by Paula Mints, Navigant Consulting
June 16, 2010 - Long before Germany instituted its feed-in tariff (FiT) law the global PV industry survived on utility and government grid-connected demonstration projects, the off-grid market and too few incentives. Japan's residential rooftop (subsidy) program stimulated a strong market that proved sustainable over time, but primarily the industry existed in a state of anxiety over when its subsidies would appear and when they would go away. Figure 1 offers a history of PV industry growth from 1974 through 2009 broken into 10-year periods.
|Figure 1: PV industry compound annual growth, 1974-2009.|
As indicated in Figure 1, periods of strong growth were generally unsustainable during the early PV industry history. In the late 1990s, subsidies in Japan along with programs in Germany and California offered some stability to the PV industry in terms of demand, but it was not until Germany's FiT incentive was instituted in 2000 and particularly after changes in the law in 2004, that industry demand began to steadily, and significantly increase. Figure 1 offers PV industry annual growth rates from 1974 to 2009. Note that years of significant growth have been followed by years of slower growth and in some cases, close to flat growth. This volatility in the early years of the PV industry made it very difficult for manufacturers, installers and system integrators to develop strategies for future growth -- essentially, the strategy was survival.
|Figure 2: Annual growth, 1974-2009|
Everything changed for the PV industry in 2004 when Germany put through changes to its tariff. Demand in Germany for PV systems increased by 174% in 2004 over 2003, and soon other countries in Europe were leaping on the FiT bandwagon -- for good and sometimes for not so good. The most effective method of stimulating a market had been found -- basically, the FiT incentive model moved the industry from megawatts to gigawatts in just four years. Figure 3 shows Germany's demand growth from 2000 through an estimate for 2010.
|Figure 3: Demand in Germany vs. the rest of the world, 2000-2010|
Before we all leap happily aboard the FiT bandwagon, there are a few caveats:
- All incentive programs are expensive. The FiT acts as (typically) a 20-year annuity with the tariff paid by rate payers over its life;
- The yearly degressions work to stimulate stronger demand in anticipation of the decrease -- that is, as the year draws to a close installations increase, sometimes significantly; and
- Because of the first and second points, FiTs can break down the very markets that they are supposed to stimulate.
An over-stimulated market can behave rapaciously, as evidenced by the debacle in Spain in 2008 and the swift rise and swift demise of the South Korean FiT (though these markets were beset by different problems). Europe's FiT also served to stimulate an entirely new genre of PV installation: the multi-megawatt, large field, utility scale -- by whatever name, it means large ground-mounted systems typically over 1MWp, and often much larger. When these systems first appeared in the early 2000s they were initially thought to be a short-lived phenomenon. Investors, however, liked the risk-ameliorating annual tariff payment, and so it came to pass that the market for solar systems in Europe matured faster than expected while remaining, essentially, immature. Figure 4 highlights demand in 2000, the birth of the solar FiT, along with 2009.
|Figure 4: Global demand, 2000-2009|
Far from removing the boom and potential bust anxiety that dogs the incentive driven PV industry, poorly administered, poorly designed, and even well-designed programs have created even more anxiety for the industry. An incentive program collapse is an ugly beast -- and an over-developed market is not easily controlled. Attempts to control growth have included caps (total or annual), yearly degressions and other changes. As with anything, no method is without its detractors and proponents. And there is just no getting around the fact that given an economic motivation to buy, solar gets installed and markets grow. The problem, again, is that incentives are expensive and someone has to pay the bill.
The US is dipping its toes into the FiT waters, but very cautiously, which is good. With the political hurdles and risk-averse personality of legislation in the US, a European FiT model is unlikely -- and this may be a good thing. The US, a market that continues to have significant potential for strong demand, needs a different FiT model -- maybe with a different moniker that is disconnected in the tax-hating US from, well, taxes. The importance for all markets is to build sustainability into the incentives so that when (or if) solar can succeed without incentives, the market will continue to mature and thrive. Nonetheless, without Germany's initial foray into FiTs, the PV industry might well be quite a bit smaller today. As with everything: No easy answers, just more questions.