Energy Policy 49 (2012) 572–585

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Why did the price of solar PV Si feedstock fluctuate so wildlyin 2004–2009?$

Yang Yu a,b,n, Yuhua Song a,1, Haibo Bao c

a College of Economics, Zhejiang University, Hangzhou, Zhejiang Province 310007, Chinab School of Economics and Trade, Ningbo Institute of Technology, Zhejiang University, Ningbo, Zhejiang Province 315100, Chinac Zhejiang School of Administration, Hangzhou, Zhejiang Province 311121, China

H I G H L I G H T S

c The determination of solar PV Si feedstock price fluctuation is identified and quantified.c Systematic structural shocks well explain 2004–2009 price fluctuations of PV Si feedstock.c Production cost and aggregated demand shocks take longer effects on feedstock price.c Exchange rate and feedstock specific demand shocks explain sharper price fluctuations.c Development of national PV power should consider effects of structure shocks.

a r t i c l e i n f o

Article history:

Received 16 May 2011

Accepted 29 June 2012Available online 23 July 2012

Keywords:

PV Si feedstock

Structural shocks

Contract and spot price

15/$ - see front matter & 2012 Elsevier Ltd. A

x.doi.org/10.1016/j.enpol.2012.06.059

paper is based on work funded by Zhejian

ciences Planning of China under Project No.1

ation Humanities and Social Sciences Yout

C790243. Two projects provide great help to

.

esponding author. Tel.: þ86 574 88229019;

ail addresses: yuer3339@163.com (Y. Yu), syu

8@sina.com (H. Bao).

l.: þ86 571 87951474.

lar PV Si feedstock refers to the silicon prim

of PV cell production in 2004–2009 (IEA PVP

a b s t r a c t

Great attention has been paid to the origin of observed wild price fluctuations of solar PV Si feedstock in

both contract and spot markets during 2004–2009. This paper sheds light on this issue and tries to

resolve it by addressing the following questions: what kind of structural shock is underlying the price

fluctuations of PV Si feedstock? How can we quantify the magnitude, timing and relative importance of

these shocks? What are their dynamic effects on the real price of PV Si feedstock? By carefully studying

development conditions, the structural decomposition of the real price of PV Si feedstock is proposed:

exchange rate shocks, production cost shocks, aggregate demand shocks and demand shocks specific to

feedstock markets. With a Structural Vector Autoregression model, the paper quantifies and verifies the

impact of structural shocks on PV Si feedstock real price changes. Based on national data, an analysis is

further taken to confirm the essential role of demand shocks specific to feedstock markets in

determining sharper price fluctuations during 2004–2009. The results of this study have important

implications for national solar PV development, which can be better promoted and administrated if

structural shocks in feedstock markets can be carefully evaluated and understood.

& 2012 Elsevier Ltd. All rights reserved.

1. Introduction

The common approach to identifying shocks underlying thereal price of solar photovoltaic Si feedstock2 (PVSF) in 2004–2009

ll rights reserved.

g Provincial Philosophy and

1YD25YB and China Ministry

h Foundation under Project

our study design and paper

fax: þ86 13967826573.

hua@126.com (Y. Song),

e material that is used for

S Program, 2005, 2010).

is to evaluate the demand and supply imbalance of PVSF. Moststudies have attributed demand fluctuations of PVSF to theimpacts of PV policy adjustments and attributed supply fluctua-tions to the constraints or overexpansion of production capacity(Flynn and Bradford, 2006; Jiang et al., 2006; Jiang and Xiao, 2010;Tie et al., 2009). Implicit in these researches are the assumptionthat the PVSF price only responds to the shocks specific to thesolar PV and feedstock markets, and other factors such asfluctuations in exchange rate and fossil fuel prices may not takedynamic effects on PVSF markets.

This approach to PVSF price analysis fails to explain thesignificant price responses of PVSF to macroeconomic aggregatechanges by the end of 2008 when PV policy supports remainedunchanged and PVSF supplies were relatively stable (Bartlett,2009). It also fails to fully explain the sharp price deviations of

Table 1World annual average blended price of SGS.

Sources: Prometheus institute (2006, 2008), Yonts (2009).

Time 2003 2004 2005 2006 2007 2008 2009

Price ($) 25 48 62 100 128 160 65

Y. Yu et al. / Energy Policy 49 (2012) 572–585 573

PVSF traded in the contract and spot markets, and much largerprice range in Europe than in USA market (IEA PVPS Program,2010). This indicates that the causes and effects of PVSF pricefluctuations during 2004–2009 are not well defined when the realprice changes of PVSF are only related to shocks specific to PVmarkets. Thus, for the first time in the literature, we propose astructural vector autoregression (SVAR) model to address sys-tematic structural shocks underlying the real price of PVSF.

The identification and quantification of structural shocks withthe SVAR model enable us to clarify the origin of PVSF pricefluctuations, determine the different (aggregate) impact of eachstructural shock on the long-term and short-term PVSF real price,explain different price responses among PV leading countries, andsuggest the better development of national solar PV power withthe improved understanding of PVSF markets.

The remainder of the paper is arranged as follows. Section 2identifies the effective structural shocks underlying the real price ofPVSF during 2004–2009. In this section, we clarify relationshipsbetween PVSF markets and other related markets. Section 3 con-structs an SVAR model and describes measures and data used for theempirical estimation. Section 4 reports the dynamic effects of theseshocks on the real price of PVSF. Section 5 provides evidence fromnational solar PV policy adjustments and Chinese PVSF import datato confirm the effects of proposed unexpected and precautionarydemand shocks. Section 6 offers conclusions and implications.

2. Identification of structural shocks to solar PV Si feedstockprices during 2004–2009

2.1. Solar PV Si feedstock price fluctuations in contract and spot

markets

The blended PVSF price is the weighted price of the contractprice, spot price and minor quality price. Before 2010, most long-term (usually 6–12 years) contracts were take-or-pay (TOP)contracts and took up about 80–70% of market transactions.TOP contract is an agreement that requires buyers to either payfor and take delivery of a pre-set quantity at the agreed-uponprice or pay for prepayment without taking delivery (Johnstonet al., 2008). TOP regulation guarantees the amortization of initialinvestments by suppliers and protects suppliers from (Glachantand Hallack, 2009) the possibility of hold-up, but it makes thecontract price less flexible and slow to respond to actual demandchanges. The spot price is the market price at which PVSF can bedelivered in one month or less and bears much less cost ofprepayments. PVSF transacted in spot markets includes solar-grade feedstock3 and scrap silicon4 (minor quality feedstock), butPVSF spot price excludes the price of scrap silicon and is usuallyapplied to signal the demand and supply balance out of TOPcontracts. The spot trade takes up about 10–20% of total supplies(IEA PVPS Program, 2003–2009) and has been adopted morefrequently by new buyers in both spot and contract marketssince the spot price dropped sharply after 2008 (Yonts, 2009).

