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Today’s solar PV market is a story of shifts - often gradual but sometimes quick. As solar demand has grown, it has shifted away from reliance on two key countries - Germany and Italy - that consumed 60% of new demand in 2011 to a much more global arrangement, where no one region will consume more than 30% of new demand in 2018.

In a more subtle shift, energy market characteristics are playing an increasingly active role in individual solar markets’ compositions by application. This is making demand profiles in each country increasingly market-specific and forcing module manufacturers, developers and other stakeholders to revise their strategies.

They must make difficult decisions about the markets they want to compete within and the businesses they prioritize. Therefore, in order to forecast the prospects for the U.S. utility-scale market, one must first understand the global landscape, including the market for smaller installations.

New PV demand worldwide will grow from 31 GW in 2012 to 61 GW in 2018 (see Figure 1), helped in no small part by the acceleration of the Chinese demand market, which will become the largest in the world in 2013, and break the 10 GW threshold for new installations in 2015.

The U.S. will be the third largest market in 2015, with 5.4 GW installed, before vaulting to second place in 2016, ahead of the investment tax credit (ITC) reduction to 10%. The U.S. will break the 10 GW mark in 2018.

We forecast installations by application (residential, commercial and utility-scale) and find no runaway winner, with each segment growing to between 18 GW and 24 GW in 2018. Even so, distributed generation (residential and commercial) accounts for the majority of new installations in 2018 (68%), though utility-scale has the highest compound annual growth rate at 12.5%. These numbers help tell a different story about the way in which the solar demand market is growing.

Germany and Italy - the two countries that used to constitute the vast majority of the demand market - are both making concerted efforts to decrease annual demand to sustainable levels and specify the types of systems they prefer installed. In Italy, the Conto Energia V demonstrated priority for rooftop systems; net metering is now limited to systems less than 200 kW in size. Germany has also stated a clear preference for rooftop systems.

When feed-in tariff rates were high and those two countries dominated the demand market, investor appetite for utility-scale systems increased quickly. Today, both countries must manage sustainable new demand markets, rather than incentivize solar systems to make them competitive.

Further, large bases of installed solar - an intermittent resource - without grid infrastructure upgrades or energy storage incentives can threaten the stability of the grid. Germany and Italy lead the world in electricity consumed from solar. (See Figure 2.)

 

Shift to distributed solar

To this end, countries with high installed bases of solar and slowly growing electricity demand are looking to deploy solar as distributed generation to displace grid electricity in small instances rather than bring more intermittent generation on the grid in one place. Distributed generation also lends well to energy storage, should utilities seek to incentivize it.

On the other hand, emerging markets have quickly growing electricity demand. These countries include India, South Africa, Saudi Arabia, Chile and Argentina. Not only are these countries’ solar markets growing, but they also very much need the added electricity it can provide. These markets and others like them are responsible for the strong growth in the utility-scale sector.

Note that although the top suppliers/utility-scale developers First Solar and SunPower have roots in the U.S. and Europe, they have expanded their development capabilities in the past two years to Latin and South America, the Middle East, China and the rest of the Asia Pacific region in anticipation of this shift in the market. Recurrent Energy has also stated intentions to move into emerging markets.

The U.S. utility-scale solar market, meanwhile, is neither highly saturated at the level of Germany and Italy nor emerging and looking to satisfy growing electricity demand.

The cliché about the U.S. solar market - that it is really 50 markets, not one - is true. Incentives, as well as retail electricity prices and the energy mix - as the prevalence of shale gas has a clear effect on solar in some states - differ widely between states and regions. As the U.S. solar market grows to 10.7 GW in 2018, not all states and application segments share the load equally.

One problem for utility-scale solar in the U.S. is that some of the biggest and fastest growing U.S. solar markets - such as New Jersey, Maryland and Connecticut - are located in the population-dense Northeast. This favors some utility-scale project growth in the near term if only due to proximity to other projects and good solar sentiment, but space limitations will prevent sustained long-term growth in these states.

Furthermore, some renewable portfolio standards that would normally cater to utility-scale growth, such as Ohio’s, do not have sharp teeth, lacking enforcement if utilities do not meet benchmarks.

As a result, utility-scale solar remains largely relegated to the sunny Southwest U.S., such as California, Arizona and Nevada. The market has some traction in places like Tennessee, but generally, extremely low retail rates will keep solar out of the Southeast region.

Texas, meanwhile, is an interesting case. Its initial growth has come in the distributed segment thanks to favorable policies from utilities such as Austin Energy, but utility-scale solar could grow there as system costs continue to decline. New incentives are unlikely to come online at the state level.

