Solar to become mainstream, but will experience growing pains

Ernst & Young has released its quarterly analysis of the renewable energy market this week and provided some interesting statements following what it called "a tumultuous few months".

The global professional services giant suggested in the report that the impact of incentive reductions and an oversupply in the photovoltaics industry were being tempered by recent events including the natural and nuclear disaster in Japan, and the political unrest in the Middle East and North Africa (MENA).

"A change in environment in one part of the world can cause a shift in attitudes on a macro level," it said of the Japan and MENA crises. "[The crises] are causing a reconsideration of the optimal energy mix at the national level and the role of renewable energy in generating electricity. As a result, the solar industry may experience an easing of some of the structural issues it currently faces."

The report suggested that solar, more than other renewable energy sources, would be the great long-term winner from recent developments, but it still had a lot to do after a very tough beginning to 2011.

After the events in Japan, many countries were forced to rethink their nuclear energy usage, including Germany announcing it will scrap nuclear energy usage in the country by 2022 today. Solar valuations also shot up, however these gains have since returned to losses. The energy security concerns raised by MENA instability in the petroleum markets have also helped to energize a broader push for solar at a governmental level, which has helped to check the effects of tough policy making, particularly in Europe.

The report suggests that countries are now looking to develop a mix of energy plans to fit environmental and political preferences, which is leading to a greater long-term forecasts for solar over other forms of energy production.

Growing pains

"We’re seeing interesting growing pains," says Ernst & Young LLP Energy and Environmental Infrastructure Leader Ben Warren. "In the short term, policy makers are focusing on cost-effectiveness of renewables – this is penalizing solar energy versus other technologies such as onshore wind. In the longer term, the events in Japan will help move solar out of a niche technology corner and into the mainstream of power generation technologies."

The report also sees the next big questions for photovoltaics being "how" and "when" grid-parity with fossil fuels will be achieved.

"Primed by events in Japan and the Middle East, and supported by climate concerns, PVs will then enter a new phase of growth to become a major part of the overall energy supply. Grid parity with fossil fuels in the future is sure – but the length of the journey leading there is uncertain," said the report.

Country by country analysis

After the sluggish start to 2011, this development to parity is still a way off, however. According to the report, "the nuclear disaster in Japan and events in the MENA area will not save the PV industry from short-term pain."

Despite this renewed long-term confidence, the photovoltaics industry, particularly in Europe, will still struggle to avoid what the report called an "annus horribilis".

Many of the "brighter spots in the industry" were outside of Europe, most notably the U.S., China and India. However, since non-European markets account for only 20 percent of global demand, their growth would not yet offset weakness or stagnation in Europe.

Ernst & Young’s analysis of standings in terms of favorable renewable energy regimes for solar sees the U.S. top the list and extend its lead from last report, with India and China second and third respectively. Most notably, Germany fell six places to 12th overall, which was the biggest slide up or down the rankings of any country.

Changes in policy across Europe had stymied growth notably in Germany and Italy, as well as in the Czech Republic with policy decisions "all but ensuring that the market will collapse in 2011".

Both China and the U.S. announced plans for multi-million dollar projects, such as those in Yulin City and the California Solar Valley Ranch, which helped drive their growth and development.

Morocco, Taiwan, Bulgaria, and Chile were also mentioned by the report as countries with emerging possibilities surrounding the development of photovoltaics.

Investors in photovoltaics are also looking to reduce country risk in their energy portfolios, which means close attention is being paid to policy decisions. The report says that retroactivity is a terrible sign for investors and it tends to make people very, very cautious.

Supply and demand: The impacts

From the viewpoint of European manufacturers, the bad news did not stop there. Global production capacity is estimated to have increased 87 percent in 2010. Based on expansion plans, capacity should increase a further 80 percent in 2011, with much of the new capacity being added in Asia.

As these capacities come online, greater oversupply will develop. Significantly more modules could make their way to Europe, squeezing higher-cost producers first. European producers that are not at scale will face stiff competition from Asia.

"To compensate for the loss of markets in Europe, the industry will have to quickly internationalize its sales and project development networks," the report says. "This will come at an extremely untimely period of high strain due to lower returns in established markets. Firms will require strong balance sheets, a good handle on working capital, and access to sources of capital to expand their footprint in this period."

Gerhard Stryi-Hipp, Head of Energy Policy at the Fraunhofer Institute for Solar Energy Systems, says that coming years will see increased competition in the market as companies strive to best deal with fluctuating policy.

"Worldwide, PV demand is not growing as fast as production, and I would expect that we will see strong oversupply in the world market, which will lead to increased competition between companies," he said, adding, "so the module price will quickly decrease to a level where it is more attractive to invest."