Monday, May 23, 2011

Has the Solar Market Reached A Turning Point?

Several trends appear to be converging to make 2011 a watershed year for solar power, though not quite along the lines that solar advocates have been telling us to expect. The long-awaited arrival of "grid parity", when the unsubsidized cost of power from solar panels finally becomes competitive with that of power from the grid, is still either imminent or elusively out of reach, depending on who you ask. In the meantime, solar power remains critically dependent on government incentives. Changes in subsidy levels in key countries and the rapid growth of solar manufacturing in Asia are setting the stage for a shift in the geographical focus of the industry, with important implications for national energy policies.

Last year most of the new solar photovoltaic (PV) capacity in the world was installed in Europe, accounting for roughly 4 out of every 5 Watts of global PV additions. That shouldn't have surprised anyone, because it fits a long-standing pattern. However, the European policies that made it possible for PV to compete, even in such un-sunny northern locations as Germany, have come under considerable pressure as governments have been forced to confront high debt levels and other priorities. Feed-in tariffs (FIT) that guaranteed above-market power prices for the life of a PV installation have been slashed across Europe, including in Germany, Italy and France, in a trend that has lately spread beyond Europe. This is beginning to translate into lower demand. The reason it hadn't already resulted in a big reduction in European PV installations is that the cost of PV was dropping rapidly, further justifying legislated cuts to generous FITs.

Here's where the narrative diverges from the storyline that advocates outside the solar industry have been touting for years. Although a substantial portion of those cost reductions is attributable to economies of scale and experience curve effects--manufacturers finding new ways to cut costs as output climbs--a large slice of the reduction in global PV prices has been due to increased competition from lower-cost producers entering the game. The largest PV manufacturers in the world are now mainly based in China, rather than Europe, and PV producers outside Asia have had to shift much of their manufacturing to lower-cost locations in response. So for the last couple of years we've seen a global PV market focused mainly on sales in Europe but increasingly dominated by export-driven manufacturing in Asia. That picture is now changing as domestic demand in Asia picks up, along with growing installations in the US.

China is rapidly becoming the key country for solar, from both a supply and demand perspective. In addition to hosting leading PV producers such as JA Solar, Suntech Power, Trina Solar and Yngli Green Energy, China's latest five-year plan increases the country's solar power target to 10,000 MW by 2015 and 50,000 MW by 2020. That compares to global solar capacity of around 37,000 MW at the end of 2010, nearly half of which is in Germany. Ramping up installations to meet its new goals, as ambitious as they are, is unlikely to turn China from a net solar exporter to a net importer, as happened earlier for oil. That's because China's PV manufacturers are still adding capacity at a rate that should allow them to satisfy domestic demand in China--where they face only modest competition from foreign firms--while remaining highly competitive elsewhere.

With these developments, policy makers in Europe and the US who have been as focused on the creation of national solar manufacturing industries as on the deployment of solar as an element of their broader renewable energy strategies must answer a crucial question: As the PV industry develops and matures, will it follow the path of wind turbine manufacturing, in which established US and EU firms have been able to remain globally competitive, similar to the aerospace industry, or is it likelier to emulate consumer electronics, for which manufacturing is now dominated by Asian producers? If it's the latter, then the whole system of solar incentives must be rethought.

In the meantime, the shift of the solar power center of gravity away from northern Europe should advance the prospects for grid parity, because low-cost solar power depends as much on high-quality solar resources as on cheap PV panels. Geography isn't always destiny, but in the case of solar power its full potential will only be achieved when its deployment aligns large power demand with high average annual solar irradiance. In the long run, that points to a global PV market focused squarely on the US and China.

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