No matter how you look at it, 2016 is going to be a watershed year for the solar industry. Four years from now, the 30 percent federal tax credit for solar that has helped the industry grow exponentially will expire, and whether or not there will be anything to replace it is uncertain. But what will the solar market look like in 2016? Will it be poised for success, or bracing for a heavy blow? The outcome of that year, and the future of the solar industry, depends on three factors: the health of the manufacturing sector, the financial options for development, and cost-competitiveness.
The last year has seen photovoltaic (PV) manufacturing in a tailspin, with highly publicized failures and market consolidation. Although painful to the companies that are struggling, consolidation is necessary and will continue, as a correction to the oversupply that developed over the last few years. Greentech Media estimates that there are 59 gigawatts (GW) of total supply compared to 30 GW of total demand. This capacity was built up as firms invested in production facilities, eager to get a piece of the huge market expansion made possible by feed-in tariffs and other incentives. But most of the 250+ companies currently operating will simply not survive the continuing shakeout in the manufacturing sector, and those that do are going to have to scale up in order to deliver PV systems at prices competitive with the grid. By 2016, I think there will only be ten to 20 truly global competitors in the PV module manufacturing industry, capable of addressing the global market.
Solar financing will also experience huge changes in the coming years. While the leasing programs now being offered by firms like SunRun, SolarCity, NRG and others are spurring the residential market, it can still be difficult to secure third party financing for PV systems. Residential solar will really take off when the homeowner has an array of lease and purchase options similar to what is now offered to car buyers. By 2016, I expect that local banks, finance companies, equipment lease companies and others will all be offering solar finance products to residential customers. In addition, solar companies will also build financing arms, modeled on those that many car manufacturers have today.
The financing of commercial solar projects will also become much easier. Right now, only very large banks with massive tax appetites finance solar projects, usually on much more expensive terms than a new office building or apartment complex, for example. Over the next four years, as conventional financing institutions become more familiar and comfortable with the financing of solar projects, they will garner much more favorable terms than we see today. Bankers will perceive less technology risk and construction risk, which will translate to lower interest rates for solar developers, and this is very important as financing charges are one of the key “soft cost” issues that must be addressed as we reach for grid parity.
Cost-competitiveness is the third variable for the success of solar in 2016 and beyond. Right now, the PV industry is installing 1 MW systems at prices ranging from $3.25 to $2.80 per
watt. In order to be competitive with the grid in distributed generation applications, I believe the industry needs to attain an installed cost of less than $2.00 per watt. How much below that price will depend primarily on the cost of grid power. Historically, the cost of electricity has increased at roughly 5.2 percent annually, and in all likelihood, prices are going to continue to rise. The natural gas “boom” has upended the trend in some places, but domestic and global demand for the inexpensive energy source will result in higher prices over the next four years. In addition, the costs of aging grid infrastructure and those of developing smart grid technologies will also add to the cost of electricity. If the solar industry can tackle the soft costs of installing PV - like financing and legal costs and the cost of interconnection, I am confident that solar will be competitive with traditional grid power in many markets.
What is almost certain is that the industry will be much bigger, with more installed power. Currently, the U.S. is installing about 3 GW annually, and last year the Solar Energy Industries Association (SEIA) announced a goal of 10 GW of annual production by 2015. I believe the solar industry will meet that goal by 2015 and surpass it the following year. If we can address the above challenges with creativity and cooperation, there's no reason that the solar industry won't have a sunny outlook for 2016.