Table 1 and Fig. 1 display the world annual and monthlyaverage prices of solar-grade poly-silicon (SGS), the main sourceof PVSF. The corresponding price series showed that the worldaverage blended price of SGS in 2008 was more than five times of

3 The main source of silicon feedstock for PV cells is solar-grade poly-silicon,

accounting for major market shares during 2004–2009 ((IEA PVPS Program,

2010)).4 Scrap silicon refers to top and tail from single crystals, single crystals from

aborted runs, pot scrap and various other materials of minor quantities ((IEA PVPS

Program, 2010)). Scrap silicon accounted for 5–10% market share during 2004–

2009.

2003, but declined to less than half in 2009. Both contract andspot markets hit price turning point around September 2008, butobviously, the spot price presented much wilder fluctuations thanthe contract price. What kind of shocks and how had they causedsuch large price changes of PVSF markets?

2.2. Exchange rate shocks driven by euro- to-dollar exchange rate

fluctuations

The euro–dollar exchange rate had played an important role inbalancing production and consumption of PVSF by countries during2004–2009. International Energy Agency Photovoltaic Power Sys-tems (IEA PVPS) Program national reports of USA (NREL, 2009,2010)record that USA experienced the largest expansion of PVSF produc-tion (35–57% of market supplies) when euro-to-dollar appearedweak in 2004–2009. PVPS reports of IEA PVPS program reports(2004–2009) exhibit that Europe dominated the PVSF consumptionin its PV installation (64–81% share of global installation), butheavily depended on PVSF supplies directly from USA, or indirectlyfrom the reprocessed PVSF (solar cell or panel) by Asian countries,like China and Japan, which imported a large percentage of PVSFfrom USA as well (Fig. 2). Thus, either production reports of world’smajor PVSF manufacturers (Wacker, 2011; REC, 2011; MEMC, 2011)or solar PV industrial reports by consultant companies (Rao, 2011;Hearps and McConnell, 2011) have included the effects of exchangerate changes on PVSF prices.

Fig. 3 shows that the nominal euro-to-dollar exchange rate saw19 months of appreciation before July 2008, coinciding with thecontinuous increase of PVSF dollar prices and the largest increase ofannual supplies from USA (six times higher than that of Germany).Followed the depreciation of euro-to-dollar exchange rate, PVSF alsosaw the drop of dollar prices. It can be expected when the euro-to-dollar exchange rate appreciates, PVSF buyers are more willing toaccept transactions in dollars rather than in euros, which in turnstimulates more feedstock supplies from USA and price increases indollars. The depreciation of the euro-to-dollar exchange rate weak-ens feedstock production in USA and rebalance the demand andsupply in the European and USA markets. Therefore, it is reasonableto expect a significant response of the PVSF price to shocks of euro-to-dollar exchange rate.

2.3. Production cost Shocks driven by oil and natural gas price

fluctuations

Aside from exchange rate shocks giving rise to PVSF pricefluctuations and supply changes by countries, how have the solarPV and, in turn, PVSF markets stepped into the board market outof the niche market when the cost of PV power is substantiallyhigher than conventional power generation? As Campillo andFoster (2008) holds that oil crises pressed governments world-wide to encourage the use of solar power for the sake of energysecurity, as ‘‘the main driving force (of PV industry), as withalmost all emerging industries, is economic sensibility’’.

IEA PVPS Program reports (1993–2010) record the symbolicinitiatives supporting national solar PV development followinghistorical high oil prices, like the first USA Federal PhotovoltaicUtilisation Program in 1973, the first net metering program andsolar PV bill in 1982, the first Germany 1000-roofs program in 1990,and many more solar energy bills, laws and amendments adopted

050

100150200250300350400450500

Time

Pric

e ($

/kg)

spot pricecontractprice

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

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-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Mar

-07

Jan-

07

Fig. 1. World monthly average contract and spot prices of SGS.

Source: PHOTON (2007–2009).

Fig. 2. (a) SGS demands for PV production. (b) SGS Supplies. (c) SGS Demands in PV Installation.

Sources: IEA PVPS Program Reports (2002–2010), Jiang et, al. (2006), Jiang and Xiao (2010).

Y. Yu et al. / Energy Policy 49 (2012) 572–585574

by European nations during the high oil price period of 2004–2008to meet their promise of renewable energy developments in 2001EU Renewable Energy Source. Green Rhino Energy (2011) tests andproves the significant dependence of solar power on the prices forfossil fuels with weekly closes of solar companies’ share prices andBrent crude oil prices from January 2008 to March 2009. NationalRenewable Energy Laboratory NREL report (2009) also holds thatsubstitutional relations between natural gas and solar power forelectricity generation start to exist in some PV leading countries. So,it can be expected that the consideration of energy supply safety andrelative cost of solar PV to other electricity sources (such as oil andnatural gas) can lead to cost shocks to the real price of PVSF.

On the other hand, PVSF production is electricity-consuming,such that positive/negative electricity cost changes driven by priceshocks of electricity energy sources will directly increase/decreasethe production costs of PVSF and weaken the substitution effectsof PVSF and in turn PV electricity production. Oil and natural gashave been known to be the main drivers of energy and electricityprices and have displayed a short-term erratic relationshipand long-term equilibrium with electricity prices (Bencivengaand Sargenti, 2009; Munoz and Dickey, 2009). Therefore, wepropose to consider oil and natural gas price shocks as the mainsources of production cost shocks to the real price of PVSF during2004–2009.

00.20.40.60.8

11.21.41.61.8

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Mar

-201

0

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-201

0

Jul-2

010

Time

euro

/usd

Euro/USD

Fig. 3. Euro-to-dollar exchange rate in January 2005–July 2010.

Source: International monetary fund (IMF).

0

100

200

300

400

500

600

Aug

-05

Oct

-05

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$

oilnatural gasfeedstock

Fig. 4. Log dollar spot prices of oil, natural gas and PVSF. Note: oil ($/barrel), natural gas ($/cubic meter) and PVSF ($/kg).

Source: IMF.

Fig. 5. Solar share index PPVX and oil price WTI.

Source: Zhan and Zhang (2009).

