by Stephen Lacey
July 06, 2018

Europe plays a curious role in the global solar market.

It simultaneously commands the most admiration and attracts the most criticism. It is known both as the "cradle of life" for the modern solar market by creating lavish feed-in tariffs, and the "valley of death" for solar developers after countries abruptly pulled those subsidies back.

"Europe was able to kind of help kick-start the global growth in the solar market that we've seen, but certainly the policies they employed were by no means perfect, and did have some negative ramifications for the European markets itself," said Tom Heggarty, a senior analyst with GTM Research's global solar team. He recently published a deep-dive report on Europe's solar outlook.

Germany, once held as the model for promoting solar, fell into a trap. The country's tapestry of wind projects and distributed PV systems depressed wholesale prices, creating some of the lowest in Europe. But because those generators were getting such high feed-in tariffs for their power, the average German citizen kept seeing retail electricity rates rise. 

"You had a kind of a strange situation where very low prices were being delivered into the wholesale market, but retail consumers were having to pay a very high price for that," said Heggarty.

Europe's solar market went through numerous boom-bust cycles over the last decade, with the last five years marked by a precipitous decline in installations followed by anemic growth. And yet, the region continues to push forward by expanding renewable energy targets, creating new auction systems, and establishing self-consumption rights for consumers that will strengthen solar's role on the grid.

Europe is now moving into a new phase of sustainable growth. Long gone are the years of 20-gigawatt-plus capacity additions and 20-cent feed-in tariffs. (China long ago took over as the world's leader in unsustainable PV deployment, but finally decided to slash its over-subsidization too.) Across Europe, feed-in tariffs are steadily being replaced by competitive auctions, bringing a shift toward utility-scale projects and a steady decline in pricing. There's also a small-but-growing number of "subsidy-free" projects emerging. European utilities are also setting some pretty hefty solar targets.

This new era of stability, as defined by GTM Research, will make Europe a formidable force once again on the global stage. From 2018 until 2022, the region will see 14 gigawatts of PV annually, much of it utility-scale. Meanwhile, the levelized cost of projects may fall by 20 percent over the next four years. 

Still, Europe faces some very difficult challenges. Carbon emissions in the region are on the rise. There are 50 nuclear reactors around the region that may close within the decade, taking the equivalent of seven years' worth of renewable energy off the grid. Can solar help close the gap?

First, let's look at some important stats in the region. Then we'll explore the broader implications for this shift.

What does "stable growth" look like? If this were the Gartner hype cycle, Europe would be well into the "slope of enlightenment" and moving into the "plateau of productivity."

PV expansion will be concentrated in a half-dozen markets: Germany, France, Turkey, Italy, the Netherlands and Spain. These countries are all transitioning to competitive procurement in some way.

A long tail of markets will boost growth as well. Austria, Ukraine, Switzerland, Belgium, Greece, Poland, Ireland and Portugal will all be gigawatt-scale markets through 2022, collectively installing 13.6 gigawatts. Europe will have two dozen markets over 100 megawatts by then.

Cumulative European capacity will reach 182 gigawatts by 2022, putting PV on a path to meeting 8 percent of European electricity supply by 2035. 

Historically, residential solar was the pillar of Europe's solar market. But falling retail rates and low subsidies will ensure that Europe-wide growth rates for residential PV likely don't creep above 2 percent.

As auctions expand, they'll continue to encourage large-scale PV development over distributed systems. There are now 21 projects over 100 megawatts planned across the region, amounting to 7.7 gigawatts of capacity.

The result: average utility-scale system costs by the 2020s that are well below a dollar per watt. 

In countries without auctions that offer long-term price stability, "subsidy-free" solar (admittedly a bit of a squishy term) may become more common. These are projects without any direct government subsidies; however, they may still benefit from government-sponsored transmission projects or other supporting infrastructure. As of now, only a handful of solar developers in Spain are planning multi-hundred-megawatt projects without any backing from the government. But Heggarty expects the trend to play out in Italy, Portugal and Britain.

These projects will be limited to certain conditions: ultra-competitive financing, rising wholesale prices, government backing for interconnection, diverse revenue streams, and economies of scale.

"You do need to take quite a different approach to project development across different markets and different levels in play. It's a pretty complex region when we look at the utility-scale solar space, certainly," said Heggarty.

A lot of factors need to play in the favor of developers. But they'll certainly have equipment costs on their side.

So what does all this tell us about the future of European solar development, power markets and climate policy? Where does solar fit in?

Tom Heggarty explains below.

Stephen Lacey: Explain how these auctions work across different countries.

