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Analysis

Supply Chain Disruption Impacts Mexico’s Solar Opportunities

By Cas Biekmann | Wed, 02/16/2022 - 17:27

After years of progress toward making technology cost-efficient, rising logistics costs due to the global pandemic, a trade war between US and China and shortages in key materials are challenging solar’s development at a previously unseen level. As costs face an unexpected increase, the industry must find the best way to increase competitiveness for greener energy tech.

Accoridng to Enrique Garduño, Co-Founder and CEO, Skysense, solar is a commodity-based sector. Core components’ costs weigh massively on the overall cost of the system and thus on its actual viability. For all the sustainability benefits renewable energy can bring, their adoption is still mainly driven by simple economics. The National Renewable Energy Laboratory (NREL) documented a decade of sharply declining costs for solar systems, which hit a record low in 2020. More efficient modules, as well as cheaper hardware and inverters, made solar a no-brainer in most countries, especially those with as much sunshine as Mexico. “A significant portion of the cost declines over the past decade can be attributed to an 85 percent cost decline in module price. A decade ago, the module alone cost around US$2.50/W. Now, an entire utility-scale PV system costs around US$1/W,” said NREL’s Senior Financial Analyst David Feldman last year. Once the price drop began, solar installation began to take off, reaching over 700GW in 2020 at the global level. Data from Mexican solar association ASOLMEX shows that Mexico installed around 6.5GW of this capacity.

Supply chain issues are now threatening this development as the price of solar components increased following the pandemic, especially polysilicon, due to the so-called bullwhip effect. Before the pandemic, there was an oversupply of polysilicon that helped to address demand when production was halted as the first lockdowns hit. As the economic reactivation advanced, demand skyrocketed but polysilicon production could not keep up.

BloombergNEF expects that polysilicon will see a price surge of 29 percent in 2022. In 2023, this pricing forecast will add another whopping 57 percent increase. Cost has been a major factor in increasing solar module prices for the first time in 2021. Nevertheless, BNEF does not predict a further module price hike for solar modules and even sees potential for a small drop by the end of 2022. It furthermore reported that global solar installations added 191GW in 2021, even amid a challenging environment.

 

Mexico’s Experts Weigh In

In Mexico, analysts report that the slowdown in utility scale projects has moved the problem of rising material costs to the background. Larger projects require more modules, while residential, commercial and industrial projects rely more on to the cost of installation than that of the components. Still, the increase in prices is not without effects. “Raw materials are becoming scarcer, so there are fewer solar panels being produced at a much higher price. Many projects are being postponed as a result,” explained Christof Kling, Managing Director Mexico, Krannich Solar.

Industry experts do signal a different issue that has had a much larger impact: global logistics. “Since the start of the pandemic, logistics have become a nightmare,” Kling explained. Companies have had to learn how to live with cost hikes and an ongoing trade war between the US and China. Because many of the world’s foremost solar technology companies manufacture in China, the line between these two external variables get blurred somewhat. “Importing from China takes much longer and is more expensive. In 2020, the cost of shipping a container was around US$2,500. Today, that same container can cost US$16,000. This crisis will not be resolved any time soon, but when it is, prices will still be relatively high, around US$8,000,” said Roberto Moreno, General Manager Renewable Energy Projects, Solar Power Group. Kling fully agreed on these price developments, adding that prices are dropping somewhat but that the future remains uncertain. “Due to the increased level of insecurity, shipments have become riskier, too, and time frames have increased quite a bit,” Kling added.

 

Opportunity in Moving Logistics

“In regard to logistics costs, the pandemic has taught us that we need to decentralize operations across the world,” said Muñoz about the company’s bigger focus on Mexico. “Mexico has a huge market and has trade agreements with the US and Canada. There are many beneficial opportunities, although its differences against China could be a challenge at first,” he added.

Canadian Solar decided against manufacturing in Mexico but other companies do see the country as a viable hub. “Mexico is a strategic location for us because it allows the company to access the US market, which has enacted strong protection measures against Chinese companies as part of a wider trade conflict,” said Simon Zhao, President, Solarever.

One issue with looking toward the Americas is an increase in costs compared to China’s cheap manufacturing capability. But this no longer an issue, argued Moreno: “Thanks to USMCA, we have gained a competitive advantage during this perfect storm of circumstances. Panels manufactured in the Americas might be more expensive because of their higher quality and cutting-edge technology but that is nothing compared to the costs of shipping and import tariffs.”

Industry analysts emphasize that logistics and raw materials are likely temporary issues, though they will certainly linger for the next few years. It is unlikely that all companies will sprint to set up shop in Mexico. Nevertheless, combining the opportunity in logistics and manufacturing with the country’s potential to develop projects will only add to the possibility to grow solar further, even if supply chain costs rise.

The data used in this article was sourced from:  
NREL, WEF, Reuters, BloombergNEF, MBN
Cas Biekmann Cas Biekmann Journalist and Industry Analyst