Andy Klump Talks About Supply Chain, Battery Pricing and Quality Solar
Clean Energy Associates’ CEO, Andy Klump in recent days has had to shelter in place in Texas like many others. Andy and Solar Wakeup podcast host, Yann Brandt, discuss the impact on supply chain and quality that COVID has had.
Relatedly, CEA has also expanded into the energy storage markets. On predictions, Andy gives us his view on where solar module and battery pricing is going to go in the future.
Key Points Discussed Include:
Impact of COVID-19 on the supply chain, not only in China, but also Malaysia, where factories were forced to shut down because of the pandemic.
How invertors and storage units were most affected due to the pandemic
Healthy inventory levels in the United States, along with a steady rise in residential solar demand during the pandemic
How the pandemic has forced suppliers to drop prices and work on thin margins
Struggles for smaller companies to to compete with big ones especially with a tighter cash flow stand point
Various signs of why the energy storage market is just gearing up to boom in the future and is being dominated by the electric vehicle market as of now. Andy also anticipates a cost decline in the segment over the next 2 to 5 years
Podcast Transcript
Yann Brandt:
Welcome to this episode of Solar Wakeup live. My name is Yann Brandt, host of Solar Wakeup and the editor of Solar Wake-ups newsletter. On today's episode, I'm joined by Andy Klump from CEA, but before we introduce Andy, make sure you hit that subscribe and rate button on your apple podcasts we want Andy to get the biggest audience possible. Every other guest we've had some great conversations relaunching this podcast. this is episode three in the relaunch. So Andy welcome to the show. You know, I'm really excited to opportune time to be talking with you obviously an expert in supply chain. Could you, for the sake of the audience, give a little bit of background of who you are and what you do and that'll frame the conversation.
Andy Klump:
Yeah, so I'm the the CEO and founder of Clean Energy Associates. We are a global technology advisory company that helps solar and storage companies work on supply chain, quality assurance and engineering services issues. So we have a team of about 125 professionals in 12 countries and completed about 55 gigawatts worth of solar and storage related projects.
Covid-19 Impact on Solar Supply Chain
Yann Brandt:
So opportune time for good and bad reasons obviously with COVID-19 setting the stage you know, you're, you're typically based in Asia but you know, one of the interesting things that happened right around Intersolar this year, which was in February of 2020 there was a lot of questions in the supply chain market around what is the impact of COVID-19 on your supply chain? And, and every manufacturer really had to answer that by, by looking at their factories overseas that very quickly became a domestic domestic problem where no one really was considering that part of the supply chain, but kind of give the play-by-play of what did it look like from your standpoint in January, February this year, while you were still in Asia?
Solar Manufacturing Impact in China
Andy Klump:
Yes, so I I had the good fortune to be traveling outside of China when it really started to hit. So I had a little more flexibility in my schedule, but the reality was the impact was quite prevalent in China at first a lot of factories who typically would shut down for Chinese new year or have reduced capacity. They couldn't reopen because there were some restrictions on letting the workers go back and travel around. So many factories within China were operating at very low capacity, initially Southeast Asia and non China capacity, which is what is headed the product has had for the U S they had no problems if they had enough inventory of their sub-components, but some of the smaller manufacturers relied on Chinese sub-components. And so they were compromised however, within about a month or so by the end of February the Chinese supply chain bounce back and was more or less up to full capacity. However, as COVID-19 spread, then we saw an another impact particularly in Malaysia where a number of facilities were forced to shut down. Some of which are still operating at below optimal utilization. So the impact has really kind of followed the virus.
Yann Brandt:
Following in stages. So where would you say, would you say that China and most non China, Asia factories are sort of backup to operate to the, could they be at top levels of manufacturing in terms of utilization?
Andy Klump:
Yes, we have over you know, over 75 close to 80 inspectors and engineers in factories around the world. And we don't just look at modules, but also other components of supply chain. So from the module manufacturing side almost all those facilities are back up and running and at nearly full capacity with the only exception I think, are those that are impacted by the fact that demand is dropped off. And and those as I mentioned in Malaysia, if you look at other parts of the supply chain, I think the impacts have varied. I think there's certainly some mounting structure companies that were impacted with some of the sub-components coming from China that happened at various various stages. But I think those are back up and running as well. And I think you know, inverters as well as some of the storage units also had some issues as well.
