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Photovoltaic cells and panels

October, 2012

Overview
Value chain of crystalline module manufacturer

No manufacturing base in India

Manufacturing capacity of 800 MW 8-10 players

Manufacturing capacity of 1.7 GW 30-35 players

Indosolar Moser baer Tata Power Solar XL energy

Moser baer Tata Power Solar XL energy Solar semiconductor

There are two types of solar PV technologies : crystalline and thin film Thin film constitutes 60% of total installed capacity whereas crystalline accounts for the balance 97% of the manufacturing capacities in India are crystalline-based and rest are thin film-based

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Global scenario

Global demand review

Trend in global capacity additions
Europe 35 30 25 20 16.8 13 6.3 2.5 2007 Source: EPIA 2008 2009 2010 2011 H1 2012 7.4 Asia pacific America China Rest of the World H1 2012

29.7

15
10 5 0

Almost 30 GW of solar PV capacity was added in 2011, an increase of 76% y-o-y, taking installed capacity to 69.7 GW Europe retained its leadership in the global PV market with a share of 74% in the total capacity additions Italy (9 GW) and Germany (7.5 GW) together accounted for 56% of the total capacity additions in 2011 Falling capital costs (due to drop in module prices) and favorable feed in tariffs has led to a surge in capacity additions Installations increased to 13 GW in H1 2012, an increase of 35 per cent y-o-y
Germany remained the largest market with additions of 4.4 GW, with 1.1 GW added in March and 1.8 GW added in June The US market added 1.2 GW, an increase of 93% y-o-y in a rush to avail investment tax credit, set to expire in 2012

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Pace of fall in prices has moderated in 2012

Trend in crystalline module and cell prices
Crystalline cell prices 120 100 80 60 40 Crystalline module prices 120 100 80 60 40 20 May- May- 0 Aug-12 Jun-12 Jul-12 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Source: Industry sources
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Trend in polysilicon and wafer prices

Polysilicon prices Silicon wafer prices

20
0 Feb-11 Mar-11 Apr-11 Oct-11 Feb-12 Mar-12 Aug-11 Sep-11 Nov-11 Dec-11 Jun-11 Jan-12 Apr-12 Jul-11

Source: Industry sources

Trend in thin film and cadmium prices

120 100 80 60 40 20 0 Jan-11 Feb-11 Mar-11 Apr-11 May- Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May- Jun-12 Jul-12 Aug-12 Thin film (CdTe) Cadmium

Sharp fall in polysilicon prices was driven by capacity expansions in polysilicon Reduction in wafer processing costs has also supported the price decline Pace of module price decline moderated in 2012 as many players exited the market Module prices would decline at a slower pace to reach $0.65-$0.70 per watt by end of 2012
Supply of PV modules will still far exceed demand Top chinese companies still hold inventory of 5 GW Polysilicon prices expected to decline to $18 per kg by end of 2012

Source: Industry sources

5

Profitability of global players severely impacted in 2011

Operating margins of global players
Op Margin (%) 20 15.4 15 10 5 0 -1.1 0.5 2007 Source: Bloomberg 2008 2009 2010 2011 0 China US India Japan Germany Source: CRISIL Research 15.2

Module prices in China vs other countries

($ per watt) 2.5 2 1.94 1.67 1.47
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2.03

11.8
6.1

1.764

1.5 1

-5

Profitability was severely impacted in 2011 due to:

Sharp fall in prices driven by significant over capacity in modules market China alone had the capacity to produce 50 GW of modules in 2011, whereas global demand was only 30 GW

Around 40 companies were forced to shut down in the US and Europe due to stiff competition from Chinese manufacturers In May 2012, US imposed anti dumping duty ranging from 31% to 250% on Chinese manufacturers to protect its PV industry

Global solar PV industry witnesses bankruptcies, shut downs

COMPANY Solyndra Evergreen Solar Spectrawatt Stirling Energy Systems Photowatt Solon Energy Conversion Devices Scheuten Solar Odersun Q-Cells Konarka Schuco COUNTRY U.S. U.S. U.S. U.S. France Germany U.S. Netherlands Germany Germany U.S. Germany PRIMARY BUSINESS Solar panel maker Solar panel maker Solar panel maker (sold all of its equipment to Canadian Solar ) Equipment maker and project developer Solar panel maker Solar panel maker, project developer Solar panel maker Solar panel maker (assets sold to Sunwaymaker) Solar panel maker Solar panel maker, project developer Thin film panels manufacturer Thin film panels manufacturer DATE Aug 2011 Aug 2011 Sept 2011
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Sept 2011 Nov 2011 Dec 2011 Feb 2012 Feb 2012 Mar 2012 Apr 2012 June 2012 August 2012

Japan, China to drive global demand; EU to decline

Country Italy Feed in tariff Rs.8.6 p.u. Remarks Conto Energia V became effective in August 2012, once the annual cumulative funding level reached 6 bn Conto Energia V had a subsidy budget of 700 million, of which limit of 300 million has already been reached This budget is expected to exhaust by end of 2012, after which no further incentives will be provided for PV projects Outlook

Germany

Rs.12.45 p.u.

