Where is Asia's place in the sun?

Business Times 4 Nov 09;

OVERVIEW

IT'S been a somewhat gloomy year for solar power players. Hurt by a financing squeeze and a demand slump amid the recession, the industry winced even more when Spain's once-glorious photovoltaic (PV) market crashed as the government retracted its generous subsidies.

Still, prospects for the industry remain bright, said panellists of a roundtable organised by The Business Times. This is thanks in large part to multibillion-dollar plans by governments for clean energy. In fact, leaders of the United States and China recently declared they each want to lead in the clean energy race, a major part of which is solar power. Where is Asia's place in the sun?

Panellists:

# ArminGAberle, Deputy CEO, Solar Energy Research Institute of Singapore (SERIS)

# Carol Tan, Head of Project Finance, Epuron

# Christophe Inglin, Managing Director, Phoenix Solar, Singapore

# David Tan, Deputy CEO, Energy Market Authority, Singapore

Q: Among the renewable energy sources, how big do you think solar generation will become over the next 10 years?

Armin Aberle: I am convinced that over the next 10 years, the solar electricity market will increase by more than a factor of five.

Carol Tan: We expect a distinct and substantial growth in solar generation starting from 2010 for the following reasons: Dwindling supply of fossil fuels; price decrease in solar modules; and an increasing trend to move into renewable industry by major economies.

David Tan: At the global level, the International Energy Agency has estimated that solar energy (both solar photovoltaic and solar thermal) contributed just 0.02 per cent of the electricity produced worldwide in 2006. This is expected to increase to one per cent by 2030. For Singapore, we expect solar PV to contribute to only a very small fraction (probably less than one per cent) of our electricity demand over the next decade.

Christophe Inglin: Assuming approximately 8GWp of solar PV modules installed globally this year, and anticipating a compound annual growth rate of 30 per cent in the coming years, it would mean that in 2019 around 110GWp would be installed. That is equivalent to around 18 one-GW-size nuclear or coal-fired power plants. But 30 per cent growth is conservative by the standards of recent years. I believe 50 per cent compound average growth rate is more likely, in which case 460GWp gets installed in 2019, equivalent to nearly 80 nuclear plants. That would be enough to supply Singapore's current electricity consumption 15 times over.

If you add cumulative installations in prior years, then PV will contribute 1-3 per cent of global electricity by 2019. Many sceptics find such growth rates improbable, but they overlook the tremendous growth that will ensue when PV systems cross grid parity, which means they will compete against conventional power plants without any subsidies. The above calculations do not consider additional capacity from concentrating solar thermal (CSP) power plants. These will be located in deserts and use concentrated solar heat rays to heat up a fluid and drive conventional steam turbines.

Q: Where do you think Asia stands right now in what obviously has become a global race to lead clean-energy technology, including in the area of solar power?

Armin Aberle: Asia is increasingly becoming the global manufacturing hub for solar technologies. It already manufactures more than half of the world's solar cells and modules, and this fraction will increase further in the coming decade.

Carol Tan: The ongoing price war resulting from the current buyers' market situation presents a window of opportunity for renewable energy to become a mainstream technology. This can potentially be a breakthrough that gives rise to market opportunities for companies supplying components or services to this sector (including solar power). The stimulus packages and incentives towards renewable energy generation from the Asian economies will further spur the growth in this sector.

Specifically, markets such as Korea, Thailand, Philippines, Malaysia and Indonesia have already or are currently putting in place financial (in the form of feed-in tariffs) and tax incentives in support of power plants utilising various forms of renewable energy technologies. We believe and are optimistic that Asia is on the right track towards becoming a global player in this industry.

Christophe Inglin: Japan is Asia's current PV technology leader, followed closely by China and Taiwan. But China is moving into overdrive. Already, China manufactures more than 50 per cent of the world's PV modules, and is helping to drive down costs faster. Whereas the Chinese until last year preferred to manufacture for export to the West, their government is now moving remarkably fast to encourage local installations. In a few years from now, China could well become the biggest PV market. By manufacturing and installing PV modules in their own country, you can be sure that the Chinese will also leverage their own research and development (R&D).

India also promises to become a large manufacturer and consumer of PV and CSP. Plenty of investment and technical knowhow will come to India from its diaspora in Silicon Valley. But initially at least, progress in India is likely to be a little more chaotic than in China.