Y. Yu et al. / Energy Policy 49 (2012) 572–585 575

Fig. 4 shows the log dollar spot prices of oil, natural gas andPVSF from June 2005 to December 2009. Fig. 5 exhibits the trendof the solar share index PPVX (Photon Photovoltaic Shares Index)5

and West Texas Intermediate (WTI) oil price. Both exhibit thatthere exists a close price correlation among PVSF, oil and naturalgas, but it is also obvious that the PVSF price moves with morevolatility than prices of oil and natural gas, especially during someperiods of time, such as July 2006–Oct. 2006, Aug. 2007–May2008, and Nov. 2008–Jan. 2009. Fig. 6 exhibits the share ofnational gas and oil in total electricity energy inputs and the shareof net energy import in total energy consumption in six PV leadingcountries. Countries that are more heavily dependent on oil andnatural gas, such as Spain and Italy, did experience wilder demandfluctuations of solar power during 2007–2009 than other coun-tries. But, there is an exception that South Korea, with relativelylower and stable electricity dependency on oil and natural gas, stillsuffered a significant demand drop of solar power in 2009. Thus,

5 The PPVX contains the world’s 30 largest quoted solar shares, and altogether,

they were worth more than 80 billion euros in early 2008.

production cost shocks driven by oil and natural gas pricefluctuations alone may not fully explain price moves of PVSF.

It can’t be denied that solar PV costs remain far higher thanother sources.6 The production cost shocks due to oil and naturalgas price fluctuations still have limited effects on the price of PVSFif there is no favorable subsidies for solar power users. As for theeffects of PV policies, it will be discussed in Section 2.5.

2.4. Real economic activity

Aside from the supply-side shocks mentioned above, theaggregate demand shocks and demand shocks specific to PVSFmarkets had also played an important role in the real price ofPVSF during 2004–2009.

During the period of 2004–2009, most PV leading countriesexperienced from economic boom to economic recession. Changes

6 The levelised electricity cost from solar PV is about 40 cents (2007 dollar)

per kilowatt hour, 4.2 times that of coal and 4.7 times that of natural gas combined

cycle (IER, 2009).

Fig. 6. Electricity share by sources and net energy import share in six PV leading countries. (a) Germany, (b) Spain, (c) Italy, (d) USA, (e) Japan, (f) South Korea.

Sources: IEA, the World Bank, Central intelligence agency world factbooks.

7 Mainly OECD 20 countries in IEA-PVPS program.

Y. Yu et al. / Energy Policy 49 (2012) 572–585576

of real economic activity are likely to influence consumers’ wealthand income, which lead to changes of their preference on aggregatedemands for electricity and in turn for PV-generated power. NRELreport (2009) points out that the severe demand shocks of realeconomic activity not only affected consumers’ wiling-to-pay for PVelectricity, but also companies’ investments and governments’expenditures in supporting PV-related markets. So it is reasonableto take the overall real economic activity changes as aggregatedemand shocks to the real price of PVSF.

Real economic activity is difficult to measure for three reasons:the value on monthly frequency, the proper weight of country’scontribution to real economic activity and technical changes overtime affecting electricity elastic to aggregate demand (Kilian,2009). At present, the most frequently used measurements areproxy indices of industrial production (IPI), quarterly real GDPand Kilian global index of dry cargo. For the latter two indices, thefrequency of data or availability of updated data cannot meet ourrequirements for measures. Our data series is short, and there willnot be large technical changes to affect the quality of the indexover time. Thus, the monthly index of industrial production (IIP)is taken to represent global real economic activity. To furtherunderstand the effectiveness of IIP, see Section 3.2.4. Euro area(16 countries), USA and Japan are taken as the country measuresof real economic activity because they account for more than 95%of solar power demand. The weight is annual GDP shares amongthree areas to account for the relative importance of regional ornational macro-economic activities. From Figs. 1 and 10, it is easy

to see that the turning point of PVSF price changes almostcoincides with that of real economic activity.

2.5. Solar PV policies

Before we discuss demand shocks specific to PVSF markets, itis very important to differentiate between demand and supplyshocks specific to PVSF markets and determine which shocksdominated the markets during 2004–2009.

No significant demand and supply shocks specific to PVSFmarkets were expected before 2000. Hampered by high costs, lowpublic awareness and environmental safety concerns for solar PVapplication before 1990, only PV technology-leading countries hadcarried out small-scale R&D and demonstration projects (IEA PVPSprogram, 1998–2001). With increasing government supports7 andinternational cooperation initiated by IEA PVPS program during1990s, global demands for solar power expanded from a nichemarket to a utility market, but Si feedstock demands for solar PVindustry were still limited. Supportive evidence is that no companywas specifically dedicated to the production of SGS before 2000 (IEAPVPS program, 1998, 2000). Refined poly from semiconductorsilicon scraps satisfied the majority of PVSF demands and the pricewas low and stable, ranging from 5 to 20 $/kg (Woditscha andKochb, 2002).

Fig. 7. Global production demands for solar-grade and electronic-grade silicon.

Sources: Prometheus institute (2006, 2008), Jiang and Xiao (2010).

01000200030004000500060007000

2000

00.511.522.53

Annual Installed PV Power(MW)Growth Rate(%)

1995

1996

1997

1998

1999

2009

2008

2007

2006

2005

2004

2003

2002

2001

Fig. 8. Annual installed PV power in OECD 20 countries.

Source: IEA PVPS program (2009).

Y. Yu et al. / Energy Policy 49 (2012) 572–585 577

Since 2000, demand shocks have dominated PVSF markets.Germany, as the first feed-in tariff (FIT) and largest PV deploy-ment country, has led European countries to adopt very suppor-tive measures8 after 2000 to meet aggressive, binding targets forthe international and regional9 promotion of PV power develop-ments (IEA PVPS Program, 1998–2010). USA and Japan10 raisedtheir PV targets extensively in 2004 to compete their lead in themarket applications. More countries started large scale PV pro-jects to follow their suit. IEA PVPS program report (2011)estimates that cumulative installed PV capacity doubled less thanevery two years by 2010, but two and half years around a decadeago and three-four years in the early to mid 1990s. Correspon-dently, PVSF demands for solar power increased dramatically byaround 40% of annual growth rate and exceeded demands forsemiconductor after 2004 (Fig. 7). Meanwhile, most adoptedsupportive measures are very changeable, which has made themarket demand volatile and difficult to predict. Like Spain, thedomestic market stood to benefit richly from FIT (decoupled fromelectricity cost) in 2006 and contributed the largest growth sharein the global market during 2007–2008, but experienced almost100% sharpest demand reductions with capped FIT regulation in2009 (For more details about policy changes, see Section 5.1).Figs. 7 and 8 clearly show that Si feedstock demands for installed

