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Global Solar PV Market Report

Trends and Drivers

Solar PV was the only renewable energy technology to break the record for capacity addition in 2022. With each passing year, solar PV has solidified its predominant position in the renewable energy sector for all stakeholders, including investors, developers, policymakers, and regulators. Its low initial base partly contributed to the current high growth rates. From an investment perspective, solar PV is increasingly the preferred choice due to its key advantages, such as a mature and cost-effective technical configuration, policy support for capacity allocation, and a growing market orientation. The energy crisis of 2022 was another factor that catalyzed the industry’s project pipeline by expediting policy approvals and streamlining permitting procedures.

In 2022, Solar PV broke the record for capacity additions among all renewable technologies.

Solar PV as the Leading Choice

In the competitive space of investments, solar PV projects have displaced the onshore wind’s position. The policy support and incentives explain one part of such growth. The other can be found in the attractiveness due to lower development lead time, modular and distributed nature of the technology. Solar PV outlay is, in fact, rising faster than most of the energy technologies including conventional ones. IEA’s latest report on global energy investments (as of May 2023) estimated solar PV outlay exceeding that of upstream oil sector by the end of 2023, to reach about $380 billion.

Solar PV Investment and its Relative Share in Renewable Energy

Source: IRENA
IEA’s projected solar power investment in 2023 could turn out to be the first time when solar investment is higher than the spending on oil production. The decadal comparison shows the stark difference between the two sectors in the competition for investment capital. The solar PV project pipeline continues to be in a steady expansion mode. This is unlike other energy technologies (renewable or otherwise) where project pipeline has not been as steadily reliable or bullish in the long-term.

Source: IEA

The competitive choice of solar PV over other technologies is also reinforced by the relative consistency in the cost trend. Despite inflationary pressures and supply chain challenges, solar PV project costs have been the most attractive amongst the various competitive clean energy technologies. Through economies of scale and bulk tendering opportunities, solar PV solar PV maintains a competitive advantage over many other renewable-based power generation methods, including onshore wind. Modular deployment options, such as rooftop solar, make it ideal for tapping into far wider range of opportunities than other options.

Source: IEA

Solar PV stands out for its significant unexplored potential, unlike its closest competitors, wind and hydro, where opportunities are either nearly saturated or constrained for further development. Both utility-scale and rooftop/residential solar PV segments possess substantial untapped commercial potential. Recent estimates indicate that the African and Middle East regions host the best locations for solar radiation, followed by others in Asia-Pacific. However, realizing this potential depends on overcoming the constraints, such as land, regulations, infrastructure connectivity, and more. The push by European developers for Middle Eastern solar projects and power transmission connectivity underscores the growing interest in expanding these frontiers.

Cost Pressures in the Business

A major recent development in solar power cost economics has been the increase in cost levels by end-2022 in most markets. As with other renewable technologies, solar power developers can no longer operate at the historically lower price ranges. Reflecting the inflationary pressure on commodities and the cost of capital, the levelized cost of solar PV rose by the end of 2022. In some markets, this increase was more substantial than others, with the US market reporting a rise in wind and solar PV levelized costs for the first time since 2009.

Despite a drop from last year’s peak, commodity prices and freight rates remain high. Furthermore, rising interest rates have increased developers’ financing costs. As a result, the global average Levelized Cost of Electricity (LCOE) for solar PV is expected to remain above 2020 levels in 2024. Even with the decline in commodity prices in 2023 from 2022 levels, they remained elevated compared to 2020, when major input prices, including steel, copper, aluminum, and polysilicon rose sharply due to a constrained supply chain and spiked post-pandemic demand. Polysilicon, a key component of crystalline silicon solar PV cells, reached its highest price in 2022, four times its level at the beginning of 2020. Steel, the primary construction material for utility-scale PV plants, increased by 75% in China, 160% in the US, and 270% in Europe, while copper and aluminum increased by 60-80% during the same period. The highest growth was in freight rates, which rose almost six times in 2022 compared with 2020.

Source: IEA
Source: IEA
Source: IEA
Source: IEA

Between 2009 and 2023, solar’s LCOE decreased by 84%.

Yet, such projects, even without subsidies, remain competitive against new-build coal and gas-based power projects. Given various assumptions, it is clear from the levelized cost of energy that new solar PV projects effectively displace the new fossil fuel power projects. Other studies, such as the one conducted by Energy Innovations, indicate that in the case of US markets, new renewable projects (wind and solar) could be a more cost-effective option than operating existing coal-based power plants. In large part, utility-scale solar PV plants play an important role in substituting conventional energy generation. Rising efficiency of the solar modules (a 15%-20% rise in commercial wafer-based silicon modules) and the falling cost of the balance-o- system components (such as inverters and mounting systems) contribute significantly to reducing the costs for a utility-scale PV plant.