Covid-19 Safety Precautions at Solar Manufacturers
Yann Brandt:
Yeah. I mean, obviously demand is the demand destruction is, is part of the story. Before we jump into sort of supply chain and demand side and, and how it impacts domestically, what's different in the factories now, what foreshadow for us what is the, is there a new normal in terms of factory operations you know, with social distancing or PP what does that look like today in Asia? It's kind of a postcard from the future.
Andy Klump:
Yeah, so absolutely there've been different practices put in place. And we know firsthand that our teams had a much tougher time getting into the facilities. We, as an external inspectors had to provide a detailed health records of all the inspectors and engineers are going into the facilities a lot more restrictions in terms of waiting periods for those coming from a different geography. we also have seen an increase in costs. I mean, some manufacturers faced in uptake that they literally couldn't get materials in their overall supply chain be transferred between different sub-component manufacturers in their facilities. So the drivers themselves either wouldn't even drive the components back and forth, or they were charging three to five X the cost. So it definitely was a cost increase. And then disruption in terms of overall supply chain. So I think going forward manufacturers are variably are just much more cautious and they've really tried to self-contain the facilities and, and obviously keeping the, the latest quarantine standards in place to ensure that they, they rid themselves of any risks around the virus.
Changes in Solar Demand and Supply
Yann Brandt:
Yeah, sure. So one of the, the interesting things that's happening is, and we saw this in the latest solar wake-up surveys as installations and construction has slowed you know, some sales have still continued, especially in residential solar, and in the U S and you know, 50% of the solar wake-up survey respondents said that their backlog was growing with states starting to open back up and building departments, moving digital and remote inspections. You're starting to see the uptake of the need for supply once again you know, the, there are, there's definitely a lot of talk around inventory levels in the U S being rather healthy. Some manufacturers might be bordering on over-supply. What does it look like? You know, what does it look like from your perspective and how hard is it going to be to, to get new supply into the market you know, kind of over the next six months.
Andy Klump:
So I think there's going to be a massive problem on the supply side. I think it's still going to be focused more on demand, EO and scan with the exception of certain facilities in Malaysia, most everywhere else is up to speed and running and operational now. And we have seen in the past, some folks actually buying directly from China which is becoming a little more feasible for some manufacturers, not everyone, but I think if you open up additional market supply from China, then I think it, it's going to be much easier to to meet all the supply needs. But in general, I think the Southeast Asian capacity is good for the time being in 2020. I think there's definitely gonna be a demand spike, and I would actually disagree with your comment about demand destruction. I would describe it more as demand delay. There's a lot of robust demand, but a lot of it's just been pushed out and, and well granted, I'm sure there's some projects that are not able to be financed or move forward. I still see there being a lot of demand for customers or homeowners that want to see solar on the rooftops, and it's just more or less a push out. So I think that's perfectly in line with the survey results that you just mentioned.
Yann Brandt:
Yeah, no, I, I, that's probably a better way of putting it is that it's a delay. What do you think happens with pricing? You know, we, we had a really healthy balance between demand and supply. You know, pricing was pretty stable from what installers were saying. Um, and now you've had this delay potential maybe a short-term over supply or over too much inventory in the market. Um and then possibly some, some drop in pricing when this delay ends who comes out the winner here and how big of a jump is it going to be in the, or how volatile is the pricing gap going to be between pre and post sort of delay?
Andy Klump:
So I think there's obviously different segments of the market are going to be impacted differently. And yes, there are some manufacturers that are stuck with inventory, and we've heard that you know, there, there are some small amounts of inventory that are going to obviously be you know, sold in the market probably below market pricing. So once again, depending on what your stock was if you were a residential installer distributor you might be able to pick up some, some bargain deals. But I think by and large, if you look at like utility scale, I think a lot of these existing projects already preset in terms of in terms of pricing, but many manufacturers are trying to stimulate the demand for 2021, where they typically would have been selling some projects into, at the end of 2020 that they couldn't necessarily have. So there is definitely going to be a drop further on on the pricing side. So I do think some suppliers are going to see tighter margins, but the project developer doesn't necessarily get the benefit of that because financing costs have jumped. Even though you have a lower interest rates there's fewer tax equity players in the market the tax equity is more expensive. And then obviously financing costs have jumped by anywhere from 75 to 100 basis points. So that makes the environment much, much tighter. And so everyone kind of loses a little bit in this market, but the good news is once again, the market's still growing. I don't see the demand destruction. It's just more of a shift to a demand in the later period of time.
