NEW YORK (TheStreet) -- At the end of July, solar industry bellwether First Solar(FSLR Quote) announced a knockout second quarter that blew past most estimates. But what got many talking afterward wasn't just the impressive numbers. It was the company's announced plan to offer rebates in Germany in order to maintain market share there.
Debates continue today about whether that was a good idea or a bad one. What isn't debated, however, is the importance of Germany in particular and Europe in general to the market for solar products. In fact, in order to truly understand what makes photovoltaic companies tick, you have to understand the incentives that have driven solar's exponential growth in Europe over the last few years.
According to most estimates, Germany and Spain are known as the top two countries in the world for PV installations. And business has been booming there of late.
In 2009, iSuppli estimates that Germany will bring in another 1.5 gigawatts, while Spain will add 400 megawatts. California landed near the top, but others on the list included European players like France, Italy, Greece and the Czech Republic.
As for why Europe has succeeded in building its solar markets? That goes well beyond sunny European skies. In fact, most if not all of the growth can be traced to a very simple, yet elegant decision to use feed-in tariffs.
Here's a quick primer: When an average person in a feed-in tariff system decides to put in a solar installation, that person then sells the energy produced by the system back to the electrical grid provider at a pre-determined rate set by the government. In Germany, that rate is set forth in its Renewable Energy Law and comes to four times the prevailing grid-electricity prices. Because the deals are locked in over an extended period of time, PV manufacturers like a Suntech Power(STP Quote) or a SunPower(SPWRA Quote) are assured of price stability that they can then plan for and build capital around.
For a new industry already saddled with initial prohibitive costs for consumers, the feed-in tariff is seen as a way to spur early development.
Compare that to the U.S. system of spurring solar growth, which largely relies on tax policy and a few other tricks to affect ends. Feed-in tariffs have trickled in through local jurisdictions -- Gainesville, FL, and Sacramento, CA, have approved them, and utilities in Michigan and Indiana have proposed them. But solar growth in the U.S. is largely driven by a labyrinth of rebates, credits, grants and loan guarantees from federal, state and local entities, each pushing differing policy objectives. For solar manufacturers and users, that means trying to cobble an economic outcome from an already complex and diverse economic ecosystem.
In other words, many believe Europe's most attractive attribute as a marketplace for solar is its elegant simplicity.
"From the standpoint of PV manufacturers, clearly Europe's feed-in tariff markets make more sense and are more attractive," Barclays Capital analyst Vishal Shah said. "The simple market rates create demand. The business models for the end-customers that buy these solar panels are pretty straightforward. They're looking at this as an investment. There's a fixed rate of return for the next 10 or 20 years depending on which market you're looking at."
But simple also has its costs as well. If you haven't realized by now, the market for solar is almost entirely dependent on government action. Growth can only come, then, with a careful regulatory hand. In that regard, both the cautionary tale and the case-in-point is Spain.
In 2007, Spain created a feed-in tariff similar to Germany's. For solar installations that hooked in to the electrical grid by the fall of 2008, the government fixed rates up to a robust 44 euro cents per kilowatt hour.
But Spain has sunnier skies than Germany, creating more opportunity for returns on panels. Couple that with the juicy tariff and unabated project financing during the pre-recession era, and one can see the seeds for the Spanish implosion were set.
Like drunken moths to a flame, solar companies from around the world set out in droves, seeking gold in Spanish rays by flooding the market with solar panels. Within months, solar capacity blew past government estimates.
"For many installers it represented a license to print money," iSuppli analyst Stefan de Haan wrote in an e-mail.
In a rush, the Spanish government capped volume and slashed incentives by around 30% at exactly the wrong time, just as credit markets began to seize up and winter seasonality issues began hurting solar installations. A now infamous glut of solar modules around the globe sent prices plummeting at the end of last year and the beginning of this year. Still, recent signs throughout the industry -- as mentioned by the likes of Yingli Green(YGE Quote), Trina Solar(TSL Quote), and Solarfun Power(SOLF Quote) -- have all pointed to improving demand, better shipments and volume growth.
But, again, all of this demonstrates the stunning role of policy in making solar work today.
"Governments can change their policies overnight," Deutsche Bank analyst Steve O'Rourke said. "We have to face facts in this industry that without government incentives, there would be no industry. It's just as simple as that. It's not economically viable on a stand alone basis... yet."
Still, tariff rates are intended to come down gradually as costs come down. Haan notes that the defining characteristic among successful non-European module makers in European countries -- First Solar, Suntech, Yingli and Trina Solar, among others -- is that they've all been cost cutters. Chinese manufacturers are able to control overhead through lower labor costs. It also helps that polysilicon prices, the raw ingredient for many panel manufacturers, has fallen of late.
But while many in the market use crystalline silicon panels, Arizona-based First Solar also made inroads in Europe through its less costly, cadmium-telluride thin-film solar panel technology.
Germany will continue to be the industry leader for the foreseeable future, though a few reports have wondered about the near-term outlook of the feed-in tariff.
Looking ahead, though, several solar watchers foresee Italy will be one of the fastest growing European markets. The already high electricity rates, along with high insolation and large areas of open, rural land make it attractive.
But, as with Greece, regulatory complexities and administrative red tape may temper an overabundance of enthusiasm in that locale.
In the U.S., California is predicted to lead the pack, and for good reason. An abundance of land and sun, along with a federal tax credit and the California Solar Initiative Program, which offers cash incentives to install solar systems, make it the obvious seeding ground. Though there are plenty of obvious differences, a small comparison can be made between the CSI and European-style incentives.
"For large systems, there is a performance-based incentive," Photon Consulting researcher Chris Porter said. "The form of incentive you get under the California Solar Initiative is not an upfront incentive based on the capacity of the system. Instead, it's a per kilowatt-hour incentive that's tied to the output of the system. In that sense, it's similar to a feed-in tariff, because the payment is stretched out over time and it's based not on capacity but on output of the system."
"That performance-based incentive is just a little bit of an additional kicker on top of the electricity bill savings that you're realizing from installing the system."
But most agree that any growth in U.S. solar ultimately must be led by the utilities. A carrot for that cause came last October when Congress passed its $700 billion economic bailout package. Through it, utilities were given the right to benefit directly from a 30% solar tax credit.
But a stick also comes in the form of the renewable portfolio standards, which are goals set by individual states requiring energy producers to increase the percentage of renewable energy customers use by a specified deadline. Otherwise, utilities may face penalties.
According to the Solar Energy Industry Association, there are over 70 different utility-scale projects in operation or under development. Just this week, First Solar announced a deal with Southern California Edison to build two big projects that could produce power for some 170,000 homes.
Still, the question of whether utilities have completely bought into solar -- in a U.S. market with the potential to drive way more volume than Europe -- is still open.
"What I think you have now in solar is a whole bunch of utilities that are roughly in Year Two of a big experiment," O'Rourke said. "If the utilities get on board and actually start to drive installations of solar, you're going to have a big market. Until that happens, it's going to be a smaller market, to say the least.
-- Reported by Sung Moss in New York
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