What is going on with Japanese solar?

The media has been schizophrenic on this question.

GTM just posted a story about how the country was blowing away earlier installation forecasts. But Reuters followed up last week with a story on how inexperienced Japanese developers are failing to deliver on projects.

The confusion is understandable. The Japanese government just commissioned its largest solar farm and has registered an impressive 3.3 gigawatts of solar power under its feed-in tariff to date. However, at the same time, the government is scaling back its carbon reduction targets and launching investigations into solar developers.

Reconciling these competing issues is all about providing context.

Make no mistake: The Japanese market is huge

The Japanese market is on pace to top 6 gigawatts this year. That makes it the second-largest PV market in the world, with incredible year-over-year growth of over 300 percent. We expect the Japanese market to constitute about 15 percent of global demand over the next five years.

But what about these failing developers?

Japan established an incredibly attractive feed-in tariff (FIT) of $0.43 per kilowatt-hour in 2012. In addition to being lucrative, this feed-in tariff also had virtually no requirements limiting who could apply.

The rationale here was simple: the Japanese government was seeking to fill a massive capacity shortfall left from powering down the country's nuclear fleet, and they needed that capacity as quickly as possible.

The feed-in tariff just happened to coincide with a slowdown in European markets, prompted by weaker incentives and a trade dispute with China. After the dust settled, Japan was left with 18 gigawatts of solar projects approved under the FIT. Now, if the "dream" was to build all 18 gigawatts of those solar projects from a base of 1.7 gigawatts in 2012, then yes, there were certainly bound to be some "shattered dreams," as Reuters put it.

But many of those projects were highly speculative and were never going to actually materialize. Even if only a small percentage of those projects get built, as we think they will, the Japanese market is still an epicenter for global demand.

What should we expect from Japan?

Japan will continue to be a huge market over coming years and likely a pretty high-priced one as well.

Growth in the residential segment is slowing, but it is showing all the signs of stabilizing at a consistent monthly level. The commercial segment is still the fastest-growing segment, although over the coming months, it will occasionally trade places with the utility segment as large projects periodically connect.

These utility projects will come from credible developers who entered the market with a game plan and understand some of the complexities of the Japanese market -- including structuring project economics to account for high engineering, procurement and construction costs, expensive land acquisition, and navigating complex grid integration processes.

The government will also start clearing out speculative developers from the FIT approval process, whether through the imposition of a required start date or more stringent application procedures.

At the end of the day, the FIT has done exactly what it was supposed to do: spark one of the world’s largest solar markets.