Tax Equity Impact on Supply Chain
Yann Brandt:
So you brought up tax equity and you know this is kind of tangential to the supply chain, but one of the things that's being proposed or floated there was an op-ed from Nat Kramer of Advanced Energy Economy and Green Tech media this week, basically and other people have brought this up, but a grant in lieu of the ITC in, in exchange for US content, I mean, the tax equity market is double digit billions. How feasible is that? Is that, is, is that a policy without basically manufacturing capacity? What do you think would happen if, if the grant all of a sudden required manufactured modules or other parts of the system?
Andy Klump:
Well the reality is there's just not nearly enough capacity domestically in the U S to meet the needs of the market. So any type of domestic content requirement has a lot of challenges. And I think it only meets a certain portion of, of the market. We're certainly aware of those facilities that are operational. Our teams have been in them, and we've also seen some challenges with respect to new facilities and getting their quality standards in place. So there's also a risk that some folks would actually end up with a poor performing product. So that's where we always highly recommend our clients to continue to have quality oversight, even in US domestic manufacturing facilities. But the reality is the supply chain doesn't exist to support large US manufacturing facilities for modules. So there's a very large investment that would be needed.
Comparing Global Solar Manufacturers
Yann Brandt:
That's an interesting topic you bring up I guess if you would ask the the art, not just the audience, but just America at large, it's always China, bad quality, low price. America, good quality higher price you know, price aside. And you've been in the factories both here and in Asia for the same manufacturer, right? I mean, companies that are manufacturing in the US most of them also manufacturing abroad. If an untrained walked into the factories sort of with a blindfold on, would they be able to say this one's in China, and this one's in the US?
Andy Klump:
There are vastly different approaches in terms of manufacturing you know, automation quality systems and and mindsets among different manufacturers, but even within the same manufacturing facility it is, there are definitely differences in quality than ended up being there. One, an untrained. I might walk into facilities in Asia, as well as the US and say, oh, they're both highly automated. They both look high tech. They're both great, right? Our teams have been in both simultaneously, and we've seen the one that is just ramping up in the U S having quality levels that are far, far worse than what they were in the Asian manufacturers. And I say Asian, because it's not just the Chinese is also Koreans and, and other other locations in Asia that are producing modules. But the reality is it does take a while for any new technology adoption curve to happen. And also for the overall quality system be in place, the workers have to be trained. The equipment needs to be calibrated. So, especially as facilities ramp up quality problems can exist even in a highly automated facility in the U S it's not just a phenomenon that it's only the Asian manufacturers that have problems.
Importance of Solar Quality Assurance Programs
Yann Brandt:
Yeah, what's the best way for, I'm assuming that most people that use a third party, like if I'm building a gigawatt project or I'm deploying hundreds of millions of dollars of capital, obviously I'm going to have a robust internal and external supply chain team. The average residential install it, it's doing maybe three, five megawatts a year. What's the best way for them to make sure what they're getting is good quality material?
Andy Klump:
So it absolutely does matter on the residential side about getting good quality material. But once again, one can not just rely on what is bought from a distributor. You know, ideally getting to a certain scale and directly sourcing from suppliers that is part of the solution. But part of it is also about having a QA program where one can go in and do the quality checks around certain batches. You can't necessarily take the same volume on a weekly or bi-weekly basis as you could from a distributor. And so understand that it's tougher for the smaller companies from a cashflow standpoint to finance that. But the reality is if you look at trends around securitization and, and large investor appetite for large portfolios of residential, they're the ones who really do care about having a broader QA program in place. So I think that the smart installers will try to align themselves with the growth needed to have all of those initiatives in house and support that through third parties.
Yann Brandt:
It's almost like that would be a good value add for distributors to play this role to make sure that they're. I don't know if any distributors are doing a QA or QC engaging services like yours and basically upselling their installers saying, hey, we've done the quality checks, and we've only bought the best material for you. That would be an interesting, maybe something I need to look into more, but that would be really interesting for them to do.
