From 2000 to 2007, Germany built the largest market in the world for photovoltaic
(PV) technologies through a specially designed government incentive program. With the help of similar policies, the Spanish solar market outgrew Germany’s last year, expanding by an incredible 285% between 2007 and 2008 (Source: SolarBuzz)—though Spain’s program was altered shortly thereafter to dramatically reduce market size. In total, generous government programs enabled the E.U. to represent 82% of the global solar market last year (Source: SolarBuzz).
In addition to creating vibrant markets, these government incentives also had a dramatic impact on manufacturing. Germany’s early policies helped spur a domestic solar manufacturing base. Yet as other countries initiated their own aggressive solar incentive programs, new solar manufacturers in Asia—particularly China and Southeast Asia—quickly expanded their production of solar technology to meet growing demand.
But much has changed in the last year.
Reductions in governmental incentives combined with fierce economic headwinds, high costs for credit and a complete disruption of “business as usual,” destabilized the newly formed supply dynamics in the industry. Challenges ranging from severe inventory build, to high overcapacity, to intense price competition are putting heavy pressure on the nascent manufacturing base in Asia and the E.U.
Now, the U.S. is widely considered one of—if not “the”—most exciting growth opportunities in solar. Changes in the country’s administration and a significant boost in funding for renewables are attracting the attention of these reeling manufacturers. And solar-friendly California is top on everyone’s list.
The state’s solar incentive program generated the largest solar market in the U.S., making up the majority of the country’s solar market. Eager for growth opportunities, European, Asian and American manufacturers are vying for an early market leadership position in the Golden State. But moving into the U.S. solar market is not as simple as changing supply chains and currencies.
The European and Californian solar markets have a variety of factors in common, including high electricity rates, favorable policy frameworks and similar electricity demand patterns. But as much as these markets have in common, the two solar markets are quite different due to key differences in incentive structures.
Many believe that the solar industry’s rapid growth is a result of uniform, generous government support in every major market. A closer look, however, reveals that each of today’s fast-growing solar markets has a unique structure due to key differences in government incentive programs.
Most importantly, many European countries offer a feed-in-tariff (FIT) incentive structure that requires electric utilities to buy renewable energy at above-market rates set by the government. The FIT turns solar systems into attractive investments for owners via a guaranteed revenue stream for the energy that is fed back into the electric grid.
By turning solar systems into fixed-income investments, the FIT structures solar markets so that system owners evaluate their solar investments purely on an internal rate of return basis. Essentially, they compare a solar installation with a bond or another long-term asset. This simple and lucrative incentive structure was designed to create, and has led to, explosive growth in the European market.
The U.S., on the other hand, uses an incentive structure that creates a market that operates within traditional electricity markets. The largest solar incentive is the federal investment tax credit (ITC), a one-time, 30-percent tax credit or rebate for solar system purchases. After the ITC is applied, however, the value of solar systems is not based on a government-determined price for electricity fed back to the grid, as in many European countries. Instead, system owners merely offset their own electricity consumption, or in the case of third-party project developers, the solar electricity is sold at competitive rates to customers. In this way, owners compare electricity rates from utilities with those produced by a solar system in order to make an investment decision.
The structural differences between an ITC-based market and an FIT-based market are worth understanding, especially as the U.S. becomes the next major growth opportunity for Asian and European manufacturers.
Manufacturing cost ($/Watt) has traditionally driven competition among manufacturers, but from an end-user standpoint, this metric is relevant only when it can be directly compared to a fixed value for energy production—as is the case with FIT systems.
On the other hand, traditional electricity markets are complex and fast changing. The price of energy is driven by everything from seasonal changes to the time of day. In these markets, manufacturing cost alone does not address the economic concerns of end-users.
This is a key issue for manufacturers seeking to access the California market. In Europe, the fixed price for energy fed into the grid leads to manufacturers only needing to address one basic type of project or customer. In the U.S., the customer types and financing options can vary more widely, representing both a threat and an opportunity for manufacturers.
California’s solar market is divided into categories of “Self-generation” and “Investor owned utility (IOU) procurement,” each of which has sub-categories defined by incentive and policy structure. In all cases, though, solar projects either compete with grid electric rates or go through a competitive bidding process that is mediated by IOUs. The important point here is that the values of solar projects in California are more directly affected by electricity markets than projects under the E.U.'s FIT systems.
Since California’s utility-centric policies favor solar projects that address true electricity market needs, manufacturers that develop manufacturing and product strategies for addressing real-world market conditions are better suited for leadership in this emerging market.
In fact, the ITC now allows utilities to own and operate solar installations, where as in Europe, the utilities are the ones paying system owners for their excess electricity. Already, electric utilities in California are exploring how solar can be used to improve operations. This is likely to encourage installations that can operate more like power plants, where systems are designed to address specific patterns of electrical demand.
Tracking is one technology helping solar systems achieve power plant-like operation. Trackers orient solar systems toward the sun throughout the day, increasing production during afternoon peak electricity hours, when electricity demand is highest and production most valuable.
Since trackers help solar systems produce 20 to 30 percent more energy throughout the day, they boost the value of a solar system when the value is based on a FIT, and even more so, when regular demand patterns and the time-dependent cost of electricity generation is taken into account. That is why in the U.S. the majority of utility and commercial PV installations are moving to single-axis tracker installations.
To achieve a market where PV is regarded as a fully recognized part of the solution, FIT countries will need to steadily adjust their policies so that solar technologies compete in electricity markets. Manufacturers should expect this new market in Europe, but early experience in the U.S. will benefit them as grid parities approach and FITs disappear.
Marc van Gerven is the Executive VP for Marketing and Sales of Solaria Corporation and Philipp Kunze is the Managing Director of Solaria Germany GmbH
