Solar PV growth slows as sector transitions to new phase

Dramatic cost reductions are now seeing solar PV becoming increasingly competitive,  but capacity additions remain subdued so far this year across major markets, following a prior year of stalled growth, according to S&P Global Platts Analytics’ latest Global Solar PV Outlook.

Although additions in Germany have been rebounding and Japan has seen a return to growth, the pace of installations remains weak in the US and has disappointed in China, the largest market in terms of annual installations  - accounting for 40% or so of total global yearly installations.

The slowdown may simply represent an inflection point in the maturity of the solar PV market, as it transitions from high levels of support, to more strictly market-driven conditions.

Solar and coal coexist in China

China brought online a mere 11.4 GW of solar PV in the first half of 2019, a decline by over 50% year on year. About 10 GW of coal was commissioned over the same timeframe. New coal plant additions have also slowed, but over 50 GW of coal capacity is in an active construction stage, with as much as 180 GW in a planning stage.

Many of these coal projects face an uncertain future, even though the country is allowing more provinces to build coal. It is difficult to understand why this is happening, as there has been a crackdown on excess generating capacity in general and excess coal-fired capacity in particular.

The long-term goal of maintaining employment may be preventing the full cancellation of all the already permitted coal-fired power projects. Additional coal-fired generating capacity may also be seen as a hedge against the possibility that overall demand growth exceeds expectations, especially at peak hours or when renewables are not available.

Nevertheless, Platts Analytics expects solar PV installations to rebound later in 2019, as the National Energy Administration has announced a sizeable amount of solar PV projects to be commissioned by the end of this year.

Go deeper: Request a copy of Platts Analytics’ Global Solar PV Outlook

Worth noting is the recent approval of almost 15 GW of PV projects with remuneration equivalent to coal-fired generators, or “grid-parity projects”. These projects will essentially be built without national subsidies and are not subject to national quotas. This is to say that approval of solar PV projects is increasingly mirroring the broader supply/demand balances and grid capacity expansions.

It is important to remember that curtailments of renewable output are still quite large in China. Curtailments were as high as 18% of the total back in 2017 and, while Chinese authorities have made huge progress to contain curtailments, 2019 still shows curtailments of over 7%. Solar is only a small portion of these curtailments, but a further development of utility-scale solar will require grid upgrades.

Auctions across the globe

While China has also introduced an auction mechanism for solar PV this year, Platts Analytics estimates that in 2019 so far, over 50 GW of solar PV projects around the world have been awarded through competitive auctions. That is equivalent to half of the yearly solar additions. Comparisons among countries are difficult, as auction design is different with the estimated load factors of the projects also varying based on solar conditions.

Nevertheless, it is interesting to look at the historical development of these auction results. Platts Analytics shows solar PV bids have averaged some $52/MWh so far in 2019. While this price is slightly higher than year-ago levels, bids were averaging over $100/MWh a few years ago. Such declines have been in part driven by declining costs, with PV panels now going for as low as US$0.22 per wattpeak. So far in 2019, PV module prices are some 15% below year ago levels, but modules were pricing 4-5 times higher a few years back.

Also worthy of note is the emergence of sub-20$/MWh bids this year. A 1.4 GW solar auction in Portugal attracted enormous interest, with one 150 MW lot awarded with a remuneration of €14.5/MWh.

The latest long-term (A-4) capacity procurement auction held in Brazil has also seen a large participation of solar developers, with solar PV projects for around 204 MW awarded supply contracts at an ultra-low price of 67.48 Brazilian Real or $17.6/MWh. In some cases, these low bids were driven by low cost of capital and the land, but also by the need to secure a grid connection.

Market and grid conditions

What the results of these auctions are also signaling is the increasing merchant nature of solar PV, as the level of public guarantee and support is clearly moving lower. Solar developers are looking at revenues from wholesale markets to cover their investments, which is to say that these projects are relying on market participant’s long-term view of wholesale power price development.

Developers in a number of countries have been mitigating the exposure to wholesale prices by entering into long-term power purchase agreements (PPAs) with counterparties. PPA markets, and similar mechanisms are developing in a growing number of countries, as developers look for revenues stabilizers. Prices agreed on these contracts have, in some cases, surprised for their low levels. Again, this means that solar PV developers are taking more market risks, especially in the residual lifetime of the plant after the PPA expires.

While a number of countries that have been late to provide support to solar, such as Vietnam, have seen their solar PV additions surge this year, growth elsewhere in major markets has been weak so far during 2019.

The solar industry is moving into a more mature phase, where solar PV projects are being built based on players expectations of market and grid connection conditions, rather than policies only. This development is now putting solar clearly in some sort of parity with other conventional sources.