International Market Entry in the Photovoltaic Industry

Strategies to Enter the U.S. Market

Table of Contents

Abstract 04

Introduction 05

Shifting Importance of European Markets 06

Growth of U.S. Market 08

Attractiveness of Downstream Segment 10

Advantages of European Firms in U.S. Markets 12

Key Considerations for Succeeding in the U.S. Market 13

Recommendations 15

International Market Entry in the Photovoltaic Industry 3 1. Abstract

Capgemini expects Since 2001, Europe has been for several unique features of the European PV project a hotbed of photovoltaic (PV) U.S. market. Unlike Europe, with developers to be able to development, thanks to a its predictable feed-in tariff regimes, combination of generous and the U.S. has a patchwork of highly capitalize on their stable government incentives, rapid complex, intermittently funded extensive experience as economic expansion, affordable incentive schemes, which vary widely they seek new growth financing for PV installations and from state to state and year to year. opportunities in the widespread public interest in Developers also need to be prepared sustainability. The recent economic to deal with a handful of investment United States downturn, however, has led to the banks in order to secure tax equity reduction of government incentives financing and take advantage of all and the tightening of credit in the available incentives. Suitable sites for EU. PV industry insiders now see PV development have been getting the United States as the next market more expensive, and environmental for growth. impact mitigation costs have been on the rise. Firms must also plan The U.S. project development on how to handle the competition, space is particularly attractive. High as bidding for Power Purchase volatility in PV manufacturing, due Agreements has become increasingly to recent policy decisions, combined aggressive. Furthermore, any player with artificially high demand for in the U.S. PV industry must have renewable energy, fostered by contingency plans for a number of renewable portfolio standards, has industry-changing scenarios, from put project development in a sweet import tariffs on Chinese PV modules spot. Capgemini expects European to a regime change on Capitol Hill. PV project developers to be able to capitalize on their extensive Success depends on entering with the experience as they seek new growth right business model and the right opportunities in the United States. strategy. An experienced partner can help firms navigate this unique However, companies looking to landscape and find success in the PV make the move need to be prepared industry’s next growth market.

4 2. Introduction

This Capgemini point of view U.S. PV industry. These players analyzes historical growth trends can utilize their past European in the global photovoltaic industry development experience as a and assesses the opportunity for strategic advantage in entering international market entry into the the fragmented U.S. development United States. Due to industry market. We also identify several expansion and regulatory shifts, challenges that European developers we believe that European project are likely to face as they launch development companies are operations in America. uniquely positioned to enter the

International Market Entry in the Photovoltaic Industry 5 3. European markets have driven rapid PV growth, and incentive changes are expected to create a market shift

Europe accounts for 74% Globally, the PV industry has grown As a comparison, PV electricity of the current total at the remarkable average annual generation in Europe accounts for installed capacity growth rate of 53% from 2005- 1.15% of Europe’s total electricity 2011.1 More than 27 gigawatts demand while PV electricity worldwide, while the U.S. (GW) of PV capacity was installed generation in the US accounts for represents a little more in 2011 alone, with the total market less than 0.1%.5,6 Germany, Italy, than 7%. Although small now representing $93 billion in and other European market leaders 2 relative to the global global revenues. Europe accounts have historically benefitted from for 74% of the current total installed favorable government incentives market, the US PV market capacity worldwide, while the supporting PV development has grown rapidly over the U.S. represents a little more than and installations. However, last 10 years. 7%.3 Although small relative to the incumbent market incentives in global market, the US PV market the two countries have become has grown rapidly over the last 10 less attractive in recent years. In years. This rapid growth is largely 2010 and 2011, Germany and Italy attributed to the continued decline significantly cut feed-in-tariff (FIT) in cost per watt installed, increasing rates, a change expected to result the attractiveness of PV projects as in an overall market decline of investment options (see Figure 1). 37% in 2012.7 Germany recently accelerated the reduction of its The global PV industry has feed-in-tariffs, with cuts originally historically been driven by European scheduled for July 1st brought countries, in particular Germany forward to April 1st.8 These drastic and Italy; together, these two changes to government incentives countries currently account for 55% have led project developers to of the total global installed capacity.4 look outside the traditional PV

Figure 1: US Installed Capacity vs. Cost per Watt Installed (2001-2010)

3000 12

30% > 2500 Decline 10

1 EPIA Global Market Outlook for 2000 8 Photovoltaics until 2016 42% 2 NPD Solarbuzz 2012 Marketbuzz 1500 CAGR 6

3 EPIA Global Market Outlook for Mega Watt 1000 4 Photovoltaics until 2016 $ per Watt Installed $ per Watt

4 EPIA Market Report - 2011 500 2

5 –Ibid. 0 0 6 EIA Electric Power Annual 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 7 Solarbuzz Solar Industry Reassessing Prospects for 2012 Installed Capacity Cost per Watt Installed