Andy Klump:
I think I agree in theory, I think the reality is we don't see distributors being proactive at that. They may market themselves as saying over we're buying from the tier ones. Well, if you look at the BNEF tier one list, it's not made to be a quality list. It's made to evaluate the quality of the company, but not the quality of the product per se. So once again, you can have a top tier one manufacturers that have poor quality because those facilities could be a OEM done owned by someone else. And their quality oversight may not be as stringent as what their own in-house manufacturing QA programs are. So we're sitting on over 55 gigawatts worth of data of all the projects we've accumulated. So we actually have a data by manufacturer by facility, even by product or by manufacturing facility line and workshop. So we can actually assess what quality is coming out of the factory and benchmarking it versus others.
Energy Storage Global Market Overview
Yann Brandt:
Really interesting this, this pandemic has created a need for all sorts of new things, right. And the dialogue has increased quite a bit. We did a solar module index you know, really primarily for residential installers and it's fascinating the range, and this was purely based on pricing really fascinating to see the range of pricing that a single module you know, same power rating, same module same frame colors, same backsheet color. Uh you're talking about 10, 15, 20 cents a watt range from one installer to the next. It's really fascinating to see you know, just how varied things are. I want to come back to market segments, but you also do a lot of work on the battery side, and this week has been full of headlines, especially with BNEF releasing their LCO We report, and we get glitzy headlines, right. We saw the middle Eastern project that I don't know, penny a kilowatt hour, penny 1.3. It doesn't even matter at this point, a massive project at a ridiculously low price. We also saw things like solar and wind are cheapest resources in the world. And then yesterday peaking solar plus storage can compete with peaking generators, all that aside. Right. What is over the last two years, what has happened in the battery market? And how far, if compared to a baseball game, like what inning are we in in terms of the scale of battery manufacturing that we're seeing on a global level?
Andy Klump:
It is absolutely in the the warm-up stage. And if you said you know, first or second inning, I could debate with you, but it's, it's early innings for sure. You know, the industry, and particularly as it pertains to storage is almost, is all overshadowed by the electric vehicle market. And the reality is that the same core chemistry that goes into and the, in R&D dollars of float into the different battery manufacturers at scale, if it really been on the premise that the electric vehicle market is going to dominate, pretty much all major automotive manufacturers are investing heavily in EVs. And so consequently, the battery ramp up has happened in a pretty massive way. And so in the past where you've had some of the Korean manufacturers and Panasonic out of Japan really dominating the market that they and Tesla have really owned that segment. But the reality is there's a massive growth in China battery manufacturing facilities, our teams are in them. And we see the growth on a firsthand basis and know that that's, what's gonna lead to a massive decline at cost and also technology improvement as these EV manufacturers orient their product more and more towards what the needs of energy storage are for in the future.
Lithium Battery Production for Energy Storage
Yann Brandt:
Yeah. I mean, I agree with you and actually some of the pricing forecasts seem very, very conservative. Um, but we talked about a little bit about this off camera before there there's a place in China that's meant to really catapult the manufacturing capabilities capacity and R&D for lithium ion. you've been there. what, what, what can you tell, tell us about this magical place of battery production?
Andy Klump:
Yes. So off the coast of Fujian, not too far from Taiwan as a small town of Ninja, and that's where the headquarters of CATL are, and the facilities are remarkable. Uh having been to dozens of battery manufacturers theirs's really are impressive. The reality is there's been a huge, huge push to have know once again, highly automated cell manufacturing facilities that are geared towards the electric vehicle market. They are you know, ramping at a scale that's unprecedented. And really if you look at the amount of investments and electric vehicles just China is just blown the US out of the water. So I think the interesting part if you track the trajectory of the cost decline, and a lot of it's come off of this type of investment, and there, you're going to continue to see ongoing cost to clients, and that's gonna allow companies like CATL to ramp up BYD, certainly in that pack, there are several dozen manufacturers that we're tracking and investigating, not just their cost reduction roadmap, but also the technology roadmap. And that's, what's going to eventually allow this overall storage market to expand exponentially.