Levelized Cost of Energy in Unsubsidized Solar PV across Configurations

Source: Lazard

The LCOE for utility-scale solar declined at the lower end of its cost range, despite inflation and supply chain challenges. Additionally, there is a growing trend of consolidation in the renewable energy sector, as companies with a larger scale can leverage supply chain economies and other efficiencies to develop new renewable energy assets more rapidly. Between 2009 and 2023, solar’s LCOE decreased by 84%.

Long-term Trends in Levelized Cost of Energy of Utility-scale Solar PV

Source: Lazard

Rising Solar Penetration and New Challenges

Between 2018 and 2022, the relative share of solar power in total generation more than doubled (based on estimates from Ember). This increase in grid-connected supply indicates the accelerating integration of solar in the overall power mix. While the global average provides a broad perspective, several top countries, including Chile, Greece, Hungary, Italy, Spain, the Netherlands, Australia, Vietnam, among others, have significantly higher shares of solar power in their generation, with penetration rates exceeding 8-9% (as of 2021 estimates).

Global Share of Solar Power against Coal in Total Electricity Generation

Note: Above data on solar power includes PV and thermal technologies
Source: Ember

The grid integration experiences of leading countries in solar (and overall renewable) energy penetration provide valuable insights into the emerging and likely scenarios. Many of these countries are finding rising instances of grid curtailment. For instance, in May 2023, the Australian grid operator reported a 40% rise in grid curtailment since previous year. Vietnam’s outlier growth in renewable capacity (from 500MW in 2018 to 25GW in 2022) led the regulators to pause all new solar (and wind) projects due to grid congestion. The presence of sufficient baseload capacity, mostly coal-based power, is also not a guarantee. The Polish grid operator resorted to curtailing solar and wind power, particularly as the grid management system was ill- equipped to reduce the conventional baseload share. In other cases, seasonal low-demand conditions similarly triggered curtailment, as was observed in Czech where Easter-induced low demand prompted the disconnection of solar generation to prevent excess supply/injection.

Faced with the integration challenges, various corrective measures are under gradual implementation. Expanding grid connectivity is just one way to enable higher offtake of power. Deeper changes involve a re-design of the power markets, departing from traditional practices. Changes in market design enable greater participation for renewable projects, whether utility-scale solar or rooftop residential/commercial. Some examples include reducing the imbalance settlement period, lowering the gate closure time, and increasing the geographical granularity of the power market. Some regulations also allow renewable developers to participate in the intra- day/balancing markets.

The most notable example of the energy system’s shortcomings in accommodating rising solar penetration surfaced in Europe during May 2023. The region had several countries reporting negative power prices in wholesale power markets during daylight hours. The relatively low summer/springtime power demand was in direct contrast with an abundance of solar power generation in grid. A negative price in such cases denotes the incentive for wholesale consumers to absorb surplus power, helping to balance the grid. This situation primarily affected central and north-west Europe, where a substantial amount of solar power was being generated. While the operators have known brief phases of negative prices to clear the markets, remains an anomaly that signals a lack of flexibility or adaptability towards rising solar power penetration.

Co-located Storage for Better Commercials

A rising number of upcoming utility-scale solar PV projects are paired with battery storage, representing a trend that has gained momentum in recent times. In such configurations, developers combine battery-based storage with the PV-based generation plant to enhance grid dispatchability and can cater to specific timeslots, such as peaking power needs.

Grid Interconnection Requests for Solar PV with Storage in the US

Note: Data on grid interconnection requests just indicative of developers’ interest but does not imply actual capacity addition
Source: NREL

Policy support helped strengthen the case for such projects. The incentives available under the US Inflation Reduction Act tipped the balance in favour of many storage and clean energy projects. Additionally, the tax credits that storage projects have garnered in the US offer added benefits. One indication of the interest in such projects is the nearly fivefold increase in grid interconnection requests between 2018 and 2022. The Western region of the US is particularly in focus due to its abundant solar resources and project portfolio. With improving commercials for battery storage projects, co-location with solar PV provides attractive opportunities for grid price arbitrage. Batteries can discharge during hours of higher prices while using cheaper solar power for charging during other time slots.

