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European PV Demand to Depend More on Business Models than Trade Disputes

With the European market currently in a strongly transitional phase, the 2013 market is expected to reach 11.2 GW, down 33% Y/Y from calendar year 2012. Demand over the next four quarters (Q3’13 to Q2’14) is set to reach 10.6 GW, with the top 3 markets being Germany, the UK, and Italy.

 Source: adapted from NPD Solarbuzz European PV Markets Quarterly report, July 2013

Market Transition

The transition is in large part due to a shift away from premium incentives as the primary market driver, towards competitively priced PV electricity. In Germany and other markets, residential consumers will see more value from avoiding electricity purchases than from selling PV generated electricity at the FIT rate. The same applies to commercial consumers, though to a lesser extent and in somewhat fewer markets.

Coming to the fore is the classic conflict of business models: centralized generation for distribution and sale versus distributed electricity generation at point-of-use. The centralized model counts on increasing demand for electricity, as well as expansion of generating plant and transport and distribution grid capacity. The distributed PV model counts on point-of-use application to avoid electricity purchase, which is at odds with the basic elements of the centralized business plan.

This conflict increases when taking into account all the complexities of the European open-market electric energy sector, from which PV has been protected by special terms that essentially guaranteed the purchase of PV electricity production at premium rates. The cutting-edge of the business model conflict (central versus distributed) is the PV market impact of emerging or changing grid-access terms that increasingly pose barriers to PV. Related policy developments in Denmark (net balance terms) and Belgium (grid access fees) have contributed to collapsing the strong residential segments in both those markets.

At the heart of grid-access issues are net-metering allowances which vary on terms including the balancing interval that ranges from instantaneous-balance to annual-balance. Notably resistant to any net-metering allowance are France, Germany, Greece, and Spain.

Instantaneous-balance (and hourly-balance) may be viable so long as PV production is less than instantaneous onsite interval-demand. If the PV electricity leaves the site it may do so with low or no value. The operator is simply avoiding the purchase of the equivalent amount of electricity. It is allowed in several European markets, but may be subject to fees and other constraints.

The Turkish market is currently growing on this driver, though on hourly-balance terms and with an export value cushion equal to the (low) FIT rate (€0.10/kWh). In Spain, this installation type is limited to 100 kW. Other administrative barriers also constrain the potential market.

Annual-balance is the case which most emulates the so called virtual-battery capacity of the network, and best accommodates the daily/annual PV production cycle(s) as well. In the Netherlands, up to 5,000 kWh/year (domestic) are allowed in net-metering with annual balancing of account. This market segment is strong but not large.

In Denmark, the strong residential segment has declined in 2013 when the annual-balance provision was modified to an hourly-balance. Belgium still allows annual-balance net metering, however, retroactive grid-access fees have been applied, contributing in part to the strong decline of the Flemish residential market. At issue is the cost to be applied for such liberal grid-access. At stake is leveraging (or not) the so called virtual-battery nature of the distribution/transport grids.

Transition is also recognized in policy aspects shifting away from premium incentives via their elimination or reduction, or new impositions such as taxes or other fees, and in too many cases retroactively. Germany remains a beacon of integrity on previous commitments, and of efficiency regarding proper control of FIT rates. Too many others have made future commitments to pay the FIT rates they may not be able to fulfill.

The EU/China trade-dispute adds uncertainty, as does the Euro-zone (and particular national cases) financial crisis, austerity measures, renewable energy target revisions, and electricity market reform measures.

The Comeback Scenario

The European market is declining on reduced incentives and amongst uncertainties, and a market comeback depends upon how the emerging grid-barriers are addressed in favor (or disfavor) of PV operating characteristics. While FIT incentives (amongst others) along with falling prices have driven strong markets, Europe is tapped to lead in the next market phase away from premium incentives and towards an appropriate application of competitive PV generation in the grid-connected environment.

Demand is forecast to remain flat Y/Y during 2014. The outlook scenarios to 2017 depend on the success or failure of appropriate integration of PV in the electric energy mix. The fact is that PV has demonstrated viability with room to yet improve.

The EU/China trade-dispute has not yet influenced the European end-market forecasts that are more strongly weighted to the key issues that were discussed above.  The dispute appears to be playing out largely as expected, in that minimum pricing and import caps should not hinder Chinese product volumes into Europe. Moreover, Chinese providers can typically deliver more than just the modules, including project delivery and financing; how the PV module component of any project bill of materials appears can be adjusted.  The trade dispute is certainly not finished but, as it stands, it is yet to have a marked effect on European end-market forecasting.

The Most-Likely forecast to 2017 shows a decline through 2013 in European market volume, followed by slow growth to 2017, approaching the 2012 level in 2016.

Optimism for growth in 2014 and beyond comes with competitive PV electricity finding its way in appropriate applications that leverage the tangibly simple aspects of the PV proposition. Conflicting electricity business models remain to be rectified.