8 Support measures mainly include feed-in tariffs (FIT), direct capital sub-

sidies, green electricity schemes, renewable portfolio standards, tax credits and

sustainable building requirements. FIT, the most favourable and debated subsidy

policy, is adopted across the world, starting from only one country in 2000 to

seven and twenty-six countries by 2004 and 2009.9 EU countries adopted and endorsed binding PV promotion targets in 2001,

2003 and 2007 after the proposal of 3 GW cumulative PV installations in the 1997

EU Renewable Energy Whitebook, and they have actively participated in the

renewable energy development to meet Kyoto Protocol.10 In 2004, Japan expanded its PV goal from installing 4500 MW by 2010 to

4820 MW by 2010 and 100 GW by 2030, as proposed in the Overview of PV Road

Toward 2030. America planned its Solar Industry Roadmap through 2030 and Beyond

to recover its lead in the PV market.

PV capacity were much more volatile than for PV production after2000. So, we expect that PVSF supply fluctuations, or morespecifically, investment constraints or production overcapacity,are just the responses to the unexpected demand changes.

On the other hand, it is observed that PVSF price fluctuationsbecame much wilder after 2004 (Table 2, Fig. 1). We propose thatunexpected demand and demand instability itself may haveplayed important roles in PVSF markets. Supported by 1997–1998 overextended spare capacity and inventory in world’s sevenlargest electronic-grade silicon (EGS) producers, the Si feedstockcontract market retained a relatively stable price for TOP contractsupplies, and production capacity expansion did not respondsignificantly to demand shocks of solar market in 2000–200411

(Table 2, Fig. 9). However, when unexpected demand surges wereagain induced by enhanced FIT versions adopted in EU countriesafter 2004, demand/supply rate12 quickly reached alarm levelfollowing slow capacity expansion in 2000–2004 (Table 2, Fig. 9).For fear of demand uncertainty and future supply constrains inTOP PVSF supplies, precautionary demand for PVSF induced priceovershooting in the spot market and capacity overexpansionin both production-efficient and -inefficient countries during2005–2008. PVSF cost trend and capacity expansion in China’smarkets are good examples of supply responses to demand andprice shocks (Table 2). More analysis about unexpected andprecautionary demands will be taken in Section 5 to confirmtheir effects in positive and negative demand shocks Table 3.

11 Given uncertainty about the state of the market, long construction and pilot

production times and huge costs of production adjustment, Si feedstock producers

had been very cautious about demand instability and production expansion. It

usually takes 12 to 18 months for capacity construction and 6 to 12 months before

full capacity is reached.12 Large Si feedstock producers, such as Hemlock, REC and Wacker, announced

capacity expansion in 2005, and real output was realised after 2007, especially in

2008 and 2009. Production capacity expansion in newly emerging markets, such

as Russia and China, constrained by efficient production costs, was mainly

announced after 2006 and put into real production after 2008.

Table 2SGS Price, cost and production capacity expansion in world and china markets.

Source: Sinolink securities (2010).

2001 2002 2003 2004 2005 2006 2007 2008 2009

World blended price ($) 16 20 25 48 62 100 128 160 65

World production capacity expansion (%) 4.4 2.3 2.3 4.9 25 20 26 197 219

Chinese cost ($) NA NA NA NA NA 70–100 70–80 70–80 50–70

Chinese production capacity/output (Ton/Ton) NA NA 100/90 100/80 400/80 400/290 4310/300 20000/5000 62100/18000

0

20

40

60

80

100

120

(%)

050001000015000200002500030000350004000045000

(Ton)

demand/supply rateSGS

2009200820072006200520042003200220012000199919981997

Fig. 9. World demand/supply rate and SGS supplies from seven largest EGS producers.

Sources: Woditscha and Kochb (2002), Jiang et al. (2006) and Jiang and Xiao (2010).

Y. Yu et al. / Energy Policy 49 (2012) 572–585578

Thus, demand shocks specific to PVSF markets are proposed tobe the unexpected demand shocks driven by PV policy adjust-ments in contract markets and precautionary demand shocksdriven by demand uncertainty itself in spot markets. More detailsconcerning effects of specific policy adjustments in differentregions and demand-supply imbalance during 2004–2009 willbe discussed in Section 5.

3. Model and data

3.1. Model

Without knowing what drove up the real price of PVSF andexplicate the corresponding effects of major shocks in the firstplace, it will be impossible to clearly explain price fluctuations ofPVSF markets and suggest better supports for solar PV develop-ment. In this section, an SVAR model is established to decomposechanges in the real price of PVSF with structural economicinterpretations. As we will argue below, this decomposition hasimmediate and important implications for how policymakersshould think about PVSF fluctuations.

This type of decomposition has not been attempted before.Aside from the complex relationships among different shocks withPVSF prices, the largest difficulties concern the data availability oraccurate measures of three time series: first, the monthly PVSFcontract and spot prices; second, measures of international naturalgas prices; and finally, measures of real economic activities forthree main markets. The data of first two variables are sourcedfrom PHONTON for January 2007 to December 2009. The lattertwo variables are measured with proxy time series. Though theyhave been carefully set (See Section 3.2), it is possible to takedifferent data sources and measures, which will affect the empiri-cal estimates presented below. However, the empirical results canbe used to compare with practical scenarios to confirm theeffectiveness of the model estimation.

3.1.1. Methodology

We conduct a structured VAR model with monthly data forzt ¼

ðeurot ,natt ,oilt ,aggt ,cont ,spottÞ, where eurot denotes the euro-to-dollar real exchange rate, natt and oilt refer to the real prices ofnatural gas and oil, respectively, aggt is the real economic activity,

cont refers to the real contract price of PVSF, and spott denotes thereal spot price of PVSF. All variables are expressed in logs.

In estimating the model, we allow for up to four months worthof lags due to the limitations of the dataset, and lag intervals aredecided by Akaike Information Criterion (AIC) and SchwarzCriterion (SC). Consider the structural representation:

A0zt ¼ aþX4

i ¼ 1

Aizt�iþet ð1Þ

where xt denotes the vector of serially and mutually uncorrelatedstructural innovations.

