On Dec 5 2007, the German Federal cabinet approved a new renewable energy law. Despite all of the fluffy headlines, overall support for solar energy dropped. In the current law, solar feed in tar riffs drop by 5% a year. In the new law they will drop by 9 to 10% in 2009, 7% in 2010, and 8% from 2011 onwards.
This presents us with two interesting math problems:
1) What happens to the price of a solar panel if the feed in tariff drops 5%? Now how about 10%?
The selling price of a solar module is currently around $3.8. The selling price of an entire system (end price to consumer) is somewhere around $7 depending on how big and where. The difference of ~$3.20 goes to labor, inverters, frames, etc.
If the feed in tariff drops, the end solar installation price has to drop an identical percentage to offer the same return on investment for consumer and project developers.
So with a 5% tariff reduction, the $7 install cost has to drop by 5% to $6.65 (a drop of 35 cents).
However, if the cost of labor and wires and cables and inverters all stay the same, which they generally do, then the whole 33 cents has to come from the module price: 3.80 - .35 = 3.47. This is an 8.6% drop in module prices. This, indecently, is roughly what happened between 2006 and 2007.
Now, if you consider a 10% drop, using the same math you get 70 cents which has to come out of the module prices: 3.80 - .70 = 3.10, or a 18.4% drop in module prices.
2) What happens to the gross margin of a solar manufacturer if costs drop by 10%, and selling prices drop by the above figured 18.4%?
Assume you currently have a 20% gross margin (Suntech, for example). So for each one dollar unit you sell, 20 cents is gross profit. 80 cents is costs.
Now assume the manufacturing costs (polysilicon for example) drop by 10%. Then the unit costs drop from 80 cents to 72 cents.
But if the selling price drops by 18.4%, each unit sells for 81.6 cents. This results in a profit per unit of:
81.6 - 72 = 9.6
And a gross margin of:
9.6/81.6 = 11.8%
What does this mean for the manufacturer?
If the profit per unit drops from 20 cents to 9.6 cents (more than 50% drop), the company now needs to sell twice as much product to maintain the same gross earnings. If the end market only grows by 40% to 50% (as analysts are predicting), earnings will likely drop.
