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Solar Economics, Part 1: Photovoltaics Value Chain

21.09.2017 — 0

Solar industry involves many different activities, from production of the crystalline silicon or thin films to the construction and operation of PV solar plants. This article maps the value chain of solar industry and explains how different segments relate to each other.

The Basics of Value Chains

The concept of value chain was first introduced by business scholar Michael Porter, famous for his research on competitiveness and strategy. As early as in 1985, Porter described value chains as a tool for strategic analysis, based on the processual view of organizations. According to Cambridge University’s Institute for Manufacturing, the idea is to see

a manufacturing (or service) organization as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources — money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits,

Porter’s value chain approach (firm level). Picture credit: Wikipedia

Porter’s model can be applied at various scales: firm-, region- or industry-level. At the industry level, the value chain encompasses all the various processes involved in the production of goods or services, from raw materials to the delivered product, and is based on the notion of value-added at each stage of production. The British geographer Garry Gereffi developed this idea further with his concept of the Global Value Chains, that span across different regions of the world. According to Gereffi, global value chains include multiple firms and multiple locations, and allow to describe

the full range of activities that firms and workers do to bring a product/good or service from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer.

Both tools can be of great help in analysing such global industries as solar photovoltaics. They allow to understand the geographical distribution of different production activities, their interconnections and dependencies, and ultimately aid decision-making in choosing new markets for expansion.

Photovoltaics Value Chain

The value chain in photovoltaics is considerably complex, and involves all the different processes required to create a utility-scale PV solar system. First, raw silicon must be produced, purified, cut into wafers, doped, cleaned and coated. The cells formed this way are subsequently assembled into modules, arrays and then combined with electrical components to construct a full-fledged system. We have written in detail about these processes before. Now it is time to take a look at the bigger picture.

**Picture credit: **

Solar DAO uses crystalline silicon solar panels, which is more complex than thin film panels. The latter’s value chain is much shorter: the models are manufactured in one single step from raw silicon and other compound materials by deposing the photovoltaic material on glass or plastic. On the other hand, in concentrating photovoltaics the value chain is more complex than in the case of crystalline silicon, and involves higher costs, because silicon or thin film solar cells must be combined with optical concentrating systems, coolers and trackers, before it can be assembled into an array. That’s why crystalline silicon cells are better suitable for utility scale PV solar plants.

However, the real journey starts once the solar cells and modules have been produced. The manufacturing process captures only the upstream part of the value chain, while most of the activities happen in its downstream part. It involves the project planning, implementation, and use phases.

**Picture credit: Green Rhino Energy, **

The project planning phase is very important, and we have written about it before. It encompasses area planning, system preparation, operational model, applying for approvals for the use of land, and considering different financial options. Once this has been done, comes the implementation phase, in which the actual construction process takes place, the system is getting verified and installed. The last part of the downstream value chain is the use phase, which involves a complex socio-technical configuration, as the researchers from Finland’s Aalto University warn. What they call socio-technical configuration involves operation and maintenance activities, as well as different adjustments and negotiations regarding the property relations around the PV solar plant, its positioning within the industry and the market, negotiations with local authorities and communities, and how the plant will be operated, and the energy it produces will be distributed and used, in a given local social context. In terms of the project planning, the use phase involves consideration of political and country risks. Read more about the risk management in PV solar industry in our next publications.

**Picture credit: **

An Organizational View of the Value Chain

Similarly to any other industry, the photovoltaics value chain can be broken down into several specific types of organizations (supplier, operators, consulting firms) that actually operate the various processes involved into the value chain.

First, there is a whole series of products that are required to build a PV solar systems. Thus, the following players must be active on the market:

  • Suppliers of the manufacturing equipment
  • Suppliers of the raw materials for wafer-, cells- and module production
  • Producers of crystalline silicon
  • Producers of silicon wafers and ingots
  • Producers of PV cells and modules
  • Producers of the mounting structures and trackers
  • Producers of electrical components
  • Software suppliers for monitoring system and operation of PV solar plants

In terms of services, there are financial, legal, consulting and testing services that go through the whole value chain, as these services may be required at each stage. One can also include different activities such as education and training of the personnel, publishing and PR efforts to promote solar energy, as well as government relations services to obtain approvals, subsidies and support grants. When it comes to actual phases of the value chain, there are several necessary services as well:

  • Wholesale distribution
  • Project planning and development
  • Design, engineering, and construction
  • Operations and Maintenance services

In an ideal market environment, all these activities can be performed by different organizations that enter contractual relations with each other. In reality, however, firms tend to optimize their cost structures by reducing the transaction costs. There are several ways of doing so: they can form a cluster, by concentrating related and interdependent activities in one region (for example, silicon, wafer and modules production), vertically integrate, by including different stages of manufacturing or downstream activities into the firm structure, or diversify their processes, that is, for example, being both a distributor and doing some activities in unrelated businesses.

Depending on the age of the firm and different competitive factors, in can be a pure player in the solar energy industry, or it can be more diversified: for example, like big fossil fuels corporations that enter the renewable energy field as a separate business activity. Diversification can also be organized in terms of combining different fields of renewable energy, like solar and wind.

The other trade-off that the firms face is the one between different degrees of vertical integration. Today, most companies are partially vertically integrated, but none covers the whole value chain, although there are many highly specialized companies in the upstream (manufacturing) and downstream (services) parts of the value chain.

Thus, the whole value chain can be depicted as follows:

**Picture credit: Green Rhino Energy, **

Read our next post about the geography of solar photovoltaics. Stay tuned with Solar DAO.

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