Although feed in tariffs were slashed for 2012, capacity additions increased by 35% in H1 2012 Feed in tariff incentive will stop once installed capacity reaches 52 GW, which is currently at 29 GW Degression of feed in tariff will apply from Nov 2012 depending on capacity expansions of that month
A new Royal Decree Law stopped all incentives for renewable energy, including feed-in tariffs for solar Unclear evolution of future support Introduced feed in tariffs from July 2012, which is 3 times the rates charged to industrial consumer Government aims to reduce dependence on nuclear energy Target of installed capacity of 28 GW by 2020 Has a quarterly RPO compliance, offers carry forward of obligations and imposes penalties for non compliance Feed in tariff policy introduced in August 2011 Has approved 1.7 GW of Golden Sun projects, scheduled for completion by end of year Government is encouraging capacity additions to support over capacity in modules industry Target of installed capacity of 21 GW of solar PV by 2015 Government plans to introduce several new subsidy programmes, in addition to feed in tariff, Golden sun programme and solar PV building project Has already installed 1.2 GW in H1 2012, almost double the installations in last year Introduction of feed in tariff mechanism in few states New laws to increase procurement of SREC to solve over supply issues Investment tax credit set to expire by end of 2012 Subsidies approaching exhaust limits in California

Spain

Withdrawn

Japan

Rs. 25.2 p.u.

China

Rs. 9.43 p.u.

USA

Each state has a separate incentive mechanism

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Indian scenario

Indian solar equipment industry on the verge of a collapse

Sharp drop in revenues and profitability
Net sales (LHS) 12,000 10,000 8,000 6,000 4,000 2,000 -146 0 2009-10 2010-11 2011-12 Note: Companies included Indosolar, Euromultivision, XL energy, Websol Energy, Surana ventures Source: Prowess -13.5 -43.1 -78.9 -6.1 -5.2 OPM NPM 0 -20 -40 -60 -80 -100 -120 -140 -160
Indosolar

Manufacturing capacity in a state of forced closure

Company Moser Baer Tata Power Solar Remarks It has shut down its thin film manufacturing operations Of the three production lines, only one is operational Retrenchment (200 employees) BP solar sold its stake to Tata Power Shift in focus from manufacturing to designing and execution of solar plants Bankers are reluctant to provide balance funding to the company which has stalled its expansion plan of 200 MW. Retrenchment (170 employees) Rating downgraded to D in Nov 2011

Sharp drop in revenues as orders have been bagged by Chinese and US companies Imports of modules have risen by 4.5 times during Apr- Dec 11 to Rs. 51 bn (China, Taiwan and US accounted for 62% of imports)
Foreign players offer equipment link financing at low interest rates and long repayment schedule Backward integration to wafer and polysilicon manufacturing gives significant cost advantage to foreign players Scale of operation is almost 10 times to that of Indian manufacturers

Domestic industry currently operating at around 15% utilisation levels

Moserbaer, Indosolar, XL energy and Jupiter solar under corporate debt restructuring

Profitability would continue to remained strained due to continued threat of imports given their significant cost disadvantage
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Capacities of 1.8-1.9 GW to be added over the next 3 years

Domestic demand
JNNSM (MW) 1000 800 600 400 200 0 2009-10 2010-11 Source: CRISIL Research 229 692 State policies REC Off-grid
JNNSM phase 2 to drive capacity additions

Capacities under state policies

State Gujarat Remarks Signed PPAs worth 968 MW, of which 707 MW commissioned till date Bid out 60 MW in April 12
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Of 150 MW bid out under batch I of JNNSM, 125 MW were commissioned

936 822 661 283 345 312 413 215 143 425

Karnataka M.P. Orissa Rajasthan Tamil Nadu Bihar U.P.

Bid out 200 MW in May 12 25 MW allocated in April 12 Bidding for 100 MW PV projects delayed Has deferred bidding for 50 MW tenders. Proposals aggregating to 198 MW have been submitted Policy is in final draft stage. Aggregate target of 1 GW by March 2017

2011-12 2012-13 P 2013-14 P 2014-15

Gujarat is not expected to sign fresh PPAs as it has achieved its RPO targets ; instead has shifted focus to rooftop projects States such as Gujarat, M.P, Karnataka have seen traction ; more than 15 states still do not have a state solar policy Most of the projects bid out in Batch 2 (JNNSM) are expected to be commissioned in 2012-13 All projects have achieved financial closure REC market and RPO obligations are expected to drive demand in the long term Exports to reach zero in the next 3 years
Exports have already halved to 122 MW in 2011-12 from 284 MW in 2010-11 Indian players are at a cost disadvantage of around 20 per cent as compared to Chinese players

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JNNSM, state policies to benefit Chinese and US companies

Although JNNSM stipulates domestic content clause but is dependent on the choice of

technology
JNNSM Technology choice has been skewed towards thin film ; around 75% of the projects are based on thin film under batch 2 of phase 1
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On the contrast, globally thin film accounts for only 14 % of the total installed capacity