3.1.2. Identifying assumptions

We postulate that A0�1 has a recursive structure, such that the

reduced form errors et can be decomposed according to et¼A0�1ut

et �

eeurot

enatt

eoilt

eaggt

econt

espott

0BBBBBBBBB@

1CCCCCCCCCA

¼

a11 0 0 0 0 0

0 a22 a23 0 0 0

a31 a32 a33 0 0 0

a41 a42 a43 a44 0 0

a51 a52 a53 a54 a55 0

a61 a62 a63 a64 a65 a66

26666666664

37777777775

ueurot

unatt

uoilt

uaggt

ucont

uspott

0BBBBBBBBB@

1CCCCCCCCCA

ð2Þ

The restrictions on A0�1 are suggested as follows: shocks to the

price of PVSF driven by euro-to-dollar exchange rate fluctuations arenot expected to respond to other structural shocks within the samemonth. This restriction is reasonable because empirical researcheshave not shown that these structural shocks tend to cause con-temporaneously significant effects on the real euro-to-dollarexchange rate and in turn the real price of PVSF (Clostermann andSchnatz, 2000; Li, 2004).

Production cost shocks driven by real natural gas price fluctua-tions are assumed to respond to the real price fluctuations of oilcontemporaneously but are assumed not to respond to other struc-tural shocks at the same time. Innovation to the PVSF production costdriven by natural gas price fluctuations is usually slow to respond todemand shocks due to uncertainty of market demands and high costof adjusting production. Only persistent demand increase/decreasewill cause significant responses of PVSF production costs. In addition,they are assumed to respond to exchange rate shocks through effectsof exchange rate fluctuations on the real price of oil. This restriction isbased on empirical research results of segmented market integration

Table 3Solar market policy events.

Sources: Solar Buzz, PHOTON, National survey report of PV power applications in United States (NREL, 2009, 2010), Solar photovoltaic electricity applications in France

national survey report 2006 (Claverie and Equer, 2007)

Time Country Policy event

1 10th July 2006 France The new tariffs doubled payment for rooftop solar electricity to 0.30 euro/kw h, four fold building-integrated solar to 0.55 euro/kw h.

50% subsidy was also provided for the cost of the solar panels and other equipments.

23rd July 2006 Spain Solar FIT was decoupled from the electricity price.Solar systems up to100kw were to receive a feed-in tariff of 0.44 euro/kw h and

systems above 100kw were to have 0.23 euro/kw h.

2 19th February

2007

Italy Decree of 19 Feb.2007 was passed into the law, symboling great encouragement to the production of solar power. The Decree

simplified application procedures, offered the most favorable tariff supports and increased installation objective, etc.

3 29th May 2007 Spain Royal Decree (RD) 661/2007 replaced RD436/2004 and embodied a further improvement to the legal and economic regimes for solar

PV development. It included additional capital supports, access to grid, etc.

4 September 2007 USA Michigan proposed the first renewable Feed-in Law in the USA. It was also the most favorable tariff arrangements in North America.

5 24th December

2007

Italy Positive revision of Renewable Energy Law 244 was introduced to supplement Law 387/03.

6 14th February

2008

USA California Public Utilities Commission approved an FIT to promote small scale renewable energy systems (including solar) at the

predefined price referent.

7 26th September

2008

Spain RD1578/2008 replaced RD 661/2007 and represented a negative adjustment of economic regime for solar PV installations. The solar

FIT supports were substantially reduced.

8 25th October

2008

DEU The new version of Renewable Energy Law was passed and would come into force in January 2009. The most negative revision was

the increased degression rate of FIT for PV systems (from 5% to 8%).

3rd October

2008

USA The Emergency Economic Stabilization Act of 2008 was passed, providing for solar power projects the extension of 30% investment

tax credit (ITC) to Dec. 2016 and the elimination of ITC monetary cap

9 26th November

2008

UK FIT policy finally became law.

10 5th February

2009

USA Gainesville, Florida approved the first national FIT for solar PV development and became eligible on March 2009

31st March 2009 South

Africa

A new FIT system was introduced for renewable energies, representing a substantial improvement than the origin. The tariff for

concentrating solar power was among the most favorable worldwide

14th May 2009 Canada Ontario adopted the Green Energy Act, aiming to be a global leader in renewable energy. The new FIT policy (including the double

payment for small solar projects) was presented, and went into effect in Oct. 2009

27th May 2009 USA Vermont became the first state to adapt a full system of renewable energy feed-in tariffs. 30 cents/kw h was granted to solar systems

up to 2.2 MW.

Y. Yu et al. / Energy Policy 49 (2012) 572–585 579

features of regional and international energy markets for gas, oil andelectricity (Bencivenga and Sargenti, 2009).

Production cost shocks by real oil price fluctuations areassumed to respond to fluctuations of the real euro-to-dollarexchange rate and real natural gas price in the same month butare assumed not to respond to other structural shocks at the sametime. The assumptions amounts to impose restrictions thataggregate demand shocks and PVSF specific demand shocks willnot immediately cause changes in the real price of oil and theproduction costs of PVSF. These restrictions are based on thereasons similar with assumptions in production cost shocksdriven by real natural gas price fluctuations.

Expansions of real economic activity in the three markets areassumed not to respond to shocks specific to PVSF marketsimmediately. These restrictions are easy to understand becauseaggregate demands have displayed sluggish responses to realprice shocks in PVSF markets in our sample time series.

Finally, innovations to real prices of contract and spot PVSF thatcannot be explained based on above shocks will be referred to asdemand shocks that are specific to PVSF markets. These shocksparticularly reflect effects of unexpected demand and precautionarydemand shocks driven by solar PV support measure adjustments.Due to the high cost of contract negotiation, the specific shocks tospot PVSF market are not expected to impact TOP contract priceimmediately.

Other assumptions implicit in the model are as follows: realeconomic activity reflects the aggregate demand of the Euroarea, USA and Japan rather than other active PVSF markets suchas China, Korea and Malaysia because these countries eitherproduce and import most of their PVSF for PV productsdemanded in other markets or their aggregate demand isrelatively much smaller than other main PV markets, and willnot have significant aggregate economic impacts on PV marketsduring 2004–2009.

3.2. Data consideration

3.2.1. Price of solar PV Si feedstock

Since SGP is the main source of PVSF, we apply a world monthlySGP dataset for PVSF prices. It is very difficult to collect monthlyprice data from publicly available sources. We only manage tocollect price data from two sources: the PHOTON, with spot andcontract monthly average prices from January 2007 to December2009; and the China Silicon Association (CSA), with spot monthlyprices from June 2005 to July 2010. Because PHOTON supplies bothspot and contract prices, we prefer to collect data from PHOTON andadjust price data with USA consumer price index (CPI). The mainshortcoming of price data is that they are presented in a short timeseries, but empirical estimation still shows relatively satisfactoryresults, as we will state in Section 4. Moreover, we believe our workcontributes a basic empirical study of market shocks to PVSF pricesfor the first time in the literature and will arouse more exploratorydiscussion in later studies of other researchers.