Apart from Taiwan and Korea, there's not much action in the rest of Asia. Malaysia and Singapore have both attracted some large foreign manufacturers, who make modules for export, and Singapore has made a big commitment to R&D by establishing the Solar Energy Research Institute of Singapore (SERIS). But neither country has a home-grown industry like those that flourish in China, Japan, Taiwan, Korea and soon in India.

David Tan: Like other parts of the world, Asia recognises the opportunities in clean energy technology and potential for such technology to address the challenges of energy security and climate change. This is why many Asian countries are ramping up their efforts to grow and develop their clean-energy sector. Singapore is no exception. At the whole-of-government level, we have set aside S$350 million to build R&D capabilities in clean energy. We believe that we have some competitive advantages due to our existing electronics, chemicals and engineering industry clusters from which we can transfer knowledge to the solar energy sector quite quickly.

We are strategically located in the Asian sunbelt where the market potential is significant in the medium to long term. We are also moving quickly to build deep expertise in solar energy applied to an urbanised, tropical environment. One major initiative is the recent establishment of SERIS led by renowned solar energy expert Professor Joachim Luther. Overall, these initiatives play to the strengths of Singapore as we position ourselves as a 'living lab' for companies to create, develop and demonstrate innovative clean energy solutions.

Q: Making solar power affordable is an oft-touted obstacle to this energy source's take-off. How long before the technology gets cheap enough?

Armin Aberle: The cost of solar electricity is coming down rapidly. It has come down a factor of 100 in the last 30 years, and in sunny countries with high electricity prices we already have grid parity today, at least during several hours of the day. For the end user, this means the cost of solar electricity is the same as the price of coal-fired electricity. As prices of solar electricity continue to fall, the global belt where PV electricity is cost-effective will widen. It starts in countries like Spain and Italy and will eventually apply to many countries with moderate climate, including Germany and the United States. Solar electricity gets more competitive by the day, and I am convinced that in 30 years a large fraction of the world's energy demand is covered by solar electricity.

Carol Tan: This question centres on whether a full-cost approach, taking into account the repair cost of environmental damage, has been considered when calculating the cost of energy production. In addition, many governments provide heavy subsidies on fossil fuels which creates further confusion in terms of comparing cost of power production. Notwithstanding this, we see that technology improvements, falling raw material cost and economies of scale will result in a convergence to grid parity which some say will happen by 2015. In fact, in some European countries it is already coming very close.

Christophe Inglin: Grid parity is where solar electricity is commercially on par with conventionally generated electricity. Installed costs for PV are falling rapidly, but reaching grid parity depends also on prevailing sunshine intensity, interest rates (to fund investments in solar power plants) and the cost of conventional electricity (linked to global oil prices). In places with high sunshine and relatively high daytime electricity tariffs, like Italy and California, grid parity is one or two years away. Most of Asia (except Japan) has much lower electricity tariffs. In Singapore, we can expect grid parity by 2014 or sooner.

David Tan: There is no definite answer to this as there are two major uncertainties: The price of fossil fuel and the cost of solar PV. The cost of fossil fuel-derived electricity will trend upwards with rising fuel prices, while the cost of solar PV-derived electricity will trend downwards, with the improvements in manufacturing processes, system integration and construction methods. The cost of solar PV has historically been falling by about 4 per cent a year. At this rate, we estimate that solar PV may be competitive over the next 10 years.

Q: Many entrepreneurs and businesses have been jumping on the bandwagon of solar energy. What will be the winning business model?

Armin Aberle: Solar can be de-centralised and centralised, so there will not be a single winning business model. Solar involves manufacturing of components and systems, but also planning and financing of large solar power plants. The cake is so big and the technologies and market segments so diverse that there will be a range of business models that will make money.

Carol Tan: Apart from the usual focus on improving the technological efficiency, and finding ways of lowering manufacturing and raw material costs, there is a need to focus on quality control - the products must meet high quality standards and be supported by professional service providers. We are looking at the deployment of equipment that is expected to be used for over 20 years and it is of paramount importance that it is made to last!

Christophe Inglin: I wish I knew the magic answer! As in any industry, hard work and quick thinking will be essential to develop new opportunities. There are opportunities throughout the value chain, from manufacturing, R&D, to installation, including project development, financing, consulting and academia. Who would have imagined just 15 years ago how the IT and telecoms sectors would turn out today? They have completely transformed themselves from being dominated by stodgy state telco monopolies to tremendously diverse and innovative industries. The power sector will likewise experience huge technical and business upheaval over the coming decades. Renewable energy and storage technology will be two sources of upheaval. Another will be smart grid technology, where Singapore is well positioned to play a leading role.

