drags on supply and demand of each of these components independently, albeit connected in a grand sense.

So what does solar look like for residents in 2023 and will this drop in polysilicon (PS) price be positive for the consumer looking to add solar to their roof? In theory, the lower PS price will trickle through the solar panel companies and in turn lower the cost of building solar panels and costs for consumers. There are a lot of factors to keep in mind though and I want to expand on what I said last week.

A large percentage of homeowners who were most interested in solar have already bought it. With the fiscal expansion in response to COVID, households had a little extra cash on hand to help them make random purchases like a new kayak or maybe some solar panels. This point however would lead you to expect slowing, or at least less quick rise in the demand for new home solar installations. It is true we saw a 23% drop in new installations in 2022. This decrease came in commercial instillations however, while residential continued to grow.

Will this continue into 2023 though? Everyone left has been hit with inflation in solar prices as well as general prices around them. Core inflation could effect the ability for people to make more discretionary purchases like new solar, especially with some demand being brought forward with the stimulus.

While we are talking about the PS price coming down, that may not have translated over to solar panels for the consumer just yet. If you take a look at producer price inflation (PPI) vs consumer price inflation (CPI), you get a broad idea of how much inflation is getting passed through to the consumer or whether the companies are taking the hit in margins. This spread widened for PPI>CPI in 2021 and 2022, meaning that corporate profit margins took a hit and they couldn’t pass the higher prices onto consumers. (Trend may be switching).

Solar panel costs are up ~25% in 2022 [1, 2] while utilities solar contracts are up 30%. It is reasonable to assume based on PPI that costs went up higher for those companies. This certainly doesn’t help the next marginal buyer of solar want to purchase. In addition, recession has been in the news frequently and with recession expectations high, people may not feel confident to make a large purchase and instead tighten there personal balance sheet a little. With the blowout in savings rate vs consumer credit outstanding, they may be onto something. Economic indicators like the yield curve and purchasing managers indices are also pointing towards a slowing economy.

If inflation and potentially recession wasn’t enough to scare the consumer away from a new rooftop solar investment, higher interest rates from the federal reserve make funding solar panels more expensive for borrowers on top of a higher sticker price.

The last thing I’ll mention about the consumer is that many states have net metering protocols [3, 4], where excess solar can be sold back to the utilities for a profit, thus cutting down on your utility bill or helping homes generate some profit with their system. A new law in California (the largest state for rooftop solar in the US) slashed the amount of money that homes get paid out for sending their excess electricity to the grid. Another disincentive for consumers.

Producers

According to the SEIA, the reduction of the new solar in 2022 is a result of supply considerations. These are significant challenges that the industry faced and will have further issues in the future as the supply chain is sorted out and other sources are brought online. The Department of Commerce determined that a number of companies were bypassing Chinese tariffs and selling solar cells through other countries resulting in panels piling up in US ports. This is all an issue because of a ban on Chinese polysilicon with ties to humanitarian concerns as of June of 2021. The Biden administration waived the tariffs for these circumventing solar panels through June 2024, but it is expected to face further political challenges.

The supply of solar panels has normalized for the time being which will help ease upward pressure on the consumer due to this factor. The next factor to consider is the input costs for producers. I mentioned above that costs were higher for producers than consumers in general, and could also have been the case for polysilicon manufacturers and solar panel assembly. Inputs to large factories in China are primarily fossil fuels which had seen higher prices over the last few years. Prices in these key commodities have since come down and likely also contribute to lower polysilicon prices.

China re-opening its borders and letting its people have greater freedom again could have a few impacts that are not clear yet. It could help ensure proper functioning of the supply chain in the region and guarantee that the production of polysilicon is running smoothly. I’ve heard analysts predict that the price of fossil fuel commodities will increase as a result too. Time will tell.

Commodity prices in the short term are more sensitive to demand swings than supply due to inelasticity. While the solar supply issues were large and most certainly had an impact, higher interest rates and costs could be slowing down new orders for panels and PS by default. The decline in polysilicon prices acts with a lag into the production of panels, and then another lag into the price a consumer pays for panels. It will take some time before these reductions of price in PS make it to the consumer.

Incentives

Government incentives are sure to help fund many solar projects and take some of the burden off the businesses and consumers. The IRA provides incentives for the consumer in terms of tax credits. It also has incentives for businesses,

The IRA includes new tax incentives designed to spur domestic manufacturing, including a 30% Investment Tax Credit (ITC) and a production tax credit (PTC) that is product specific. Tax credits for solar builders have been extended by ten years [Reuters]

It is predicted that,

A return to a steady state of supply in 2023 should put the solar market back on track. The Inflation Reduction Act is expected to bring about unprecedented growth in the industry. -SEIA

Conclusion

How will the consumer looking into solar fare in 2023? Lets recap.

Headwinds: general inflation, solar panel inflation, recession expectations, deteriorating consumer balance sheet, net-metering payout reductions, higher interest rates

Tailwinds: easing supply issues of PS and solar panels, China re-opening, lower input costs from fossil fuels, IRA incentives, general trend for more solar installations

I have also argued that the price declines in polysilicon may not be quite as peachy as it sounds because it has other factors like input costs and lower commercial demand as driving factors, opposed to viewing it as solely a supply chain induced shock.

I predict we might not get an exciting rebound in solar instillations, or at least the rate of growth might not return to what is expected in 2023. Even with lower polysilicon helping ease the cost of solar panels in the near future, consumers may not be as willing to give the investment the green light. Commercial projects already had this response in 2022.

Tends to watch: re-shoring polysilicon and solar panel production in the US, inflation rate declining, when recession hits the US, whether interest rates remain high or return to near zero.

-Grayson

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