3.2.2. Exchange rate

The usual measures of real euro-to-dollar exchange rate arethe nominal euro-to-dollar exchange rate deflated by CPI orproducer price index (PPI). Because movements in the CPI or PPIdeflated exchange rate are largely the same in the long run(Alquist and Chinn, 2002), we apply the CPI-deflated euro-to-dollar exchange rate to the data series. CPI and exchange rate dataare sourced from the International Financial Statistics of the IMF.

3.2.3. Oil and natural gas prices

Studies have confirmed that in the long-run, oil prices co-integrated globally, signaling the world oil market is unified(Bentzen, 2007; Ewing and Harter, 2000; Gulen, 1999). Unlikethe oil market, the world market for natural gas is fragmented

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IPIGDPElectricity Consumption

Fig. 10. Quarterly indices of GDP, IPI and electricity consumption in euro-16. Note: indices reflect percentage change compared to corresponding period of previous year.

Source: Eurostat (2010).

Y. Yu et al. / Energy Policy 49 (2012) 572–585580

into different regional markets,13 and co-integrated prices appearstronger within Europe, Japan and North America rather thanbetween Europe/Japan and North America (Arano and Velikova,2009; Leykam, 2008; Siliverstovsa et al., 2005). However, transat-lantic gas prices have displayed increasingly strong signs ofconvergence (Hirschhausen, 2005), and shown interesting co-movements through price mediation of international crude oilprices (Brown and Yucel, 2009). Thus, we prefer to use crude oiland natural gas data provided by WTI and Henry Hub terminal,and deflated them with monthly CPI index for our data series.Monthly data from other sources (Brent and National BalancingPoint (NBP)14) can also be applied to confirm the empirical results.

3.2.4. Real economic activity

For the measures of real economic activity, we take monthly IPIas the proxy variable. Because IPI reflects real production output,which mainly includes mining and quarrying, manufacturing, elec-tricity, gas and water industry, it displays real economic activitychanges in industrial fields. But, in our sample time, IPI does displaymore significant relations with the electricity demand than otherindices, like quarterly GDP of Euro-16 (see Fig. 10). Therefore, eventhough IPI is not a perfect index to measure real economic activity,we still consider it the proxy variable for quantifying the aggregatedemand in three areas. The relative datasets are sourced from OECD.

4. Empirical results

The SVAR model is estimated with the application of least-square methods for all equations and for the imposition ofrelevant restrictions mentioned above. We will state how factorsrespond to structural shocks and how cumulative effects ofstructural shocks will take on the real price of PVSF.

4.1. How do the euro-to-dollar exchange rate, the real prices of

natural gas and oil, real economic activity, and the real prices of

contract and spot solar PV Si feedstock respond to structural shocks?

Fig. 11 displays how the euro-to-dollar exchange rate, the realprices of natural gas and oil, real economic activity, and the realprices of contract and spot PVSF respond to a one-standarddeviation structural innovation.

Euro-to-dollar exchange rate appreciations cause an immedi-ate positive response of the real contract price of PVSF and quickly

13 International benchmarks for natural gas prices come from the Henry Hub

terminal USA, Intra-Alberta Natural Gas Exchange Canada, National Balancing

Point (NBP) UK, and Zeebruge Hub Belgium.14 Brown and Yucel (2009), research has shown NBP plays a significant role in

explaining movements in the Henry Hub price of natural gas in the bivariate model,

and European pricing of LNG against oil might be reinforcing the relationship

between crude oil and natural gas prices on both sides of the Atlantic in multivariate

models.

level off in the fifth month until the negative responses start fromthe fourteenth month. Effects are significant at 10% level from thefirst month. They cause positive responses of the real spot pricesof PVSF with two month delay but effects last for more monthsbefore turning to negative in the eleventh month. The responsesare significant at 10% level from the second month. These shocksalso immediately raise the real price of oil that is significant at 1%level from the first month. The real price of natural gas respondspositively but not significantly to exchange rate shocks in the firstfew months. The real economic activity shows slight positiveresponses before turning to negative in the sixth month.

Effects of positive production cost shocks driven by natural gasappear slightly different from other structural shocks, but displaysimilar features under different data sources. They cause temporaryrise in the real contract price of PVSF, followed by negativeresponses immediately in the second month. Effects are significantat 5% level from the third month and last for eighteen months. Theyalso cause significantly negative responses of the real spot price ofPVSF from the third month and effects last for eighteen months.They do not immediately cause significant responses from aggregatedemand and the euro-to-dollar exchange rate. Responses of oilprices appear relatively unstable, with negative and positive swings.

Positive production shocks driven by oil price take morepersistent effects on PVSF prices. They tend to raise the realcontract price of PVSF from third month and level off at theeighteenth month. Effects are significant at 10% level from secondmonth. They also tend to raise the real spot price of PVSFimmediately and last for eighteen months before turning tonegative. Effects are significant at 10% level from the first month.They do not cause significant responses of the euro-to-dollarexchange rate immediately but take more persistent and signifi-cant effects on the real price of natural gas. Real economicactivities show positive responses to positive oil price shocks inthe first year and become negative responses in the second year.

Effects of aggregate demand expansion are very persistent.They cause persistent positive responses of the real prices ofcontract and spot PVSF for almost two years. Effects are significantat marginal 10% level from the fourth and third month. Aggregatedemand expansion causes more than one year of positive effectson the real prices of oil and natural gas. They also do not takeimmediate significant effects on the euro-to-dollar exchange rate.

PVSF specific demand shocks in contract markets immediatelycause a significantly positive response of the contract price andlevel off to zero after eight months. When supply constraints arereleased, responses become negative at the thirteenth month.Effects are significant at the 1% level at the first and fourth month.They also cause an immediate positive response of the real spotprice of PVSF, and effects are significant at the 1% level in the firstand second month and lasts for twelve months before turningnegative. Demand shocks to the PVSF contract market do not causesignificant responses of the real euro-to-dollar exchange rate, thereal price of oil and real economic activity, but do significantly raisethe real price of natural gas from the third month.

Fig. 11. Responses to structural one S.D. Innovation 72 S. E. Note: Shocks 1–6 refer to exchange rate shocks, production cost shocks of natural gas, production cost shocks

of oil, demand shocks of aggregate demand, PVSF specific demand shocks in contract and spot markets.