Yann Brandt:
So, five years from now, when US politicians are saying, we can't let China win the manufacturing battle with lithium ion you'll look at them and say, yeah, that was a debate for 10 years.
Andy Klump:
I mean, I wouldn't say the battles won, but I would say that the were far, far beyond the, the starting point. So a lot of these investments in it put in absolutely. You know, huge CapEx facilities you know, and, and Tesla obviously is, is one of the leaders. And always we'll be out there as long as they have the capital to expand and continue to invest in R&D, but there's many other players that are also very well capitalized who've already built massive facilities and they're going to continue to grow and expand and fuel the global.
Forecast on Battery Prices
Yann Brandt:
So many of your customers are large scale developers. One of the solar company I got into solar in 2006, and there used to be this newsletter, Aggregated Solar Press Releases called PV buzz, Solar buzz on Sunday nights. And I remember it was Sun Edison secures three megawatt. And I would sit there with like my, my stomach would drop and I can't believe how do they do a three megawatt deal? That's crazy. Um, and then you'd have the really crazy ones, like Eight Minute Energy saying we're doing a 25 megawatts in the desert of Califon. This is 2006, right? I'm like, these guys are nuts. These are brag of Watts. Um, but you know, people made the bet and it wasn't even a bet, it was hindsight was, we knew where this pricing was going. Maybe, maybe the asymptote of where the price could stop at some of us would say a dollar, a watt, and here we are to half of that, a third of that with tariffs. Batteries cells are probably somewhere between a hundred and $200 a kilowatt hour at large scale, but that's still seems drastically more than where we're going. What's your forecast of where you think battery prices are going within the next two to five years?
Andy Klump:
Yeah. So we certainly think that within you know, two plus years, we're going to see it probably another easily, a 30% cost decline, but if you brought that out closer to five years, sure. I think it can easily be 50 to 60%. There's still a lot of scaling up in the industry that's needed to get there. It's still very early innings within the the baseball game analogy. I too joined the solar back in 2006 when I worked at Trina. And we had just, I was part of the IPO deal team that listed the company on the New York stock exchange. And I was the vice president of business development. And I still remember the first quarter after going public.
We were just scraping by to get the last few hundred kilowatts out of the warehouse. I mean, just to sell 10 megawatts in one quarter was a huge, huge accomplishment. So yeah, the industry has just scaled massively and batteries is going to be the same thing. And if you look at the product of the core battery manufacturers today, it's really a product that is not customized for energy storage, but as the energy storage market grows and will grow massively, you're going to start to see different batteries be depicted for different use cases. And that's going to allow I think the industry really to, to lower costs and to fit the needs of the use case. And that's, that's what you'll see a 10 X type of a growth curve in, in battery storage.
Solar Developer and Installer US Market
Yann Brandt:
No, that's, that's really interesting. Speaking of, kind of the market and when you said you were struggling 10 megawatts in a quarter, right. That's one of the things that was missing, then you could also count on one hand, the people that could get you those 10 megawatts. Now the US market is just massive, right? You've got 3000 residential, solar installers. You've got a two gigawatt CNI non-residential market. And then the utility scale market is there developers everywhere. What do manufacturers say when you're obviously doing work for your customers, go into their factories, but then they come back to you and say what's the outlook of not just the residential market, but the US market and how can we better service that? Because when you look at the market share between manufacturers, they're sort of struggling to get there's no clear dominance especially on the module side. Even on the battery side, right. It's still really fragmented. Um, what kind of questions are they asking you about the installer and developer behavior about the U S market?
Andy Klump:
So I think there's various levels of sophistication among different manufacturers and, and the reality is the most advanced ones. I mean, their market share is it's still very, very low it's. This is not a consolidated industry. I mean, I like to make the automotive and you know, solar comparison and effectively say, look this is like making cars in the 1920s. We had hundreds of manufacturers the supply chain hasn't consolidated to the big three. There's not a major player with a 25 30% market share. You're lucky to find a few folks with double-digit share, but the reality is the technology barriers have been low up to this point. Now we see more advanced cell manufacturing applications, and potentially a shift to a higher power class with a totally different wafer form factor. That's going to, I think, prevent certain manufacturers from making that jump. So the players who are playing catch up, they don't understand any of these dynamics and they don't know how to market themselves effectively. And so their niche and the industry is just to be an OEM player. And they couldn't ask the sophisticated questions about how to penetrate and market to smaller residential players. But the more sophisticated manufacturers, they know the different segment of these 3000 installers, and they want to target and partner with the right ones because the residential market is going to continue to grow. Once we get beyond COVID-19 and expand, and then it's going to be a game of a game of scale. And so they want to promote their brands. So I think the leading manufacturers are smart about who the winners are and we'll partner with them effectively.
