PAGE 44 DR. THOMAS RIEGLER RENEWABLE ENERGIES DOOM OR BOOM?

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1 PAGE 44 DR. THOMAS RIEGLER

2 THE AUTHOR PAGE 45 Dr. Thomas Riegler Former Chief Financial Officer centrotherm photovoltaics AG Renewable Energies Doom or Boom? Despite what pessimists say, the market for renewable energies is a superb future market. But several conditions have to be met in order to develop and take advantage of this opportunity. This article takes a look at these conditions. THE ENERGY MARKET AND THE ENERGY TURNAROUND The discussion surrounding the energy turnaround primarily revolves around the costs that it incurs. The feasibility of the energy turnaround is being questioned more and more. However, if we take a realistic look at what is happening on the market, we are not at all pessimistic about the economic feasibility. Just a few populist arguments and figures have to be set straight with standard business tools, and then people will see that changing over the energy supply to renewable energies has considerably more benefits than costs for all those involved (and impacted). It has become common practice to compare the supposed high cost of producing electricity using renewable energies (RE) with the market price for electricity on the European Electricity Exchange EPEX. This comparison is flawed because EPEX prices are based solely on the variable costs that a conventional power plant incurs. Renewable energies, however, calculate their production costs almost exclusively from the investment costs. Therefore, comparing both energy prices with each other is almost akin to the pro verbial apples and oranges comparison. Added to this is the historically established convention the energy market has of paying the same price to all the power plants supplying the grid, namely, that of the most expensive producing power plant. This situation is roughly comparable to that of an automotive manufacturer who was to sell his cars at material costs, but even if he just produces a VW Polo, he could charge for the costs of a Mercedes S Classs.

3 PAGE 46 DR. THOMAS RIEGLER In the past, energy producers used this margin to cover the investment costs for new or replacement power plants. This mechanism is now being eroded by the increasing amount of renewable energies. Since they have practically no variable costs, realizable prices are sinking considerably on the EPEX making the construction of new, even conventional power plants uneconomical. When it comes to the first condition for developing the future energy market, the onus is now on politicians to set parameters for a real (energy) market in such a way that in the future apples can be compared with apples. And then, in just a few years time, a mix of renewable energies can compete with conventional power plants; the math for this can be easily shown. clean energies only photovoltaics would be clearly too expensive. However, it is justified in the mix as clean energy would, in fact, be unaffordable without it given that considerable storage capacities would have to be built. The energy production costs from a wind/storage system could easily increase to over one euro/kwh. THE MARKET TURNAROUND How is the market for companies in the energy branch going to change in the broadest sense and who stands to benefit? Up until now there has been a relatively simple valueadded chain on the market for renewable energies as shown here with photovoltaics (Fig. 1). Not only would the renewable energy industry profit from this, but so would conventional producers. Under full cost accounting, the new construction of a gas-fired power plant, for instance, would pay off again. Consumers benefit because the EEG apportionment can be scaled down faster. What does all this have to do with renewable energies? The decisive factor here is the energy market procedure as already indicated above. Like conventional energy producers, renewable energies also require a cross subsidy. Today, energy suppliers are selling an electricity mix from various power plants; power from a gas-powered plant alone would be too expensive. Similarly, among the The added value was geared to supplying the technical products for energy production (here: solar modules) or developing them in the first place. The industry was thus driven by technology, inflamed by generous feed-in tariffs, and capacity expansion; the latter in part to such a high degree that little time was left for anything else. Initially competition was practically non-existent, the margins were very high and pressure to innovate was low. Market activity was dominated by the sellers, and goods were allocated. These are all characteristics of a growth market whereby products found themselves in the growth phase of the product life cycle. As is so often the case, the high margins Figure 1 RAW SILICON POLY- SILICON INGOT WAFER CELL MODULE VALUE-ADDED CHAIN, PHOTOVOLTAICS PROJECT DEVELOPERS