Y. Yu et al. / Energy Policy 49 (2012) 572–585 581

Demand expansion in PVSF spot markets immediately cause apositive response of the real spot price at the 1% level ofsignificance and gradually level off before the twelfth month.They also raise the real contract price of PVSF at 1% level ofsignificance from the first month and gradually drop to zero at theeighth month. When supply constraints are released, effects turnto negative from the twelfth month. Demand expansions in PVSFspot markets do not cause significant responses of the real euro-to-dollar exchange rate, the real price of oil and real economicactivity, but significantly raise the real price of natural gas.

The most outstanding results in above estimations are differ-ent features of shocks unspecific and specific to PVSF markets. Weobserve the more persistent effects of aggregate demand shocksand production cost shocks on PVSF markets, and the moreimmediately significant impact of exchange rate shocks anddemand shocks specific to PVSF markets. In Section 4.2, we willfurther disclose the cumulative effects of structural shocks anddemonstrate their importance to PV leading countries.

4.2. How do the cumulative effects of structure shocks affect the real

price of solar PV Si feedstock?

The study of cumulative effects of structural shocks on the realprice of PVSF will help us to judge the respective cumulativecontribution of each structural shock to the real price of PVSF andhelp to make proper implications.

Fig. 12 shows all structural shocks have made importantcontributions to the real price of PVSF. The exchange rate shocks

driven by euro-to-dollar exchange rate fluctuations appear tomake a less persistent contribution to both real contract and spotprices of PVSF. Production cost shocks driven by natural gas andoil have made more lasting contributions to the real price of PVSF.Natural gas, as an increasing share of electricity generation, ismore likely to weaken the competitiveness of solar PV electricityproduction and make a negative contribution to the real price ofPVSF. On the contrary, production cost shocks of oil are morelikely to strengthen the competitiveness of solar PV and make apositive contribution to the real price of PVSF. The real spot priceof PVSF responds more actively than the real contract price toproduction cost shocks of both natural gas and oil.

Aggregate demand shocks have made the largest and longestlasting contribution to the real contract and spot prices of PVSF andcumulative effects are obviously more significant on the real spotprice of PVSF. Demand shocks specific to the PVSF contract markethave made a relatively less persistent but important contribution tothe real prices of PVSF in both contract and spot markets. Demandshocks specific to the spot PVSF market are more likely to beresponsible for sharper price increases or decreases in the real spotprice of PVSF markets before TOP contract supplies can be expanded.

Based on the above estimation results, it is easy to explain whythe PVSF price responded differently to structural shocks among PVleading countries during 2004–2009. Spain, with a high dependencyrate on external supplies of natural gas and oil and the moreabrupt changes to solar PV support measures, displayed largerPVSF demand changes and price responses to systematic struc-tural shocks. Germany, with a lower dependency rate on external

Fig. 12. Accumulated response to structural one S.D. Innovation þ/�2 S. E.

Y. Yu et al. / Energy Policy 49 (2012) 572–585582

electricity energy imports and stronger national economic sup-ports, showed flatter PVSF price responses than Italy. The USA,with a lower dependency rate on external electricity energysupplies and less attractive supports to solar PV applications,demonstrated flatter PVSF demand increases and lower priceranges than other PV leading countries, like Japan, which reini-tiated a favorable PV policy after 2008. South Korea, with lessfavorable PV support measures, suffered more severe PVSFdemand and price drop than Italy in the aggregate demandrecession and energy price collapse periods.

In Section 5, further discussion will be made to confirm thedemand shocks specific to the PVSF market and support theempirical results of this section.

5. Price responses of solar PV Si feedstock to demand shocksspecific to PV markets

5.1. Price responses of solar PV Si feedstock and national solar PV

policy adjustments

After careful review of tariff information on professional PVwebsites, such as Solar Buzz and PHOTON, we list following

important national PV policy events and relevant monthly PVSFprices changes to examine impacts of PV policy adjustments onPVSF markets. World price data are collected from PHOTON andCSA. National price and volume data are sourced from ChineseCustoms Statistics.

1.

In July 2006, with positive policy adjustments from Franceand Spain, the world spot price rose 20% when other relatedfactors fluctuated less than 1% (monthly contract price dataare unavailable before January 2007).

2.

In February 2007, with positive policy adjustments from Italy,the world spot price rose 6% when other related factorsfluctuated less than 2%.

3.

Following positive policy adjustments of Spain on 29th May2007, the world spot price increased by USD 25, or 8.3%, and thecontract price increased by USD 10, or 15%, holding other factorsquite stable, with less than 1% of fluctuations in June 2007.

4.

In September 2007, encouraged by most favorable tariffarrangements proposal in USA, the average world spot pricedecreased by 6.7% and the contract price by 5%. China’simport market experienced a 14.7% price increase from USAimports in comparison with a 30% price decrease of importsfrom European countries.

Y. Yu et al. / Energy Policy 49 (2012) 572–585 583

5.

Encouraged by positive policy changes in Italy in December2007, the world spot market price increased by USD 50, or14%, and China’s market witnessed a 132% price increase fromItalian imports, compared with a 51% increase from Europeancountries. World contract markets witnessed a slight priceincrease in December 2007.

6.

In February 2008, USA took its big step for FIT policyarrangements in the state of California. Despite both spotand contract prices of PVSF remained stable in February, theysurged to the highest historical monthly average price inMarch, with 18.8% and 25% increases separately, holdingother factors much less volatile. Chinese PVSF importsexperienced a slight price climb and 55% supply increasefrom the USA market, while imports from Europe and Japanexperienced approximately a 16% price drop and 20% supplydecrease.

7.

From September 2008, the spot price of PVSF began acontinuous decline through the end of 2009, and the contractprice experienced a decreasing trend with a two-month delay(Chinese import data of Spain’s PVSF price are unavailable).

8.

In October 2008, PVSF markets were affected by positivepolicy arrangements from USA, but negative policy adjust-ments from Germany. Meanwhile, macro and fuel indicesexhibited continuously weak growth signs. With unclearmarket conditions, the world spot market of PVSF exhibiteda small price decline, while contract markets exhibited asmall price rise. Chinese import data exhibited small priceincreases for PVSF from USA, contrary to the 10% pricedecrease from the European and Japanese markets.

9.

Despite the good news of UK market, in November 2008, thespot price of PVSF market witnessed a single largest monthlydecrease of $130, compared with slight increase in thecontract price of USD 2. Chinese import market witnessed arelatively smaller price decrease of 5% from European sup-plies compared to 25% from Japanese supplies. USA importsremained stable, with a slight price increase of USD 2.Quantity of imports from three regions still kept increasing.