8 “Germany Cuts Feed-In Tariff another 20-30%,” Sustainablebusiness.com News, Sources: The Open PV Project EPIA Global Market Outlook for Photovoltaics until 2015 February 23, 2012

6 strongholds of Western Europe in incentives have been instrumental pursuit of growth. in establishing PV markets by subsidizing the cost of delivery to Though technological advancements the end consumer. In the near-term, and falling PV module prices have government incentives will continue lowered the cost of delivering to have a strong influence on 9 IHS Emerging Energy Research “Global Solar solar energy to end-consumers, market development and shifts, but PV Supply Chain Strategies: 2010 – 2025” PV has not yet reached price in the medium to long term, solar 10 Deutsche Bank: “Solar Photovoltaic parity with other forms of energy.9 will be able to succeed without Industry 2010 Global Outlook: Deja Vu?” Therefore, attractive government government subsidies.10

International Market Entry in the Photovoltaic Industry 7 4. With the upcoming regulatory shift, the U.S. PV market will be especially attractive for entry

As growth in European markets the 2009 Recovery Act stimulus slows, North America and Asia package. Of the $16.8 billion, Pacific are expected to drive future $50.67 million is expected to go to growth. Within these regions, the photovoltaic systems U.S., Japan, China, and India are development.16 The U.S. Business expected to lead PV demand.11 By Energy Investment Tax Credit 2025, the U.S. market is expected to (ITC) provides a 30% tax credit for account for 20% of the global market eligible solar energy investments.17 (up from roughly 7% today).12 There These incentives have helped solar are more than 18 GW of utility-scale approach grid parity with projects either under construction or conventional energy sources in a under development in the United number of markets in several States, representing a pipeline over states, including California, sixty times larger than the currently Arizona, New Mexico and Nevada. existing capacity.13 The following factors make the U.S. distinctively d) Established financial markets: attractive for companies looking to Well-established and functioning enter a high-growth market: financial markets support investment opportunities in the a) High solar resources: The high United States. As the global solar resources of the Southwest economy continues to recover and California have attracted from the 2008 financial crisis, significant attention from improving capital markets have developers and investors, and contributed to working capital and there is an increasing trend to bridge financing investments for leverage the availability of high- renewable energy projects. This 11 European Photovoltaic Industry Association quality solar resources to drive type of funding is critical to “Global Market Outlook for Photovoltaics demand. project developers for building up Until 2014” a project pipeline.18 12 IHS Emerging Energy Research “Global b) Price Parity in Sight: The U.S. Solar PV Supply Chain Strategies: 2010 consumes more electricity than e) Awareness of sustainability: – 2025” any other country in the world Recent studies show that U.S. 13 Solar Energy Industries Association (SEIA) and electricity rates are projected consumers associate renewable

14 U.S. Energy Information Administration – to remain relatively flat, even as energy with environmental Annual Energy Outlook 2012 with projections solar power generation costs benefits; in the study, the clear to 2035 continue a rapid decline.14 When majority (80%) indicated that they

15 Capgemini industry interview PV electricity reaches price parity care about the use of renewable with traditional energy sources, energy.19 With this view of 16 Office of Energy Efficiency & Renewable demand for solar in the U.S. renewable energy becoming more Energy: American Recovery and Reinvestment Act market is expected to rise and more prevalent in the U.S., the dramatically.15 PV industry is poised to see (http://www1.eere.energy.gov/recovery/) considerable gains. 17 Database of State Incentives for c) U.S. government support of Renewables & Efficiency (DSIRE); Capgemini renewable energies: The current f) High Prices for Solar Systems: Analysis U.S. administration has been System prices are still much higher 18 Capgemini industry interview favorable towards renewable in the U.S. than in Europe. This is 19 National Renewable Energy Laboratory energy, awarding the Office of especially true in the commercial “Consumer Attitudes About Renewable Energy Efficiency & Renewable segment. This would be a very Energy: Trends and Regional Differences” Energy (EERE) $16.8 billion from attractive segment for European