Market Price Trends in Solar Modules
Yann Brandt:
Yeah. So you've, you've been in solar a while and you've seen many things that maybe a lot of people didn't think were possible. But the question is, what do you think will happen that no one thinks is possible? Like what do you see on the ground that would just blow people's minds?
Andy Klump:
I think that the reality is we are going to see modules eventually below you know, 10 cents a watt the market's trending there. It's not going to happen this year or next year. And we obviously are looking at an environment when they're no longer as a tariff regime in place. So that's still to be determined when that will be lifted, but the reality is the technology is getting better and better. Cost curves have come down quite dramatically and they're going to continue to keep coming down. But once again, this is still probably you know, a 10 year out prediction to be at that level because the big cost declines that happened, and 2008 to 9 and 2011 to 12, a lot of this was driven by massive changes in policy that caused this big demand shock. And that the overinflated costs was really on the polysilicon side. Well, no other one individual component is really driving all of the costs. Like it was at one point in time in 2008 or polysilicon was 80 or 90% of the cost. Now it's, it's much more of a game of technology. And now I think you're going to start to see some of the leading manufacturers spread and have a little bit of distance, but I still think it's going to be another decade before you really see a consolidated market.
Yann Brandt:
Oh, 10 cents a watt modules is I don't know how I feel about that. And it's it's too exciting to contain, I guess you agree with me.
Andy Klump:
And that's why I'll say it's not on the radar screen to the next four or five years, but you know, I think the market and the industry will eventually get there. So once again, residential installers won't necessarily see that unless they have the size and scale to be buying gigawatt worth. So by the time you have the other layers and you take away the tariff a lot of the things have to come into place. That's a workout. Yeah.
Forecast for Global Solar Market
Yann Brandt:
Caveats aside what kind of to put a bow on it. We're right in the middle of this pandemic, we've the shelter in place over the last eight weeks, we've gone through these various stages. Things are starting to open back up depending on where you live, right. You and I having this conversation right in the middle of all of this, right. We have no foresight of what this looks like even two weeks from now and varied by state and no idea what it looks like in the fall with all these conditions, but taking all of that aside, what do you think happens in 2020 in this market?
Andy Klump:
So it's obviously going to vary by segment and while the residential segment was the first one to really shut off and effectively go to hardly any installations. I think when we get beyond the this period and the opening of the market and let's hope there's no second wave. I think you're going to have all of a sudden see that pent up demand, see as order backlogs come and residential will have probably the quickest recovery on a relative basis. But look, I still see there being robust build out of a lot of facilities. So I still think the market will grow clearly. The demand delay will reduce the overall market in the U S by 15 to 25%. It's hard to predict how much, but but I think a lot of that is really come out residential and to some of the smaller CNI scale. But but I absolutely believe that the demand is there. We still see in our business a lot of demand. Our utilization has been while it was much lower at certain points in Q1 very strong April and very strong demand. We're actually hiring and adding to our team right now. We didn't even contemplate going through any type of of reduction because you know, we feel very confident with the market and then I think the demands there.
Yann Brandt:
That's excellent. So we'll, we'll leave it at that. Andy. I appreciate you coming on. We appreciate everyone listening and you know, stay safe. Hopefully you'll be able to get back on an airplane relatively soon you'll have to get yourself that immunity certificate. I'm getting my antibody tests next week. So it was crossed because at some point people are gonna start hugging each other just to get themselves an immunity certificate. Yes, yes. Very irresponsible thing to say, but I can definitely see frustrations in people. So appreciate you coming on and everyone else for listening, don't forget to rate and subscribe to the podcast. And if you've got some really great things to say about this episode, make sure you leave a review for us that down below.