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Solar in 2011: is Italy the new Germany?

07 Jan 2011

Following cuts to photovoltiaic feed-in tariffs across Europe, it is Italy that looks to have some of the most attractive investment conditions.

Italian rooftop solar

Italian rooftop solar

Among the countries to cut their feed-in tariff support for photovoltaics in recent weeks are the emerging markets of France and the Czech Republic, while Spain continues to take drastic action following the bungled subsidy program that generated an investment bubble in 2008. But it is the anticipated retreat of Germany, the country that has provided the bedrock on which the solar market has been built thus far, that will likely have the biggest impact on 2011 demand levels.

Thanks to its long-term historic investment in attractive subsidies, Germany now accounts for much of the world’s installed photovoltaic power generation. According to the European Photovoltaic Industry Association (EPIA) figures, since 2004 this single country has accounted for more than half of PV installations every year expect 2007 and 2008 – when the Spanish market was in the middle of its bubble phase.

But with those attractive subsidies now being reduced by Angela Merkel’s coalition government, the question is who can fill the void. Of course, the German market will not disappear – rather, it is expected to remain flat while others grow. In the long run this geographical diversification is a necessary and healthy development for photovoltaics, but in the short term it will mean a scramble to find the next major growth market.

It’s a question that has been exercising photovoltaic industry analysts for the past few months, and in his latest report, on the emerging solar markets that typically fall below the radar, Jason Eckstein from Lux Research comes to the conclusion that no single region will become “the new Germany” for a good while yet.

Under the radar
Eckstein has looked at the subsidy and regulatory structures in 15 countries that analysts have typically ignored, and sees a handful of “fast burner” markets where valuable subsidies will attract investment – although none is of a magnitude anywhere near the scale of Germany. They include Cyprus, which can only support a few hundred megawatts of solar at best, and Israel and Malaysia – where installations would be capped at about 3 GW.

On the larger scale, Eckstein identifies India as a key location, and a “top target” for vendors in the future. The country has a heavily funded subsidy scheme, says the analyst, alongside a grid in great need of distributed power generation and a huge projected increase in energy consumption as the Indian population becomes much wealthier as a whole.

South Africa will offer another key opportunity, although only in utility-scale projects and set against the backdrop of regulatory uncertainty. Perhaps surprisingly, Eckstein also rates the relatively sun-starved UK as a potential game-changer because of its tightening supply of natural gas - and has identified a potential market of some 20 GW here.

But now labeled as "slow movers" are the potentially huge markets of Russia, Brazil and Mexico - all of which lack incentive schemes right now, although Mexico is expected to be a future solar champion after enforcing a national net metering policy that should encourage the take-up of distributed energy resources in the long run.

While Eckstein has been looking at emerging markets, among those already with established demand it is the US and China that will undoubtedly provide long-term growth. But in the near term, Henning Wicht from the analyst company iSuppli sees Italy as the most likely to supplant German demand.

“Going into overdive”
Pointing to strong fourth-quarter 2010 growth, Wicht now sees the end to last year as a breakthrough period for the Italian PV market. Installations completed by the end of 2010 and grid-connected by June 30 will still qualify for the 2010 feed-in tariff rates under the country’s second Conte d’energia, something that will guarantee an extremely attractive rate of return for solar investors who have been put off by the sudden changes elsewhere. “The fourth-quarter surge will cause installations in 2010 to rise to 1.9 GW – and will set the stage for another doubling of the market in 2011, with installations rising to 3.9 GW,” predicts Wicht.

He describes the Italian solar market as “going into overdrive” towards the end of 2010, as global investment flows into the country. Citing interviews with leading project developers in Italy, he now expects to see 975 MW of installations in the closing quarter alone – double the third-quarter figure, and more than three times the 288 MW installed in the closing quarter of 2009.

Although the subsidy scheme is scheduled to expire soon, meaning that the start of 2011 will inevitably see a reduced rate of installations, Wicht expects this softening to last “weeks, rather than months”, with the rate of new installations rising rapidly again thereafter.

“Despite the expected tariff declines, the internal rate of return of solar investments in Italy will still be higher than anywhere else,” explained the analyst. “As a result, installations in Italy will rise to approximately 1 GW per quarter in 2011.”

Potential risks
That said, Wicht does see some potential risks in the country. One is the possibility that the Italian government might cut the tariff rate earlier than expected - although with official data from the country’s state-run power management agency possibly being delayed by around six months, there would likely be a similar delay of any formal adjustment of the tariff. “It is unlikely that the authorities will be able to change the tariff before the third quarter of 2011,” he added.

Another potential risk is the technical difficulty of connecting PV systems to the grid in the rural and rugged south of the country – the part that also has by far the best solar resource.

Over at Lux, Eckstein did not cover the Italian market in his latest report, but he told optics.org that Italy would not come close to supplanting German demand, should that latter market shrink significantly in 2011. He sees iSuppli’s 3.9 GW projection as a bold one, but admits: “Many of the module manufacturers and installers that we’ve been talking to are very optimistic about Italy in 2011, and are committing resources there.”

“The government will announce official 2010 figures later in Q1 2010, but I would be surprised if the [annual] total reaches 1.9 GW,” he predicted, adding, “Doubling again from [the 2010] level is unlikely and would depend almost exclusively on utility scale developers similar to the Spanish market in 2008.”

And history already shows what a mess that created.

About the Author

Mike Hatcher is the Editor in Chief of optics.org

LBP Optics LtdBoston Electronics CorporationAltechnaDiffraction InternationalPhoton Engineering, LLCSchaefter und Kirchhoff GmbHFISBA
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