Pulse of the global solar market
There is no clarity yet on what the tariffs might look like next year, but it is generally a positive for the solar industry, says Raj Prabhu.
After a tumultuous first half with huge price drops and uncertainty, we are finally seeing some positive signs in terms of demand pick up. With the module prices now in the $1.00 - $1.10 range amounting to almost a 40 per cent drop in prices compared to the $1.80 levels in the first quarter, one might expect a huge spike in demand but it did not happen. Demand elasticity has been slow to show up in most markets and is taking a while to respond to low module prices mainly due to weak and unpredictable economic conditions in Europe and with the future of Eurozone itself in question, depending on the day of the week. As a result, a difficult financing environment exists in Europe, which is adding to the problem. The US economy is recovering very slowly and politically the support for renewable energy subsidies is just not there. There are some signs of hope. News has been more positive in the last few weeks as Germany finally reported a pick-up in demand. With low module prices, high internal rate of returns (IRRs) and a looming 15 per cent cut in feed-in-tariff in January 2012, there is hope that there will be a big rush in the last few months. The cash grant in the United States is set to expire at the end of this year and with the current political conditions in Washington, chances for an extension of the cash grant is almost zero. This could create a mini-rush in the US. A 20 per cent growth has been forecast for 2011 over 2010, in the hope that the year-end rush in Germany and the US will give the market a much-needed final push. 2012 at this point looks flat compared to 2011, with economic uncertainty and feed-in-tariff cuts in Germany, cash grant expiry in the US and tariff cuts in Australia and Taiwan. There are potential risks involving subsidy decisions in Italy, Greece, Slovakia and others.
The German market is finally showing signs of life. After a lack-lustre first half, Germany installed about 2.2 GW between June, July, August and September 2011. It installed around 5.2 GW in the 2012 feed-in-tariff reference period between October 2010 and September 2011, resulting in a 15 per cent cut in feed-in-tariff starting 1 January 2012, as it crossed the growth threshold of >4,500 MW. In addition, the new German renewable energy law, Erneuerbare-Energien-Gesetz (EEG), has introduced mid-year tariff cuts from 2012 onwards. The feed-in-tariff cut which will be effective from 1 July 2012 is based on annualised installations from 1 October 2011 to 31 April 2012, which could result in a further 9 per cent cut in 2012. There has been a hike in demand in the last few months and signs are that October 2012 was a strong month. With a 15 per cent cut in feed-in-tariff starting from 1 January 2012, the market is expecting a 'big rush' to install before the tariff cuts. Therefore we are forecasting installations of about 6 GW in 2011. The market in 2012 looks softer in Germany with coming feed-in-tariff cuts (15-24 per cent), the recent slowdown in economic activity, financing difficulties and uncertainty in the Eurozone in general, all pointing to slower growth.
After the ongoing confusion about installations in Italy, the Italian Gestore dei Servizi Energetici (GSE) now states that 3.5 GW was grid-connected in calendar year (CY) 2010. Year-to-date 6.5 GW has been installed in 2011 according to GSE, and it anticipates installations of about 8.5 GW by the year-end. This will make Italy the top solar market in 2011. The new law, Quarto Conto Energia went into effect on 1 June 2011. The new feed-in-tariff plan will decline on a monthly basis through the end of 2011 and then will decline using a six month schedule through 2016. According to the new legislation, small systems less than 1 MW installed on rooftops are uncapped. Small systems include 1) roof top projects under 1 MW 2) ground projects under 200 kW under net metering and 3) plants on land owned by the public administration. This uncapped small systems segment is expected to be driven by demand. It will be impossible for Italy to sustain these levels of installations going forward as volume caps shrink and feed-in-tariff cuts continue in 2012. Even more of a risk factor is the ongoing Italian debt crisis and the Berlusconi government itself hanging by a thread.
France is also right in the middle of the Eurozone crisis with huge economic and political uncertainties in the near future. France is one of the first countries in Europe to shift from a feed-in-tariff system to a bidding system for large-scale projects, above 100 kW. France introduced a 500 MW hard cap on annual new installations and 20 per cent feed-in-tariff cuts for projects less than 100 kW. The only thing supporting the French market in 2011 is the exemption of about 3.5 GW of grandfathered systems. About 2 GW of these are expected to be installed in 2011 and 2012.