8 The current U.S. developers as they have a creates even further opportunity administration has been significantly higher level of for European firms to compete favorable towards experience and delivery excellence with their highly advanced in this area. This segment will hardware.21 renewable energy, grow very fast and it will reward awarding the Office of those with the skills to reduce the These factors are predicted to turn Energy Efficiency & “soft costs” of PV, such as several states into hot markets, Renewable Energy (EERE) permitting, planning, installation, including California, Arizona, and maintenance. Some very cost- Nevada and New Mexico. Hawaii $16.8 billion from the 2009 effective technologies that are already has natural grid parity with Recovery Act stimulus already in use in Europe are just retail electricity prices exceeding PV package. Of the $16.8 catching on in the U.S., including generation prices by far.22 billion, $50.67 million is transformerless inverters with Government incentives will remain lower costs and higher efficiency.20 important market drivers only in the expected to go to The recent decision by the U.S. short-term. Companies in the photovoltaic systems Commerce Department to level photovoltaic industry should act development. tariffs of 37% and higher on quickly to take advantage of the imported Chinese solar cells attractive U.S. market.

20 Capgemini industry interview

21 “US Slaps High Tariffs on Chinese Solar Panels,” The New York Times, May 17th, 2012

22 Capgemini industry interview

International Market Entry in the Photovoltaic Industry 9 5. Within the U.S. market, entrants should focus on downstream participation in project development while partnering with hardware manufacturers in Europe and the US

With many firms vying for The global PV value chain has projects reveals over 140 project a place in the U.S. traditionally been dominated by development firms competing 23 development market, module suppliers supported by high for PV projects in the U.S. The module prices and profit margins. typical energy purchaser will companies with clear The last few years, however, work with multiple solar project focus and positioning are have seen the rapid proliferation developers.24 Many U.S. project more likely to differentiate of Chinese module suppliers developers also have projects themselves. and plummeting prices for PV in multiple states, indicating a hardware. Only recently has the need for breadth and mobility U.S. Government moved to restrict in development. These factors the importation of mass-produced indicate that the U.S. project PV cells from China. These heavy development market is still tariffs are a boon to European and in the nascent stages, with U.S. manufacturers. European opportunity for market leaders developers are perfectly situated to to be established. With many take advantage of this shift for the firms vying for a place in the U.S. following reasons: development market, companies with clear focus and positioning a) U.S. project development are more likely to differentiate market fragmentation: Analyzing themselves in this “multi-niche” a list of major U.S. solar business. Development firms

23 Solar Energy Industries Association (SEIA): “Utility-Scale Solar Projects in the United States Operating, Under Construction, or Under Development”

24 Capgemini Analysis

10 may utilize prior experience imposed by the U.S. Commerce and transferable skills from the Department could not have European market to become come at a more critical time for leaders in the U.S. European hardware manufacturers. As these manufacturers rush to b) EU Developers have take advantage of the new market close relationships with opportunity in the U.S., their existing European hardware preferred partners in the EU will manufacturers who will now have an advantage in securing be eager to enter the U.S. distribution partnerships in the U.S. market. The heavy tariffs

Figure 2: PV Value Chain and Market Leaders

Manufacture Develop Operate & Sell

Balance of Financing/ End Utility Systems Ownership Consumer

Wafer Cell Module Project Developer Operations & Maintenance

Engineering, Procurement, & Construction U.S. Opportunity

Major PV Firms:

Project Financing/ Wafer Cell Module EPC O&M Development Ownership

LDK Solar LDK Solar LDK Solar Yingli Yingli Mitsubishi Unisolar Sharp Sharp Sharp Trina Solar Trina Solar Heavy Industries Q-Cells Kyocera Kyocera Kyocera Canadian Solar Canadian Solar Samsung First Solar Sanyo Sanyo Sanyo SunTech SunTech Hyundai SunPower SolarWorld SolarWorld SolarWorld Unisolar Unisolar BP Solar Mitsubishi Schott Schott Schott Q-Cells Q-Cells Heavy Industries Aleo Solar Aleo Solar Aleo Solar First Solar First Solar BP Solar Evergreen Solar Evergreen Solar Evergreen Solar SunPower SunPower Yingli Yingli Yingli Mitsubishi Mitsubishi Trina Solar Trina Solar Trina Solar Heavy Industries Heavy Industries Canadian Solar Canadian Solar Canadian Solar Solon Solon First Solar First Solar SunTech Conergy Conergy SunPower SunPower First Solar Samsung Samsung Mitsubishi Mitsubishi SunPower Hyundai Hyundai Heavy Industries Heavy Industries Mitsubishi BP Solar BP Solar Unisolar Heavy Industries Q-Cells Unisolar Conergy Q-Cells Samsung Solon Hyundai Conergy Samsung Hyundai

International Market Entry in the Photovoltaic Industry 11 6. European developers can leverage their prior experience as a strategic advantage in entering U.S. commercial and utility markets

European project European Development firms many years and thousands of developers can capitalize have achieved a significant installations. Figure 3 shows on their prior experience cost advantage over their US that the smallest German solar counterparts with a combination systems are less expensive on to achieve advantage in of advanced technologies, efficient a cost-per-installed-watt basis efficiently developing and commercial & industrial system that the largest US systems. This delivering projects in the designs, and specialized project degree of cost advantage would be U.S. market. management techniques, all hugely advantageous for European developed over the course of developers entering the US market.