Q: The governments of Asian countries including China have become more aggressive in pushing the solar power agenda. What's your assessment of their efforts? What's the most effective approach government should take?

Armin Aberle: Their efforts are excellent and timely. The global energy sector is not a level playing field, and hence solar technologies need some form of subsidy during the next 10 years or so to establish themselves. It is important to have a balanced approach which supports the manufacturing sector and simultaneously creates a local market for solar systems. You shouldn't walk barefoot when you are a shoemaker; likewise, Asian countries need to establish conditions that create a local market for solar systems.

There is a range of possible support schemes, but the easiest and by far best-performing approach is the German feed-in tariff scheme. This scheme pays a subsidy for each unit of solar electricity generated, ensuring that the systems are carefully selected, installed and maintained. The German government loves the scheme too, as it does not involve government money - the subsidy is paid by the electricity users in Germany.

Carol Tan: Like many Asian markets, China, which is one of the largest carbon emitters, has realised that solar power can be a key contributor towards addressing its rising energy demand and at the same time, a significant driver to its national economy. This is the reason why China has surged ahead in campaigning the solar power agenda. The approach by the government should be to propose tariffs, incentives and other support mechanisms that work towards the reduction of environmental damage and the cost of repairing such damage. At the same time, these measures should encourage an open economy with globalised trade. Ultimately, the consumer should be given the choice to select the equipment and service providers, to analyse the costs and benefits, and to decide on the most attractive and sustainable solution over the long term.

Christophe Inglin: To become an excellent cook, you can start by reading some cookery books, taking courses and watching shows. You can also test bed your new recipes on trusted friends. But you will not progress far without ample practice and regular feedback from people who eat your cuisine. The Chinese, Japanese, Korean and Indian governments are making sure there is plenty of healthy appetite to consume their cooks' output. The rest are just beginning to read the recipe books.

Q: Do you sense rising protectionism in the global race to own and produce solar energy? China, for instance, requires that 75 per cent of the content of government-purchased solar panels be Chinese-made.

Armin Aberle: Protectionism is short-sighted and does not help. Countries like China have a big export surplus, and hence it is inappropriate for the Chinese to protect their market from foreign products. Most people will agree that the world as a whole benefits from free trade, and hence I don't think that protectionism will surge.

An increasingly protectionist solar market would slow down the rate of innovation and cost reduction in the solar market, and thus slow down the growth rate of the solar business. Solar is not only about manufacturing of the solar cells and panels - the panels need to be shipped to the point of use, the solar system needs to be designed, planned, financed, installed and maintained. These are all local jobs, so countries should not be worried if a large fraction of the solar modules comes from Asia. Today, we buy most of our oil from a few countries, and nobody seems to have major problems with this fact.

Christophe Inglin: Protectionism is seldom good for an industry, and I do not believe the Chinese government will try it for long, for fear of retaliation in their export markets, which are currently much bigger than their domestic market. Consider also that the biggest announced project MOU in China came from US manufacturer First Solar, to install over 2GW of modules in phases from 2010 to 2019.

David Tan: We are not in a position to comment on the trade policies of other countries.

Q: With the US and China both wanting to dominate the solar scene, do other countries have a fighting chance to be among the top players?

Armin Aberle: China is a manufacturing powerhouse, USA is not. Standard solar panels will become a commodity like TV sets and personal computers, and thus it will be very difficult to compete with the Chinese in the field of standard products. Industrialised countries like USA or Germany need to concentrate on high-end products such as high-efficiency PV panels or highest-performance solar cells for concentrator systems. It is a bit like with cars: You can manufacture a Mercedes in Germany, but not the Tata Nano.

Christophe Inglin: I am not yet convinced of US determination to dominate the solar scene. The US is certainly not a top player today - they are well behind Japan, Germany, China and even Taiwan. I also doubt one or two countries can dominate the world market. As component costs come down, freight costs will become more significant, giving local production an advantage over imports from remote places.

Singapore stands an excellent chance of regional leadership because our higher electricity tariffs mean we should achieve grid parity before our neighbours, and therefore grow our own market ahead of other countries. Having SERIS here also gives us a regional headstart in adapting the technology to tropical conditions. But as with the cooking analogy, we need to quickly grow beyond contrived test bedding to make real progress.

David Tan: While the US and China are currently major players in the solar energy sector, the continued development and expansion of the clean-energy industry (including solar) will likely bring about growing opportunities which other countries/players can also seize upon by leveraging on their unique strengths and niche capabilities.