Projects under state policies have relied on imports in absence of any domestic content clause Charanka Solar Park in Gujarat, with 214 MW capacity, has equipment sourced from the US and State policies Chinese manufacturers like MEMC, Suntech Power and CSun. Reliance Powers 40 MW PV project in Rajasthan uses modules from First Solar, a US company

Madhya Pradesh is the only state that stipulates domestic content clause similar to that of JNNSM

Only those Indian project developers who also make solar equipment buy equipment from their own plants Indian suppliers Tata Powers 25 MW plant in Gujarat procured modules from Tata Power Solar Lanco Solars 35 MW plant in Rajasthan installed self-manufactured modules

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No investments expected over the next 2 years

Although players have announced capacity expansion plans of 145 MW, we do not expect it to materialise
Significant overcapacity Weak financial position of players
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MNRE had introduced a soft loan scheme through IREDA for setting up manufacturing facilities for polysilicon, wafers and cells. Presently the program is not active due to lack of government budgetary support

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Porters Model
Threat of new entrants Low Negative profitability and significant over capacity in the market would deter players from entering this business
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Bargaining power of suppliers Low Suppliers have been forced to bring down

Competition Intensity High Intense competition in the domestic and

Bargaining power of buyers High Buyers have the option to import from

prices due to significant over supply in

domestic and international market Chinese suppliers are at a cost advantage of 20% to Indian players

international market especially China

abroad, which is cheaper

There are 30-35 module suppliers in Indian market and more than 400 suppliers globally

Threat of substitutes Moderate Other sources of renewable energy sources such as wind, hydro, bio-mass, etc. Solar CSP operate at higher efficiencies

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Working capital requirements

Working capital cycle
2010 - 11 Raw material days Finished goods days Debtor days Creditor days Cash Conversion cycle 24 44 42 45 65 2011 - 12 64 30
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47 65 77

Working capital days have increased from 65 days to 77 days mainly due to building up of raw material inventory Credit period has been extended in view of their weak financial position Bigger challenge for the industry is not on the working capital management front but on capacity utilization front

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CIPI Matrix

3 Investment Required 2 1 1 2 3 4 5
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Industry Performance Indicator

Industry Performance (1 on 5)
Next 2 year revenue growth CAGR : -54 % ROCE (last 5 years average) : - 6% Last 2 years average net profit margin : -24%

Investment required (1 on 3)
No fresh investments expected over the next 3 years

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Key conclusions
Demand outlook
Capacities of 1.8-1.9 GW to be added over the next 3 years
Capacity additions in Gujarat to fall significantly as it has shifted its focus to rooftop projects Most of the capacities under batch 2 of Phase I under JNNSM are expected to be commissioned in 2012-13 REC market and RPO obligations to drive demand in the long term Exports to reach zero in the next three years
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However, most of the demand to be met by imports from China and US as:
Developers get equipment linked funding from abroad Cheaper than Indian manufacturers due to backward integration and higher scale of operations

Japan and China to drive global demand ; demand from Italy and Spain to decline

Profitability
Profitability of players would continue to remain strained due to:
Inability to overcome threat of imports Low capacity utilisation levels due to significant over capacity

Investments
No fresh investments expected over the next 3 years due to significant over-capacity, low capacity utilization levels and weak financial position of the players

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Shift in polysilicon manufacturing base to China

Share of top 10 polysilicon manufacturers (in capacity)
2011 China USA Japan Korea Norway Germany Total capacity (MT) 38% 19% 18% 14% 8% 3% 100% 2010 23% 29% 16% 18% 10% 5% 100% 2009 23% 29% 14% 17% 10% 7% 100% 2008 7% 42% 10% 23% 10% 8% 100% 2007 4% 39% 0%
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27% 16% 14% 100%

Source: Bloomberg

Aggregate capacity of top ten players has increased from 173,500 MT in 2010 to 235,050 MT in 2011 Over the years, leadership in production has seen a shift to China, formerly dominated by the US and Germany China has expanded capacities to reduce production costs Backward integration in polysilicon has enabled Chinese players to be more cost competitive

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Methodology
Domestic demand

JNNSM

State policies

Off grid/ Captive

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Targets Status of bid out projects Past achievement ratio Interaction with MNRE

State targets Projects allotted Financial health of discom Interaction with sources

MNRE targets JNNSM targets Achievement till date Interaction with sources

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Equipment linked financing to Indian developers

Foreign funding
Country US Financer US EXIM bank Overseas Private Investment Corporation Export-Import Bank of China KfW

China Germany

US Fast start fund ($30 bn) being used to offer low interest rates loans to Indian project developers
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Projects backed up by foreign funding

Project Reliance 40 MW plant in Rajasthan Punj Lloyd 5 MW plant in Rajasthan Universal Solar system 2 MW plant in Gujarat Shivajinagar Sakri 125 MW solar plant in Maharashtra Financer US EXIM bank US EXIM bank US EXIM bank Amount (Mn US$) 84.3 9.2 3.7 Company providing panels First solar Abound Solar Abound Solar(modules) and SMA America (inverters) N.A. Year 2011 2011 2011

Germany's KfW

250

2011

N.A.: not available

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CRISIL Limited www.crisil.com www.standardandpoors.com www.crisilresearch.com

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