Tom Heggarty: This is where there is quite a lot of complexity down on a country level. There are a number of different ways that countries do this, from a pretty straightforward competitive reverse auction where developers will offer their best or lowest price for a fixed PPA of 15, 20 years, like we see in the Middle East and Latin America, or, in a number of countries, like France and Germany, we have what's called feed-in premiums. Those are essentially where the government is offering a top-up on top of wholesale power price revenues.

Somebody might bid 50 euros per megawatt-hour. They'll receive, say, 40 euros from the wholesale power market when they sell their power into the market, and the government will "top up" to meet that price that they've received through the auction.

The third way that we're seeing countries offer support to large-scale solar and wind projects is by setting a budget and then getting developers to come in and bid for that budget. That's what we see in the Netherlands. 

There's a lot of nuance there once again. In some markets we're seeing these auctions just being available to large-scale solar developers. In some markets we're seeing solar and onshore wind being able to compete. In some markets we're seeing all renewable energy technologies being able to go after the same pot of money. There is a lot of difference in terms of how these programs are operating.

Stephen Lacey: What do we mean when we talk about subsidy-free projects, or unsubsidized projects? What kind of auction systems are truly unsubsidized?

Tom Heggarty: When we talk about unsubsidized solar in Europe, we are essentially talking about projects that are proceeding without any kind of government support at all, and outside of any of these auction programs. In Spain for example, there were two auction rounds run in the middle of 2017 where onshore wind and solar were able to compete, but those are kind of one-off auctions.

Outside of that auction that we saw in 2017, there's now no support scheme in Spain for large-scale solar projects. At the same time, we're seeing some very large projects in Spain, multi-hundred-megawatt projects being permitted, having contracts without any kind of support from the government.

That's what we mean when we talk about unsubsidized solar: Project development that's taking place without any kind of government guarantee. They're really proceeding on their own basis, typically through signing long-term power-purchase agreements with other offtakers, like utilities, power traders, or in some cases, large-scale corporate consumers.

Shayle Kann: How much are we starting to see in Europe the impacts of duck-curve-like phenomena? There are markets in Europe where you have higher solar penetration than you have almost anywhere in the U.S. Meanwhile, you're getting these fixed-price contracts, but the wholesale prices are crashing.

Tom Heggarty: It's not a problem we've seen to a huge degree in Europe yet. If anything, wind is kind of more responsible for big fluctuations or negative pricing that we see in Europe. There were recently negative wholesale prices in Germany over the Christmas period at the end of last year, and that was because there was an unseasonably warm and windy period during December when demand was very low and there were a number of hours of negative pricing there.

We don't really see that yet in the summer months in Europe, but that's certainly a risk as solar continues to ramp up and as Europe returns to pretty strong growth. But solar-plus-storage will absolutely play a greater role in some markets throughout the region. In particularly, countries like the U.K. where the economics of solar on an unsubsidized basis are nowhere near as good as they are in southern Europe, primarily since the sun doesn't shine so often.

Stephen Lacey: You're looking at, I think, around 12 gigawatts of nuclear plants that are going to come offline by 2022 in Germany alone.  You're not even going to fill that in with solar, even at such strong growth levels. Are we just running in place?

Tom Heggarty: Yeah, absolutely. This is not just an issue that Germany is facing. This is a Europe-wide issue and in some cases a global issue. The nuclear phase-out in Germany is one piece of the puzzle there.

France is Europe's biggest exporter of electricity at the moment; I think it's actually the world's biggest exporter of electricity. Much of that is coming from a massive fleet of nuclear power plants. Reducing that by a third is really significant.

At the same time, we've got numerous markets throughout Europe phasing out coal generation as well. That's a huge reduction in baseload power supply throughout the region. Talking about kind of 8 to 15 gigawatts of solar being installed in Europe over the next five years is not going to come close to replacing the power that's being lost.

I think we're talking about around 90 gigawatts of coal and nuclear capacity being lost over the next 20 years in Europe. To put that in context, that's as much power generation capacity as the U.K. has at the moment. That's going to be a big shock to the European market. Legislators are going to have to come up with ways to make sure that the market still has sufficient reliable capacity.

The European power market is pretty oversupplied. Electricity demand has been extremely week since 2008-2009 since the global financial crisis. Although people talk about electric vehicles as being a real catalyst for electricity demand growth, so there'll be a rebalancing in the market as all of that supply comes out.

But things could still get pretty challenging, particularly when we see periods of very high demand and low wind speeds in the winter, when you also don't have much solar on the grid. Things could get pretty challenging in terms of keeping the lights on in Europe as all of that capacity comes up into market.

Read Heggarty's report on Europe here.