4 DR. THOMAS RIEGLER PAGE 47 and growth rates attracted scores of other players, and considerable capacities were built up while at the same time the willingness of the public to fund these products subsided. Finally, the bubble burst in The market collapsed, module prices plunged into a bottomless pit, and the industry wound up in a painful consolidation phase, which is still the case today. A number of bankruptcies and company failures went hand in hand with the consolidation. Traditionally, the margins, except for project developers, were the lowest at the lower end of the value-added chain. After the noncompetitive Si thin-film technology achieved notoriety with spectacular bankruptcies as early as 2010, module manufacturers like Solon AG were the first to bow out of the race at the end of 2011 followed by the cell manufacturers Q-Cells, Sovello and Schott Solar primarily in the first half of More integrated and diversified companies such as Solarworld or even Conergy have still been able to perform well on the market. Here it will depend on how fast dwindling sales in the production business can be replaced by sales with new business models. Bosch Solar or even Suntech were not able to do this sufficiently or were no longer willing to invest in such a reconstruction that would require large amounts of resources and for this reason bowed out of the race in March The higher-margin levels of the value-added chain above the wafer level have remained to a large extent intact in part because they are appreciated on account of high investments or complex processes (silicon production). But here too, companies have also run into problems (REC) or will do so in the future. Manufacturers of photovoltaic machines are a unique group. While manufacturers of solar products succumbed notably to the pricing pressure of the competition from Chinese manufacturers given a simultaneous shrinking market, machine manufacturers thought they were safe for a long time because they also saw a market for themselves in East Asia. And so they were caught off guard by the complete disappearance of the PV machine market at the end of Centrotherm is just the most radical and earliest market consolidation here in July 2012, which is also emerging for other machine and equipment manufacturers. Up until now, the companies that have done the best here were those that offered a sufficiently diversified product portfolio such as Manz AG or those that offered PV as just a small portion of their portfolio like teamtechnik. However, even here there have already been numerous layoffs, albeit with little public attention.

5 PAGE 48 DR. THOMAS RIEGLER This is based on the idea that the value-added chain shifts its focus from its fixation on electricity-generating products to what the end customer wants, namely a reliable and cost-effective supply of electricity and user orientation (Fig. 2). RENEWABLE ENERGIES NOT A TRAGEDY The situation described above can be regarded as a transition to a mature industry, admittedly by way of painful consolidation. For companies it will be a matter of being able to get themselves ready to make tracks and jump on a new S curve of innovation. This leads to a second condition. The future prospects are bright for companies that succeed in correctly aligning themselves to shifts along the new value-added chain. Those companies that realign themselves fast enough and make themselves ready for new business models will survive. The slow switch to a customer-driven, buyer-oriented market necessitates, among other things, the radical enforce ment of bottom line costs: The manufacturing of components like PV modules, which from the customer s perspective are merely a means to an end of the most favorable electricity supply and thus a commodity, will no longer happen in Europe. Production is no longer driven by technology but, rather, by costs because the basic technological processes are adequately known around the world. For this reason, manufacturers of such products would be well advised to brace themselves for new energy supply business models like numerous companies have done such as Q-Cells and Solarworld. In particular, project developers who used to be specialized in PV or wind energy have an especially good hand because they are close to the end customer anyway. Figure 2 EQUIPMENT PROVIDER COMPONENT PRODUCER DEVELOPER & PLANNER POWER PLANT BUILDER POWER PLANT OPERATOR / ENERGY PROVIDER ENERGY / POWER CONSUMER NEW VALUE CHAIN RENEWABLE ENERGY PRODUCTION AND PROVIDER machinery toolmaker suppliers for solar wind bio solutions engineering EPCs hybrid kombi B2B distributors application & solutions: air conditioning desalination ventilation industrial facility energy efficiency

6 DR. THOMAS RIEGLER PAGE 49 For machine manufacturers it will come down to moving ahead in a sufficiently diversified way. It won t be enough to just wobble through the market with the wooden PV leg because at least two or three diversified mainstays will be needed. Whether a broad machine spectrum will be able to assert itself and develop in light of growing manufacturing in East Asia will depend on the technological parameters. These will have to be carefully evaluated and checked in detail on a case-by-case basis. In order to make companies ready for the future, it is important to tap into the opportunities of the company and to use their products and competencies to supply the new value-added chain. Companies need to assess where they can contribute the value that will be seen and appreciated as such by the customer. Circumstances are such that merely manufacturing associated components no longer suffices.