For most of this decade, Germany was the solar industry. The lifeblood that pulsated through its veins, setting the pace its heart beat, and feeding it the vital nutrients it needed to survive. Single-handedly accounting for roughly 43% of industry demand over the last five years, providing the heft and scale to drive pricing down to more economic levels, and creating an influential subsidy policy that not only attracted crucial investment capital but was affordable to society, Germany has made the solar industry what it is today. However, thanks to a maturing environmental awareness worldwide, mounting concerns about climate change and energy security, and improving economics, an array of countries across three continents have stepped up with long-term commitments to help take some of the load off Germany’s shoulders.
Of course, Germany has been seated at the head of the solar table for so long it is hard for anyone following the solar industry to ever imagine any other country ever rivaling its influence. With more than 3 GW of PV installations last year, Germany single handedly accounted for almost 50% of industry demand, based on Displaybank’s estimate of 6.4 GW of worldwide installations. Except for the brief exception of 2008 when Spain’s aggressive feed-in-tariff policy drove a one-time surge in demand, Germany has been responsible for more than 40% of demand in every year since 2004 even accounting for as much as 55% of installations in 2006. Without Germany’s contribution, annual installations for the solar PV industry would have declined in two of the last five years instead of growing in each and every year as it has at a compound rate of growth of 39% since 2004. Driven by a widely successful feed-in-tariff policy, the solar PV installed on German land and rooftops now produce roughly 42% of the peak capacity of all the solar PV cumulatively installed across the entire globe. As the source of such an outsized proportion of industry demand, it’s not hard to understand why all eyes in the industry are constantly peeled on the lips of the German Environment Minister for an indication of a shift in its feed-in-tariff policy and why markets shudder when feed-in-tariff rates are cut a few percentage points more than expected.
However, the industry has finally matured to the point where Germany will become a less and less dominant force and ultimately drive a smaller and smaller proportion of total industry demand in the years ahead. Partly due to a wider network of nations following Germany’s example of using a feed-in-tariff policy to attract long-term project financing, in part because of heightened environmental awareness by the United States and developing countries since the effective failure of the Kyoto Protocol in 1999, and also partly driven by desires to promote both domestic manufacturing industries and energy security, demand for solar has become broad enough and strong enough worldwide to provide sizeable and sustainable support even without Germany.
Though forecasts for 2010 worldwide PV installations extend across a wide range from less than 7 GW to more than 12 GW, a quick review of estimates from third party resources like Displaybank, iSuppli, and Lux Research, media analysts like Greentech Media, solar module makers like Trina, JASO, and Suntech, and investment banks like Deutsche Bank suggests an unofficial average of between 8.5-9.0 GW of demand this year. As the table below highlights, emerging growth across a breadth of countries will allow for the high end of this forecast to be achieved even if German demand remains flat year over year. In fact, four key markets that are demanding newfound attention from investors in the solar space—Italy, the US, Japan, and China—can be expected to drive more than 50% of year over year installation growth in 2010. If the German market manages to grow further in 2010, it would only serve to bolster the industry’s growth prospects, but clearly the market looks on pace to achieve close to 40% growth without it.
To be clear, the estimates in the above table do not include outlandish assumptions for some of the newly created feed-in-tariff markets like Canada and the UK and include lower assumptions than many sources are forecasting for the US, China, Japan, France, and Belgium. Moreover, these estimates leave realistic potential for significant upside in both Italy and the Czech Republic.
