Five Risks and Trends of Photovoltaic Energy Storage Industry in 2023

I can’t think of a better way to describe the solar and energy storage industry’s transition from an unusually turbulent 2022 to an uncertain 2023. The new normal has not yet been established, and leaders in the energy transition must grapple with a strategic dilemma created by shifting and often conflicting geopolitical and macroeconomic forces.

The purpose of this discussion is to ensure that industry players develop strategic measures to maximize opportunities and mitigate risks associated with the following key market trends:

1. Re-globalization of the solar PV and energy storage system (ESS) supply chain

2. Government Intervention in Polysilicon and Critical Minerals Markets

3. First-mover advantage in electric vehicles

4. Validation (or not) of long-term energy storage and green hydrogen projects

Re-globalization of solar PV and ESS supply chains

Strategic question - where should I invest? How do I position myself against the competition? How should I set up an RFP? Am I prepared for the increased risk posed by entry-level OEM suppliers? What is my plan if the tariffs are removed?

The impact of the aforementioned labor laws, as well as a series of tariffs, such as Section 201/301 and anti-dumping/countervailing duties against China, have greatly increased the cost of imported PV modules. The Biden administration has not signaled any relief from these tariffs beyond a 24-month period through June 2024 for the new tariffs.

The Inflation Reduction Act (IRA) provided generous support for domestically produced solar and storage equipment, further incentivizing the cleantech industry to diversify its supply base, including localizing manufacturing.

India is also working to increase the independence of the PV supply chain. India's annual installed solar capacity is expected to exceed 20GW in FY2023, and it is getting closer to the 2030 target of 500GW of cumulative renewable energy generation capacity. To achieve this, India's central government has said it wants to control more of the supply chain at home. Similar to the US, India has adopted a series of protectionist policies.

India's central government in April approved a capacity-linked incentive scheme with a budget of more than $611 million to drive 10GW of integrated solar capacity. Import duty rates start at 14.5% and can reach over 50%.

In fact, the EU appears to be an exception, which has yet to formalize an aggressive localization strategy for PV or ESS. Statements by European Commission President Ursula von der Leyen at Davos 2023 hinted at structural challenges in the bloc in creating commercially viable internal supply chains. To overcome this challenge, the EU is about to implement crucial policy actions.

Although the EU has some of the most ambitious decarbonization plans in the world, high labor and energy costs have hindered localization within the EU. Ultimately, Europe may decide to become the preferred export market for component suppliers in the US, India and Southeast Asia, focusing on downstream job creation and equipment deployment.

Lithium price relief looms as polysilicon prices slump, government intervention

Strategic Questions - How will global supply and market conditions affect new polysilicon investment in the US? Where are new lithium resources being developed? What are the policy risks in these countries? How do I set up an RFP? Can I hedge my indexed battery purchase agreement?

Global trade disputes have cast a shadow of dramatic change in the global polysilicon supply-demand balance. After 18 months of tight supply and skyrocketing prices, the first weeks of 2023 saw a dramatic realignment in the polysilicon market, with prices slumping 55% from December 2022 to $18/kg.

As reflected in the Clean Energy Association's (CEA) PV Price Forecast report, the price collapse was driven by a massive wave of capacity growth in China. According to forecasts, China's polysilicon supply will nearly double in 2023.

However, after this month's meeting of polysilicon manufacturers in China, the sharp downward trend in market pricing was suddenly reversed, with polysilicon prices surging by more than 30%. The first quarter is a typical volatility period for material pricing, and both buyers and sellers are trying to test the bottom line of the market. The aforementioned phenomenon will undoubtedly raise concerns and may prompt the government to do more to limit price gouging. The government has so far taken little action, but issued a series of circulars to polysilicon manufacturers to control pricing in 2023 so as not to affect PV module prices.

In 2022 and 2023, lithium pricing has been relatively stable, but this has not relieved the pressure on the global battery energy storage industry, because the price remains high. However, mitigating measures may be on the horizon given the rapid increase in capacity in 2023/2024. Emerging lithium suppliers in Latin America have seen varying degrees of government involvement.

