Today’s executives can lead the solar transformation race

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By Anas Kaakeh and Joe Rahi*

SOLAR power is becoming more and more a significant element of a successful renewable energy shift. For years now, we came to learn about the advantages and benefits that can be reaped from living in a solar-powered world, like energy sustainability and carbon emissions reductions. Our world is finally demonstrating an increased and better understanding of solar power and its applications. An example of this newfound acceptance can be seen in California, which shows that solar power now addresses around 50 per cent of the state's demand at one point during a sunny day in March.

Improved cost effectiveness led to the surge in solar power. According to the US Department of Energy, photovoltaic system prices are around one-third of their 2010 levels. IRENA forecasts that solar power will be cost-competitive with fossil fuels in two years on a levelized cost of electricity (LCOE) basis.

That helped solar to be the largest source of net power generating capacity added in 2017 with 98 gigawatts (GW)—38% of the annual global total—according to a co-branded report from Bloomberg New Energy Finance and the UN Environment Program. It outperformed the net additions of all fossil fuel technologies at 70 GW. The MENA region has also joined the surge of solar installations in recent years. The many projects across the region demonstrate the prioritization of this energy source. IHS estimates that the Middle East will add ~60 GW of new solar power capacity between now and 2035.

Three main market trends are affecting the industry: improvements in technology, continuous player consolidation and turnover, and government regulations through either protectionist trade policies or benefits to local manufacturers.

Accelerating shifts in technology and technical enhancements have resulted in higher solar cell efficiencies thanks to advanced technology and manufacturing processes, such as high-efficiency monocrystalline and diamond-wire wafer production. The market is continuously pushing toward higher efficiencies. Along with steady cost reductions, manufacturers are required to catch up to the latest and highest purity and efficiency expectations. Companies will need to increase the efficiency of their operations to meet customers’ primary criteria—price, product quality and supply chain reliability.

These market trends hurt high-cost manufacturers the most. Market consolidation is evident in the closures of high-cost manufacturers, who are not able to continue operating due to strained financials. Prices may surge temporarily, though over time, existing low-cost players expand capacity and additional players enter the market to balance demand. Over the past decade, this turnover and entry of low-cost manufacturers has resulted in the majority of production shifting to Asia-Pacific.

Government policies play a large role in the competitiveness of the solar manufacturing industry. The low cost of capital through low-interest loans, rebates on electricity costs and land leases and preferential tax policies are some examples of government support. This can be seen in China, where solar power is now seen more and more as a strategic industry to protect and support. Tariffs are often discussed in solar power and renewable energy conversations. Protectionist trade policies have led to a number of quarrels and reactions, especially between large manufacturers such as China and the United States. These discussions will continue to occur as the market heads toward commoditization.

These market trends will be especially important for executives of solar PV manufacturers, along with the private sector and policymakers investing in solar power. There are five things executives can keep in mind to succeed in this solar transformation:

• An engrained culture of performance improvement to reduce opex costs. Executives will need to be mindful of their operations to secure their competitiveness. The largest costs to tackle are utilities, raw materials, direct labor and maintenance costs.

• Continuous investments in R&D and tech capabilities to further improve solar cell efficiencies. This is not only to meet customer demands, but also any environmental or purity requirements set by local regulations. Executives must keep an eye on disruptive technologies and third-generation solar cells.

• Strong financial planning and project controls for capital expenditures to manage the sizable impact on returns. Required investments in technology and capabilities can in some cases create levels of capex depreciation high enough to push all-in production costs above market prices, leading to an unsustainable financial outlook. Financial engineering will be vital for the success of large solar projects to ensure adequate equity returns, especially for highly leveraged ones.

• Maximizing operational metrics and maximizing reliability and availability of production facilities increase production levels. This often requires investments to improve efficiency and expand facilities.

• Increasing the agility of the business plan, with continuous reassessment of manufacturing against market conditions. It is especially important to monitor how tariffs affect the business’ bottom line. Tariffs are a major factor in the success of new solar production facilities. It is critical that companies are adaptable to government regulations such as anti-dumping tariffs.

Despite these industry dynamics, advocates for solar power should be optimistic because many forecasts indicate that prices will continue to drop over the next few years and countries across the world will continue to announce high solar power targets. Solar power has already reached its tipping point, and it now plays a sizable role in any energy strategy. The solar transformation is now underway.

* Anas Kaakeh is a manager in Bain & Company’s Middle East offices. He is an active member of Bain’s Energy, Oil & Gas, Real Estate and Private Equity practices in the Middle East.

* Joe Rahi is a partner in Bain & Company’s Middle East offices. He is an active member of Bain’s Industrial Good & Services, Oil & Gas, Social & Public Sector and Organization practices in the Middle East.


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