To be sure, the growth in this sub-segment depends on the commercialization in the battery storage business. The US market’s growth reflects the same. In other markets, such as in Europe, it has been slow to pick up. In Spain (which also has high solar PV penetration), the government offered grants in December 2022 worth €150 million for energy storage projects co-located with renewable generation. In March 2023, a solar-plus-storage project was commissioned in Germany and was the first of such capacity under the recent innovation tenders in the country for co-located storage projects. Other countries are similarly prioritizing this. As of May 2023, The Serbian government established a working group to devise a tendering plan for selecting an EPC developer/contractor for a potential 1GW worth of solar PV capacity co-located with 200MW of battery storage capacity.

Most of these projects involve a fair degree of complexity as the business model is impacted by the regulatory framework of the power market. Local norms and incentive structures are thus important. Consequently, the growth and depth in the battery storage market and their business models to monetize grid-related functionalities are critical for the solar-plus-storage sub-segment.

Over the years, competitive bidding has been the most important enabler among the market orientation measures undertaken by policy and regulatory authorities.

The Post-Subsidy Market Orientation

A gradual but definite realignment of business is underway with the phaseout of subsidy support. Projects are thus exploring avenues in competitively bid auctions, corporate power purchase agreements (PPAs), direct offtake agreements, energy certificates, and merchant power projects. As IEA’s estimates indicate, about a fifth of the total power procurement in utility-scale wind and solar power is expected to follow market-based routes during 2023-2024. Regional considerations play an important role in this case. In China, which holds a world-leading share in capacity and procurement, projects receive fixed tariffs and premiums set by the provincial authorities after feed-in tariffs were phased out. Excluding the Chinese market, total power procurement based on market-based allocation for 2023-2024 stands at 36%. Over the years, competitive bidding has been the most important enabler among the market orientation measures undertaken by policy and regulatory authorities. The capacity allocation done in this route yields the price discovery of utility-scale PV generation vis-à-vis the prevalent energy mix connected to the grid. Competitive bidding or auction-based allocation is the most prevalent form of policy-led push in Europe and India, followed by the US, South Korea, UAE and Brazil. Some of the key factors driving the auction-based allocation are climate mitigation targets, utility- based procurement, and economic attractiveness.

Recent Solar PV Auctions Announced / Planned

ource: News reports, press releases

The volatility in the energy wholesale markets during 2022, together with other challenges such as the rise in the inflation rate, interest rates, and equipment costs, impacted the auctions.

The volatility in the energy wholesale markets during 2022, together with other challenges such as the rise in inflation rate, interest rates, and equipment costs, impacted the auctions. Many of them closed under-subscribed. Lower ceiling prices in the auctions, especially when compared to the corporate PPAs or the merchant segment, make the incentives weaker. A recent example in point is the Spanish auction, which as of November 2022, went largely unsubscribed for 3,000MW worth of solar PV capacity on offer. Yet, it appears that the dampened sentiment in auctions may gradually turn a corner. In June 2023, Germany’s solar PV auction was marginally over-subscribed, with final average price at $0.077/kWh. France similarly reported an oversubscribed 172MW worth of auction-based allocation in January 2023.

Note: Data refers to Renewable Industry Survey Report 2023, covering 543 renewable energy sellers across 65 countries
Source: Solar Quarter

Even as the predominance of competitive bidding continues, PPAs and merchant plants are the other two key segments supporting the market-led shift in solar PV business. As with other renewable energy projects, solar PV developers progressively face greater volatility through exposure to the merchant power segment. Volatility, however, is not the only factor to consider. Merchant PV power (in terms of direct sales in electricity market or through PPAs) enables developers to tap into attractive prices and circumvent the constraints of tendered bidding contracts (time, restrictive conditions, volume). Even with a minor share in the overall procurement scheme, developers are gradually increasing their participation in merchant plants.

The European market, primarily driven by the policy-led growth in capacity and the related support structures, also accommodates the potential for the merchant power segment. Select markets such as those of the Nordics are examples of prominent merchant PPAs due to the elimination of subsidies. In contrast, other markets have CfDs, which could act against the incentives for PPAs and may, effectively, displace the capacity that would otherwise be allocated through merchant or other direct offtake-based PPAs.

Market Support and the Room for Merchant Exposure in European Countries

The corporate PPA segment plays an increasingly important role in market-based procurement of solar PV It has become a well-established trend, with energy-intensive enterprises, led by technology (data centers) to corner a predominant share of PPAs in clean energy. Over time, solar PV came to account for a major share in this context. The US is an important market for such a model, where many of the enterprises have adopted a virtual PPA route (transactions at a pre-agreed price through a tradeable  certificate instead of actual physical delivery).

Source: Electrek