Representatives of Argentina, Bolivia and Chile publicly discussed the formation of the cartel. The OPEC-style trade group's goal is to ensure prices remain high enough to justify the massive investment needed to support new lithium mining operations while boosting state coffers through those new operations.

In theory, a lithium-focused trade bloc covering the entire Latin American region would be a potential headwind to China's downstream market dominance. In Latin America, however, there have been few success stories of government-controlled natural resource companies to date. Furthermore, Australia's clear leadership in the global lithium mining market will undercut the global pricing power that regional cartels hope to gain. So while this is unlikely to happen, if governments of lithium producers in the Latin American region form a cartel, it might just boost investment in supply to other free markets like the US and Canada.

First-mover advantage opportunities for electric vehicles

Strategic question - is the residential or commercial segment more likely to be profitable? Which part of the EV value chain has attracted the most investment?

According to research by LMC Automotive and EVVolumes.com, EV sales will peak in 2022, accounting for 10% of global vehicle sales. The milestone is significant despite the large subsidized markets in Europe and China. The U.S. is expected to catch up in the near term, thanks to new tax breaks from the IRA and a surge in new EV models from traditional automakers that should attract potential buyers. But 2023 will be a challenging year as consumers continue to struggle with inflation and recession fears linger.

While EV sales are highly uncertain, they could open the door for aggressive companies looking to gain a first-mover advantage in EVs. Focusing on electrification may be the most logical way to take advantage of the generous incentives for EV charging equipment. In terms of volume, the electric vehicle charging market is expected to be mainly tilted towards household charging systems. This market is likely to mimic the structure of the residential PV industry: highly fragmented and with particularly high customer acquisition costs. Likewise, the deployment of public charging stations will take place at the municipal level. While doing so would be more profitable from a pricing standpoint, it could face similar issues of fragmentation and delays.

If clean energy history repeats itself, the C&I market for vehicle electrification will first be dominated by a small number of early adopters looking to differentiate brands by focusing on the 'green' credentials of their core business. That's exactly what happened over the past decade, when companies with power-hungry data centers signed some of the first virtual power purchase agreements for solar in the United States. Their actions opened doors for others. However, it should be noted that 60% of total green electricity use is driven by just 15 companies among the EPA's top 100 partners.

Pilot projects to test long-term energy storage and green hydrogen projects

Strategic Questions – What is our company's strategy around deep decarbonization? What investment opportunities exist for each technology type? How to quantify and manage technology risk in the short term? Where will the renewable energy to support the pilot project come from?

Long-term energy storage (LDES) and green hydrogen (GH2) investors have had an exceptionally tough 2022. Shares in SPAC-backed LDES suppliers have plummeted, as have longtime suppliers of fuel cell and electrolyzer equipment. Despite these losses, the industry remains optimistic. In order to start the pre-commercial operation of new technologies, a large number of incentives are in use by the US state and federal governments. The hype period is coming to an end, and 2023 is the year for early innovators to prove their technology can pass the audit.

Pilot projects for LDES and GH2 are proliferating, and the $8 billion Hydrogen Center program sponsored by the Department of Energy (DOE) is gaining particular attention. Currently, more than 20 projects are vying for some of the funding. Likewise, the U.S. Department of Energy is providing $350 million in funding for the development of 11 LDES demonstration projects for early benchmarking of different technology types. Successfully securing these funds is key for potential investors to gain ground in the early competition.

LDES and GH2 face many regulatory and commercial challenges, making successful technology demonstrators all the more important. We can look at the failure of the multi-billion dollar Petra Nova coal-fired power project and the shadow it casts on the future of carbon capture utilization and energy storage in the United States. The project was supported by $195 million in funding from the U.S. Department of Energy.

The project has been off-grid since May 2020. Furthermore, while operating, the project never met code requirements related to CO2 capture rates. This fate must be avoided for the LDES and GH2 pilot projects if they are to retain investor interest and earn the trust of an eager development community.