Figure 3: European Cost Advantage

Smallest German Solar Beats Biggest US Solar $4.50 $4.00 $3.90 $3.50 $3.40 $3.00 $2.50 $2.00 $1.50

Installed Cost Installed Cost Per Watt $1.00 $0.50 $0.00 U.S. PV by Utilities (2011 Q2) Sm. German PV (2011 Q2)

Source: Institute for Local Self-Reliance

12 7. For success in the U.S., European developers should be aware of several key market conditions

The tariffs recently a)Land prices for suitable ground and these banks generally only imposed by the Commerce mount sites are on the rise. A solar work with developers that have at Department against land rush is underway in several least $100M work of projects in markets, including California, where the pipeline.28 Chinese PV may not stand the price of suitable sites has risen up to legal challenges. The 10- to 20-fold over the last few years. d)Industry dynamics could change November 2012 election Developers are taking a number of rapidly under a number of plausible scenarios. could spell doom or boom steps to avoid over-paying for real The tariffs estate, including buying adjacent recently imposed by the Commerce for the market tracts under different names in order Department against Chinese PV may to keep landowners from realizing not stand up to legal challenges. that land is being purchased for a The November 2012 election could large solar installation.25 spell doom or boom for the market, with conservatives campaigning b)There is enormous untapped on a “Drill, Baby, Drill” platform potential in commercial rooftops. (consequently reducing support for The available PV supply for PV development) and progressives commercial rooftop installations promising to continue support for has been estimated at over 300 GW renewable energy. Firms that delay in the U.S26. The opportunity in entering the US, waiting for the this market has largely remained market to stabilize, will forfeit an unrealized due to the difficulty opportunity to establish a strong associated with integrating these foothold. Entrants need to move systems into the existing grid and quickly while remaining prepared for previously high development costs. a number of contingencies. Lack of awareness on the part of commercial building owners as e)Competition in the development to the potential upside of rooftop space is heating up. For example, PV installations has been another in 2009, Tucson Electric Power significant factor hindering issued an RFP for solar resources. commercial rooftop PV growth27. The RFP generated 144 proposals from 58 different developers, of c)The US incentive structure is which 24 were shortlisted and complex and often requires only 10 contracts were ultimately partnership to secure. The biggest signed (five of which were for 25 “Land speculators see silver lining in solar bottleneck to solar installations in the PV). Most RFPs have taken this projects,” Los Angeles Times, February 18th, U.S. is finance, and developers must path as new developers scramble 2012 work with investment banks in order to acquire pipeline.29 26 Supply Curves for Rooftop Solar PV- to take advantage of all available Generated Electricity for the United States, incentives. Many incentives are in f) Different business models NREL, November 2008 the form of tax credits. In order to will have unique advantages. 27 Incorporating PV in Buildings: A Gathering take advantage of these incentives, Business model selection depends of Eagles, Stanford, January 2005 developers who cannot apply these upon company maturity, core 28 “Tax investors talk solar project financing tax credits to their own earnings competencies, and strategic goals. at PV America,” Clean Energy Authority.com, must work with investment banks Vertically integrated firms such as April 6, 2011 to reap the benefits of these credits Sunpower have enjoyed relative 29 “Can pure-play utility PV developers by selling them through tax equity stability in the last few years, as firms compete in the U.S. market?,” financing. There are currently on 20 engaged purely in manufacturing greentechsolar:, December 7, 2010 banks offering tax equity financing have suffered. Sunpower’s

International Market Entry in the Photovoltaic Industry 13 participation in the value chain and large installed base.31 Other buy, or ally is critical. All avenues extends all the way to ownership firms have found success in the for penetration should be assessed and operation, giving it some development space alone. Nextlight according each developer’s goals, protection from falling prices in the Energy, LLC, for example, developed strengths and weaknesses in light manufacturing space.30 First Solar, a large project pipeline and cashed in of available opportunities. on the other hand, manufactures through a sale to First Solar.32 These modules and develops projects, but are just a few of the business models 30 stops short of owning and operating within PV development, which “Classifying the top Utility-Scale PV Developers in the United States,” Shayle its utility-scale installations, instead have unique advantages for different Kann, Greentechmedia.com, February 3, 2010 selling them to utilities such as industry players. 31 Edison Mission Energy as soon “First Solar acquires Edison Mission Group development pipeline,” as they come online. First Solar g) A firm’s engagement approach RenewableEnergyWorld.com, January 15, leaves the plant operations to those will be determined by its unique 2010

best suited for it and reinvests the goals, strengths and weaknesses 32 “First Solar Agrees to Acquire Nextlight proceeds into development, which and the opportunities that are Renewable Power, LLC,” Reuters.com, April is the key to its strong pipeline available. The decision to build, 28th, 2010