Looking beyond 2010, government policies and initiatives suggest the key markets of the US, China, Italy, and Japan are poised to take the reins as the PV industry’s primary growth drivers, while Canada, the UK, Korea, and even India offer the potential to play a significant supporting role. Driven by state-specific renewable portfolio standards and accelerating adoption by a widening scope of utilities, the US is expected to transform from an also-ran to a market leader with potentially more than 1.6 GW of annual demand in 2012; in fact, both Greentech Media and Navigant Consulting suggest that if incentive policies are maintained or even strengthened, the US has the potential to surpass 2 GW in annual demand by then. Italy, too, has emerged as an unexpected leader in PV deployment, driven by a generous feed-in-tariff that has been reported to lead to project IRRs north of 20%. Though rates are expected to be cut in mid-2011, falling system installed costs and high insolation levels have left Italy as one of the few countries to reportedly enjoy grid parity, which should help drive continued demand for PV in the country for years to come. Though growth in China may not really kick off until next year, massive government programs like the Solar Rooftop Program, for which 91 MW of projects were reportedly approved, and the Golden Sun Program, which targets 500 MW of installations through 2012, will help the country quickly pick up the pace. Though recent developments suggest the national solar feed-in-tariff announced last year will at minimum be delayed (if not outright cancelled), China nevertheless is on a path to hit the National Energy Administration’s target of 2 GW of installed capacity by 2011, while its ambitious plans to build a 2 GW thin-film plant with First Solar aim to propel demand in the latter half of the decade. Finally, after eliminating subsidies for solar in 2006, the government in Japan reinstituted rebates and established a feed-in-tariff last year, which should serve as a strong tailwind to drive Japan towards its lofty goal of installing 28 GW of cumulative capacity by 2020.
Driven by the increasing heft of these four countries as well as notable growth in Canada, the UK, Korea, and potentially India, annual solar PV installations are on a clear path to double over a three year time frame from roughly 6.4 GW in 2009 to more than 13.5 GW in 2012 even if the German market doesn’t grow at all over that span. If this were to be the case, annual German demand would drop from close to 50% of the industry last year to 35% this year and only 23% in 2012. The four new key markets of the US, China, Japan, and Italy, meanwhile, would grow from 24% of the industry last year to 40% in 2012 with ample room for potential upside over that time frame.
Of note, some fear that the German market could decline in the years ahead and thus turn the market into a negative drag on industry growth. This is particularly unlikely, however, as lower feed-in-tariff rates are coinciding with comparable drops in system installed costs, leaving project IRRs still above reported hurdle rates and thus continuing to support steady demand. In fact, it is probably more likely Germany continues to grow in the years ahead, thus further buttressing the industry’s outlook. Surely, there are few solar module manufacturer executives who wouldn’t welcome Germany remaining a high proportion of industry-wide demand, driving installation growth even higher, and in turn helping overcome the overcapacity currently plaguing the sector. To be clear, the assumption of 13.6 GW installed in 2012 in the table above is a conservative forecast relative to estimates from DisplaySearch for 17 GW and iSuppli for 15.4 GW and leaves much room for upside. This data point is intended less as an outright projection than as an illustration that the solar PV industry offers sufficient growth potential even in the absence of continued growth in the German market.
This transition is a crucial one that investors would be wise not to overlook. Not only will it be a healthy development for the solar PV industry to not rely so heavily on one single customer and broaden the foundations upon which its fortunes depend, but it also suggests the canary may be in a different coalmine than most investors’ eyes are focused on. Though all followers of the solar industry have long been trained to hone in on market developments and subsidy changes in Germany to guide their outlook for the industry, the opportunity for growth in the new key markets ultimately outweigh the threat of declines in Germany going forward. In turn, it would behoove investors to assign greater weight to the uptake to the feed-in-tariffs in Ontario, France, Korea, and the UK than on the German Ministry of the Environment’s decision to cut its feed-in-tariff rate by 17% instead of 15%. In the same vein, lower than expected payouts for ground-mounted projects in Germany in 2011 will likely have far less implications than higher than forecast project IRRs in Italy, while plans to pull forward Germany’s feed-in-tariff cuts by a few months may have far less impact on installation growth then unexpected multi-megawatt projects in China breaking ground this year and next.
At this point, it is a foregone conclusion that Germany will announce another double digit cut to its feed-in-tariff rate for PV installations in 2011. Do investors expect stocks to sell-off on news that the market may have already priced in? On the flip side, are investors anticipating an announcement of a feed in tariff scheme in populous US states like Indiana and Michigan or the establishment of floors and long-term SREC contracts in states like New York and Maryland? Are analysts fully taking into account some of the ambitious solar targets governments in Japan and Korea have set? Are traders assigning high probability to the success of the feed-in-tariff in India? Investors train your eyes on a new breeding ground, as more positive surprises from these new growth markets are likely over the next few years than negative ones.
Disclosure: No Positions