United States (US)
The United States installed almost 900 MW in 2010 and the market has been expecting this number to double in 2011. Even with rapidly declining module prices in the first half of the year, the market was not exactly spectacular. The wild card is the 30 per cent treasury cash grant programme, which will expire at the end of 2011 and may fuel a year end rush, unless renewed.
Under the current political conditions in Washington and the recent bankruptcies of Department of Energy backed Evergreen Solar, Solyndra, Spectrawatt and Beacon power, the cash grant extension looks dead with the chances of renewal close to zero. The administration has also recently ordered a review of the Energy Department's loan programme. US still does not have a central, cohesive solar incentive policy, instead the market is driven by state renewable portfolio standards, state and municipal rebate programmes and 30 per cent federal investment tax credit (ITC) and loan guarantee programmes. While California, which is the largest solar market within the United States, is fuelled by an aggressive Renewable Portfolio Standard (RPS), states like New Jersey relied on Solar Renewable Energy Certificates (SRECs) for growth. The market for projects in New Jersey has declined after the recent collapse in SREC prices in that state, which was the second largest solar market in the US, other SREC dependent states may suffer a similar plight.
China has so far been a solar exporter rather than an end-market. The Chinese National Development and Reform Commission (NDRC) announced a solar feed-in-tariff without a cap, but the projects are subject to NDRC approval. According to the new policy, projects approved before 1 July 2011 and completed by 31 December 2011 will receive an FIT of $0.18/kWh. Projects approved after 1 July 2011 or completed after 31 December 2011 will receive an FIT of $0.156/kWh. This feed-in-tariff does not apply to other PV programmes such as the Golden Sun programme that are receiving government subsidies. The policy is still in its early stages with a lot to be clarified, but the fact that China has an FIT and is working toward a goal of 10 GW by 2015 and 40-50 GW by 2020 is a huge positive for the industry. There is a lot of focus on China right now after some American manufacturers filed a trade complaint against China disputing the subsidies offered by the Chinese government to Chinese manufacturers. With a difficult year coming up, 2012 will be a great year for China to announce some strong policies to spur domestic demand which may help the solar industry globally. The module prices are low enough for China to turn its attention from exporting panels to start consuming them.
Japan may end up shutting down all of its 54 nuclear power plants by the year end, according to Japanese Trade Ministry officials. How this will affect renewable energy sectors, specifically solar, is still unclear. Again, nuclear power is base load and solar is not. Japan at the moment is struggling with regular power shortages since the Fukushima disaster and has set a goal of achieving 28 GW of cumulative PV by 2020. Japan announced a new clean-energy law coming into effect on 1 July 2012 but the feed-in-tariff levels are still unclear. The country's Parliament passed a bill on 26 August 2011 that guarantees feed-in-tariff rates for wind, solar and geothermal energy. The bill is one of the first steps by Japan to promote the renewable energy industry in view of the recent Fukushima disaster. Under the law, the trade and industry ministry will set rates and periods each year.
Currently, the tariff for residential solar power is ~$0.54 per kilowatt-hour, while the tariff for commercial installations is ~$0.52 per kilowatt-hour. Even though there is no clarity yet on what the tariffs might look like next year, it is generally a positive for the solar industry.
The Ministry of New and Renewable Energy (MNRE) announced in August that 35 of the 37 photovoltaic (PV) projects amounting to 140 MW were able to submit evidence of funding and all of the seven concentrated solar power (CSP) projects amounting to 470 MW were able to secure funding under Phase 1, Batch 1 of Jawaharlal Nehru National Solar Mission (JNNSM). This is a very optimistic sign for the JNNSM solar programme as there were doubts about the ability to secure funding on most of the projects due to the low bids submitted. What is not clear is if these projects were mostly funded by banks and financial institutions as project funding or if they were primarily funded through balance sheet funding. All PV projects in Batch 1 are due to be commissioned around the second week of January 2012 and Batch 1 CSP projects are due to be commissioned in May of 2013.
The recently concluded 350 MW, Batch 2 bidding, under the JNNSM saw some extremely low bidding according to unofficial sources. NVVN said that the official list will be out in a few weeks. The low bid in the latest round is rumoured to be around Rs 7.49 (~$0.15) and the average bid was about Rs 8.77 (~$0.18). These tariffs are some of the lowest in the world and it is difficult to see how these projects will secure financing and make a decent return on investment.
The author is Managing Partner at Mercom Capital Group. Views are personal.