November 18, 2022
We’re in the midst of a global energy crisis - so what does it mean for the solar market?
We’re in the midst of a global energy crisis, fuelled by the aftermath of the Covid pandemic, the driest summer in Europe in perhaps 500 years, supply chain issues in addition to the Russian invasion of Ukraine. In other words, a fairly gloomy outlook. However, we sat down with Vegard Wiik Vollset in Rystad Energy who helped shed some light on the current energy outlook and the implications for the solar market.
Could you provide your views on the recent dynamics in the European power markets and what impact that will have on solar development?
European power markets are facing extreme volatility. With gas being the marginal price setter and in scarce supply coupled with the halt in exports from Russia resulted in prices ballooning to levels never seen before. This has further enforced the EU’s commitment to transition to clean energy, launching REPowerEU, the most ambitious clean energy policy package ever proposed. Normally, such a proposal takes years for approval, however REPowerEU was approved in record time, underpinning the EU’s intent on decisive action.
Does the Inflation Reduction Act and the REPowerEU schemes provide the necessary incentives in conjunction with a strong enough framework to bring clean energy and in particular solar to the forefront?
The Inflation Reduction Act (IRA) and REPowerEU indicate strong support for solar development. In the REPowerEU proposal solar is outlined as the main focal point of enabling a rapid build out of clean energy infrastructure. The flexibility and scalability of solar energy is flagged as a key reason - allowing for installation across residential rooftop, commercial spaces to large gigawatt, utility scale solar projects. The new 2030 target pledge of reaching 600 GWAC requires a quadrupling of current installed capacity in Europe, demonstrating that the future energy future of the European Union will be solar powered.
However, in terms of actual incentives put in place by the REPowerEU, the proof will be in the pudding. Current efforts have focused on the short term, i.e. such as the first major market intervention to cap the revenue of non-gas electricity generation.
For the IRA, we estimate that the extension of the production tax credits (PTC) and Investment Tax Credits (ITC), could result in over 155 additional GW of utility scale solar and wind by 2030. However, the impact will not be immediate as the solar industry must address the lingering effects of the antidumping and countervailing (ADCV) investigation into panel imports, as well as the uncertainty over the Xinjiang polysilicon ban and the backlogged interconnection queues.
What do you see as the near term challenges for utility solar developers and what can be done to solve them?
The main challenges can be split into three pillars:
First and foremost, permitting and access to land. Permitting has been flagged in the REPowerEU as one of the main pillars for improvement. The process can be very arduous, both for solar and wind projects, and it is not uncommon for permitting to take several years. Germany already identified this as a key issue last spring, and declared in their “Easter policy package” that the use of renewables was a matter of public interest and that it was vital to simplify and accelerate permitting and approval procedures for the public’s safety. We expect several countries to follow suit and further simplify permitting. Alongside permitting, is also the need for access to suitable land. The UK government’s recent proposal exemplifies this, where the definition of certain agricultural land has been extended and in turn limits land for solar development. However, the agility of solar deployment and recent technological innovations including agrivoltaics, floating solar developments and rooftop solar deployment all play a big role in mitigating land restrictions and working around current access issues.
Supply chain constraints are another key challenge for the development of solar. Polysilicon prices hit a new all-time high in August and the prices of solar panels remain at levels not seen since 2018. To better visualize the production landscape, China has approximately 98% of wafer manufacturing capacity, 78% of polysilicon manufacturing capacity and 82% of module manufacturing capacity. There is critical reliance on overseas manufacturing, which governments are eager to avoid, and have been flagged in REPowerEU and IRA. Both proposals outline clear goals to build up local supply chain capacity, enhancing resilience in the long term. The intention to distribute the manufacturing capabilities of solar coupled with China’s planned expansion of manufacturing capacity puts downward pressure on the prices of solar modules, which we expect to decrease in 2023. However, we have to be cognizant that the reliance on foreign imports will still remain high for Europe and the US over the coming years.
Lastly, and importantly, transmission. Current interconnection queues in the United States are over 1000 GW, which is rapidly becoming one of the key bottlenecks for solar deployment. Europe is starting to feel the pinch here too, given the rising penetration of intermittent energy. With the expanding rollout of wind and solar; curtailments, negative prices and limited grid will hamper development, if action is not taken to improve the transmission grid. The development and buildout of the grid requires more time than the development of solar, hence we see this as one of the key possible bottlenecks for intermittent renewable rollout.
How big of a role does technology play in rolling out and expanding the scale of solar energy and where do you see the biggest gap in the market?
Technology can play a huge part in the rollout of solar energy, both in terms of the flexibility some of the technologies can provide (solar + storage for combatting intermittency for instance), but also to address land access issues. Building integrated photovoltaics (BIPV), floating PV and agri-voltaics all have the potential for strong synergy effects which goes outside the basics of generating electricity. The exciting part will be when the general public understands the potential solar energy really holds for Europe as a whole. There is still a general misconception that solar energy doesn’t work so far north (at least in northern Europe), but luckily this perception is changing rapidly!