Here comes the sun: Thailand should think deeper about solar manufacturing

Author: EIC | Economic Intelligence Center
Published in Bangkok Post/Asia In Depth: Asia Focus section, 5 December 2016

As Thailand looks for sunrise industries to target, it should look more closely at the booming solar photovoltaics manufacturing industry.  Global new investment in solar installations totaled some $161 billion in 2015, according to Bloomberg New Energy Finance. That dollar figure will grow dramatically in the years to come, judging from capacity demand forecasts. Bloomberg projects that annual demand for photovoltaic modules will reach 170 GW by 2030, far above the 64 GW of solar modules being produced in 2016.

To be sure, the photovoltaic equipment manufacturing industry is volatile and fiercely competitive, dominated by big companies in China that have large economies of scale and benefit from supportive government policies. Chinese makers now have a massive 51 GW of annual module production capacity. Unfortunately, Thailand lacks competitive advantage in the key PV module production processes, namely manufacturing solar-grade silicon and solar silicon wafers, which are capital-intensive, energy-intensive businesses that require low-cost electricity supply. But Thailand still has opportunities to capture more of the PV industry’s huge overall value chain by attracting more foreign direct investment and developing Thailand’s own players. By sharpening their strategies, both the government and private sector can help Thailand increase its solar success.

Where does the nation’s photovoltaic production industry now stand?  Using imported silicon wafers, factories here will produce some 1.2 GW of modules in 2016, six times the amount in 2014.  Most of this growth comes from plants owned by Chinese companies, which have been investing overseas to avoid anti-dumping tariffs and countervailing duties imposed by the United States and European Union. In 2015 and the first half of 2016, Thailand’s Board of Investment approved over 7 billion baht in investment in solar panel manufacturing.

This figure might seem impressive, but Malaysia is well ahead of Thailand in photovoltaics manufacturing. It’s currently the third-largest producer in the world, with some 3 GW of PV module production capacity as of 2016. It aims to overtake Taiwan as the 2nd largest producer by 2020.  Meanwhile, Vietnam has attracted big-name solar manufacturers and developed a thriving foreign-invested OEM business.

If Thailand wants to keep pace in this important manufacturing industry, the government and local companies should undertake six broad efforts.

First, ensure that we attract quality technologies. Solar is a fast-changing industry, so the BOI’s investment scheme should be adjusted to target companies that make high-quality, high-efficiency products.  This will help Thailand avoid getting stuck with plants that become stranded by technological progress. To attract top manufacturers, Thailand’s FDI policies need to be competitive relative to those of neighboring countries, particularly Malaysia. Unlike Thailand, Malaysia includes renewables manufacturing companies in its strong investment incentives targeting high technology.

Second, look beyond PV panels. As the market for solar PV expands, so will demand for the components and equipment that are integrated with panels, such as solar inverters, mounting systems, and sun trackers. This so-called balance of system (BOS) comprises 20% of the cost of a typical solar installation project. The BOI should incentivize investment in BOS components to broaden the solar supply chain here.  This would take advantage of a variety of Thailand’s existing production capabilities, such as for wiring and electronic components, and help develop new capabilities in adjacent industries, such as smart grid and energy storage systems.

Third, expand opportunities downstream, i.e., in PV-related services to the power generation industry, where Thailand is already competing well in solar. With 2.4 GW of PV power generation capacity already installed, Thailand is far ahead of Malaysia’s 0.275 GW.  Impressively, Thailand ranks fifth in Asia behind China, Japan, India, and South Korea in terms of solar’s share of nationwide electricity production. The upshot is that Thai companies have already accumulated substantial project development experience at home, and are starting to lead projects overseas. Thailand should expand this business, exporting solar project development services and system integration services to neighboring countries. Partnerships with manufacturers will help to ensure that project developers and energy management businesses are on top of the latest technological trends and customer needs.

Fourth, the government should ramp up its modest targets for solar power installations, which would bolster the local PV manufacturing industry. The latest Alternative Energy Development Plan (AEDP 2015) calls for just 6 GW of solar generation capacity by 2036.  This is low compared to other Asian countries. Vietnam, with negligible capacity today, targets 12 GW by 2030. India aims for 100 GW, while Indonesia targets 8 GW.  These countries will attract the lion’s share of solar manufacturing investment.

Fifth, Thailand should strengthen PV research and development. R&D here should focus on two objectives. First, improve cell and module manufacturing processes to increase factory efficiency. Second, promote basic research on improving cell efficiency, with a focus on PV in high- temperature climates. R&D should look beyond solar panels to include balance-of-system components. For example, sun-tracking technology has improved the performance of solar farms in sunny regions. The BOI can boost solar R&D by incentivizing foreign investors to undertake research locally, as Malaysia’s FDI policy does.

Sixth, increase the electricity grid’s flexibility to better accommodate solar and other renewable energy. This calls for investment in technologies, infrastructure and personnel that can manage the more dynamic grid. Capacity building in grid improvement should focus on the general goal of better integrating renewable energy into the grid and more flexibly managing energy production and consumption.  It’s too early to focus on selecting the right specific technologies, since smart grid systems are still emerging and evolving.

If Thailand fails to fully develop its potential in the photovoltaic manufacturing value chain, the lost opportunities will be large. Annual worldwide investment in renewable power capacity exceeded non-renewables for the first time in 2015, with solar taking the largest share.  The price of solar PV systems are falling each year, nearing the point where clean, solar-generated electricity is cost-competitive with power from fossil fuels. When this point, known as grid parity, is reached, demand for PV equipment will surge among homeowners and businesses. The future of photovoltaics looks bright indeed, and soon to arrive.