 

Long-term questions

Of the roughly 9 GW of utility-scale solar that we forecast to come online in the U.S. (cumulatively) during the next five years, more than half of that capacity (57%) will be installed in Arizona (19%) and California (38%), with the rest distributed among states in chunks on the order of 10 MW to 100 MW each (annually).

One of the reasons for growth in the utility-scale segment - and the U.S. market more broadly - is the looming reduction of the ITC, from 30% to 10%, in 2017. The tax credit is critical to system financing, and its reduction will slow down new project growth. Therefore, developers will likely try to safe harbor (i.e., begin project construction on) as many systems as possible in advance of the reduction.

Although distributed installations will certainly rush in before the end of 2016 as well, with many coming online in the months afterward, utility-scale systems safe-harbored into the 30% ITC may take years to come online after projects begin construction.

The same goes for concentrating solar power (CSP) thermal plants. Despite the benefits those systems offer by incorporating thermal storage into their systems, we expect CSP suppliers to have a difficult time financing new systems in the U.S. once 2017 begins.

There will be a flurry of activity in 2016, leading to a few years of good installation numbers as suppliers complete projects initiated before the drop. This leaves the U.S. in good shape for continued growth over the next four years, with some demand also pushed out beyond that.

The long term is a bigger question, though. As the ITC reduces, many of the advanced financing options that are rumors or trials today, such as securitization, renewable bonds, real estate investment trusts and master limited partnerships, are poised to take center stage, financing bundles of distributed projects.

The current rules of these vehicles put the ITC in question if they are opened to public markets - a blow more easily absorbed when losing a 10% tax credit versus a 30% credit. Accessing public pools of capital is largely the main point with these vehicles, as that would enable a lower cost of capital.

That’s not to say that the U.S. markets are prime for easy growth for distributed solar. Yes, power generation company NRG is getting into the residential market, but a looming battle with utilities over electron market share keeps the tension palpable. Still, widespread sentiment on the supply side of the industry ranges from expecting distributed generation to make up a large majority of U.S. demand to predicting that we will see a total dearth of utility-scale projects once the ITC reduces.

We forecast utility-scale demand to peak at 26% of the U.S. market in 2017 (see Figure 3) as utility-scale projects started prior to the ITC reduction come online, before that share begins to slowly reduce in 2018 as new project growth slows down, and larger projects become more difficult to finance without the 30% ITC. The share will likely decrease to less than 10% by 2023.

 

Few utility-scale winners

Simply put, the long-term outlook for utility-scale solar in the U.S. is not particularly good; it is mediocre at best, with very few winners expected. In a recent evaluation of global policy, we found that those looking to do business in the utility-scale segment internationally as an alternative will need to make a few well-informed bets, as no market is perfect or easy to access.

There will be demand in places like Saudi Arabia and India, though domestic content concerns make some developers hesitant. Latin America and South America are due to prosper as well, though some dislike some cultural tastes for doing business there; some companies run into similar differences in Southeast Asia.

Developers or suppliers targeting utility-scale solar understand that the future of their end market is in emerging countries. Technology suppliers must understand the dynamics and strategy decisions that their customers are facing and the implications this has for technology.

Developers will be working in capex-­conscious geographies, usually in hot climates, and often exposed to sand or soil. Land costs are likely to be low, making space constraints less vital and favoring overall energy harvest over peak efficiency in performance.

As thin-film module suppliers rise from the ashes of the module market in 2014 to 2015 - or continue growing, in the case of players such as Solar Frontier and First Solar - we can expect them to pursue these markets but also to require high-performance non-active materials that can withstand these conditions. Therefore, self-cleaning and hydrophobic coatings will also remain important in the sector.

Smaller, pure-play solar firms will seek strategic investors and partners that can help them expand globally. Larger firms will look to buy developers to acquire pipeline and local expertise, rather than spending the time to start up individual offices, hire employees and build internal pipelines in new markets.

For U.S.-based developers, long-term prospects are dim without making an international play, and with a calculated risk, the expected success is higher than that from idling at home. There will continue to be occasional work in California, Massachusetts and Arizona, though emerging markets are where the significant growth lies, due to the characteristics and makeup of energy markets.

Utility-scale developers that want to do business only in the U.S. ought to scale down into the commercial segment, exploring applications such as university and office campuses, as well as industrial settings. These types of customers will continue to be prime targets for large-scale solar arrays as part of the widespread push towards corporate/organizational sustainability.

Stakeholders and developers would be wise to start riding the coattails of tomorrow’s solar market today, rather than try to push square pegs into round holes. R

 

As an analyst at Lux Research, Matthew Feinstein leads the solar systems intelligence practice, covering solar module technologies, grid interconnection and project development/finance, as well as power electronics and other balance of systems technologies. He can be contacted via Carole Jacques at carole.jacques@luxresearchinc.com.