Figure 4: US Photovoltaic Market

1 2

2

4 3

5 10 19 3 2 91 2 1 14 3

1 1 29 3

6 Major solar projects # in development

9 States with 10+ MW of PV demand in 2007

States with 10+ MW 4 of PV demand in 2010

Sources: NREL Annual Average Solar Resource Map Annual average solar Solar Energy Industries Association (SEIA): “Utility-Scale Solar Projects in the resources by state United States Operating, Under Construction, or Under Development” Capgemini Analysis

14 8. Recommendations for European developers entering U.S. commercial and utility markets

Developers should look to To take advantage of the regulatory developers can establish an early expand into secondary and market shift, it is critical for foothold to prime for success as the tertiary markets, which European project developers to US commercial and utility markets enter the U.S. immediately and continue to expand. include: Arizona, New aggressively. The U.S. project Mexico, Texas, Hawaii, development market is still in European firms must evaluate Florida, North Carolina, its nascent stages, and no clear the competitive landscape and Illinois, Ohio, Pennsylvania, market leader has emerged. determine which business model is Several European developers, most suitable to their abilities and New York, and Maryland including Phoenix Solar, enXco, goals. Transferable skills should be and Iberdrola, have recognized identified to create a unique entry this opportunity and are already position supported by a locally present in primary U.S. markets, informed entry plan. Entrants need such as California, Nevada, and to take a carefully tailored approach Colorado. Developers should to project financing and must secure look to expand into secondary and cost-competitive access to attractive tertiary markets, which include: development sites. Establishing the Arizona, New Mexico, Texas, right business partnerships will Hawaii, Florida, North Carolina, be critical for success in the U.S. Illinois, Ohio, Pennsylvania, New market in light of the complexities York, and Maryland (see Figure 4). and local nuances present. Due to Each of these states had over 10 the perennial changes of the PV MW of demand in 2010 and all are market landscape, any firm seeking contributing to the development of to compete must have a well-defined industry infrastructure. Developers contingency plan for a variety of should target states with strong market scenarios that is able to Renewable Portfolio Standards objectively prioritize opportunities. (RPS’s), which require utilities While the U.S. is expected to be to purchase a certain amount a key market for PV growth, new of renewable energy. These and recent entrants face a variety requirements will help to drive of obstacles. Due to these factors, utility demand for PV energy in engaging with an experienced future years. By entering the U.S. advisory partner in the U.S. PV immediately, European project sector is critical for success.

International Market Entry in the Photovoltaic Industry 15 This paper covers the general About Capgemini insights taken from Capgemini’s extensive research and experience in the Renewable Energy sector. With around 120,000 people in 40 Capgemini Consulting is the global countries, Capgemini is one of the world’s strategy and transformation consulting foremost providers of consulting, organization of the Capgemini Group, We would be happy to provide a technology and outsourcing services. specializing in advising and supporting more detailed view on the growth The Group reported 2011 global revenues enterprises in significant trans- of the photovoltaic market in the of EUR 9.7 billion. Together with its formation, from innovative strategy to U.S. and the tactics necessary for clients, Capgemini creates and delivers execution and with an unstinting focus business and technology solutions on results. With the new digital economy success in market entry into the that fit their needs and drive the results creating significant disruptions and U.S. market, and explore how the they want. A deeply multicultural opportunities, our global team of over opportunities uncovered may be organization, Capgemini has developed 3,600 talented individuals work with applied to your own business in its own way of working, the Collaborative leading companies and governments to TM today’s shifting environment. Business Experience , and draws on master Digital Transformation, drawing Rightshore®, its worldwide delivery model. on our understanding of the digital economy and our leadership in business Rightshore® is a trademark belonging to Capgemini transformation and organizational change.

Find out more at: www.capgemini-consulting.com

For more information, please contact: Chris Miller Capgemini Authors: [email protected] Calin Brammer Spencer Cooke Rob Farris Chai Qunfoong [email protected] Lisa Harden

Capgemini Subject Matter Expert Contributors: Subhash Jha Inderraj Gulati

Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group