10.

Despite positive policy arrangements in solar market in Febru-ary and March 2009, the world PVSF spot price continued todecrease until May 2009 and contract price, after a slightincrease in February, followed the step as well.

Based on the above analysis of the PVSF price and nationalsolar PV policy changes, it is obvious that PV policy adjustmentshave significantly influenced PVSF prices. Especially, the spotmarket displays a much more active response than the contractmarket. Meanwhile, when macroeconomic activities and fuelmarkets are experiencing negative shocks, even positive policysupport cannot well support the PVSF spot price. Thus, we deducethat the PVSF contract market is more likely to reflect long-termeffects of unexpected demand shocks, while the spot market ismore likely to display short-term precautionary demand effects of

0200400600800

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Fig. 13. China monthly solar PV Si Feedsto

policy adjustments, which are more subject to changes in macro-economic and fuel market conditions. For precautionary demandeffects, more evidence will be displayed.

5.2. Solar PV Si feedstock price fluctuations and precautionary

demands

5.2.1. Solar PV Si feedstock supply constraints and demand

uncertainty

During 2004–2009, China experienced fascinating, rapidgrowth in PV markets. It grew from a small PVSF producer withonly 80 t of self-supplies and remaining 95% import supplies tothe current world’s third-largest producer with more than20,000 t of self-supplies and 60,000 t of production capacity.Through the study of Chinese PVSF markets, it is clearer tounderstand the effects of specific demand shocks.

Figs. 13–16 are worked out for price and quantity fluctuationsof China PVSF imports by trade patterns during 2007–2009. Theyhave two features in common. One is the sign of supply con-straints from November 2007 to April 2008 during which favor-able policies 5 and 6 were announced and world prices rose torecord high: although the quantity of China PVSF imports by tradepatterns stayed stable (Fig. 14) or saw a sharp drop (Fig. 15 and16), import prices kept a climbing trend. The other is the sign ofdemand sluggishness and uncertainty from September 2008 toJune 2009: when prices of China PVSF imports declined substan-tially, quantity of imports declined less sharply but in largevolatilities. Two features confirm our propositions that supplyconstraints did exist at some point in time, but they were merelyresponding to the unexpected demand shocks and demand uncer-tainty itself, and demand uncertainty did exacerbate demandquantity and price fluctuations.

5.2.2. Solar PV Si feedstock precautionary demand

To find more evidence to support the precautionary demand inPVSF markets, data of China bonded PVSF are adopted to discoverthe reaction between PVSF purchaser demand responses andprice fluctuations.

Imported PVSF in Chinese bonded warehouses is mainly usedfor transit trade, temporary storage (within one year) for latercustoms clearance and simple processing for re-export. Of thethree patterns, temporary storage is the most powerful index toexplain the short-term precautionary demand effects. Whenunexpected demand shocks cause PVSF prices to rise/drop,temporarily-stored bonded imports, as the easiest and least costlymethod for inventory build-up/cuts, will quickly increase/decrease for precautionary demands to prevent future pricerises/price declines, which, however, will further push PVSF spotprice rises/drops.

Before July 2007, transfer trade was the main pattern forChina bonded PVSF (95%), whereas, subsequently, transfertrade dropped significantly and temporary storage became the

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ck import volume and price changes.

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Fig. 15. China monthly solar PV Si feedstock import volume and price changes by processing trade from supplied materials.

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Fig. 16. China monthly solar PV Si feedstock import volume and price changes by processing trade with imported material.

Sources: Chinese customs statistics.

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Fig. 14. China monthly solar PV Si feedstock import volume and price changes by general trade.

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Fig. 17. Bonded solar Si feedstock for temporary storage in chinese import markets.

Source: Chinese customs statistics.

Y. Yu et al. / Energy Policy 49 (2012) 572–585584

predominant use for bonded PVSF. Fig. 17 displays large swings ofmonthly temporary storage volume and a lower tendency ofcontinuous volume increases or decreases. It also displays apositive correlation between volume and price. This proves thatprecautionary demand actively responds to price changes. Thehigher price is, the higher precautionary demand will be.

Besides, after October 2008 (the month following negative PVpolicy 7), direct return cargo of China PVSF imports increasedsubstantially, accounting for about 20% of temporary storage of

bonded PVSF. It further reflects that the precautionary demanddriven by demand uncertainty did play an important role inaccelerating demand fluctuations in PVSF spot markets.

6. Conclusions

This paper analyses why and how the real price of PVSFdisplayed such wild fluctuations during 2004–2009. Our estimations

Y. Yu et al. / Energy Policy 49 (2012) 572–585 585

show that the real price of PVSF is determined by structural shocksin global markets of foreign exchange, energy substitutes, aggregateeconomic activities and PVSF, but they are not linked to the degreethat structural shocks in each market have the same effects on thedetermination of real price fluctuations of PVSF. Energy markets andreal economic activity have exhibited a long-lasting contribution toreal price fluctuations of PVSF, and demand shocks specific to PVSFmarkets, which are focused on the shocks of unexpected demandand demand uncertainty, and shocks of exchange rate have beenresponsible for sharper price fluctuations in the relatively short run.Although some measures of these shocks are subject to re-examina-tion with other alternative methods or datasets for real economicactivity or PVSF prices, our work does make a tentative explanationfor the real price and demand fluctuations in world and nationalPVSF markets during 2004–2009. The results also imply that solarPV market is more likely to bear high-cost expansion withoutadequate identification and understanding of systematic structuralshocks in PVSF markets.

The results have very important implications for the develop-ments of national PVSF markets and solar PV power applications.For countries heavily dependent on external natural gas and oilsupplies, attention should be especially paid to the substitutabil-ity between PV power and traditionary electricity energy sourcesto lower impacts of shocks by energy markets on the cost of PVSFand solar PV power generation. For countries prepared to adoptfavourable PV policies, attention should be especially paid to theextent of subsidies and interested parties to avoid excessive orinsufficient policy supports. For countries engaged in larger-scalesolar PV deployments, attention should be especially paid to theconformity and gradual exit of solar PV policy supports to abateeffects of demand uncertainty by abrupt and frequent policychanges on PVSF markets. For all pro-PV countries, attentionshould be paid to the improvement of national income and publicawareness about solar power application, the competitiveness inPVSF supply capacity, and the impact of foreign exchange ratechanges to keep a strong solar PV growth and stable PVSF marketdevelopments.

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