Global Solar PV Markets; Top 10 Trends to Watch in 2019
Tom Heggarty and Benjamin Attia, January 2019 (Wood Mackenzie)
2018 was a year of upheaval for the global solar PV market. It was the first year in which the market contracted since before 2000. From Section 201 tariffs in the US; China’s 531 policy shift; to India’s mega-tender cancellations; Japan’s FIT cut, and the lack of clarity around the memorandum of understanding (MOU) between Saudi Arabia and Softbank’s Vision Fund for 200GW of solar PV with storage, the year was characterised by uncertainty.
But even just a few weeks into 2019, there are positive signs for the global solar market. We’ve already seen policy clarity in China and Saudi Arabia, highly aggressive solar-plus-storage pricing in Hawaii, and more bold plans for some of the world’s largest single-site PV projects in India. Here are some thoughts on the top 10 trends to watch this year:
1. The market will (finally) crack 100 GW for the first time
After a muted 2018 decline—the industry’s first ever—brought on by China’s policy brake, the global solar market will finally breach 100 GW in 2019, with Wood Mackenzie’s latest 2019 forecast topping at 103 GW. The global market continues to diversify. The top 20 largest global PV markets will account for 83% of new global demand to 2023, the fastest growing of which are concentrated in the Middle East and Mediterranean (Saudi Arabia, Iran, Egypt, and Italy).
China will remain crucial to global installations, but its market share will fall from 55% in 2017 to 19% by 2023. As emerging markets in Latin America, the Middle East, and Africa scale-up rapidly and begin to deliver results post-2020, installations will settle at 115-120 GW through 2023. We expect quarterly installations to break 30 GW for the first time in Q4 of 2019.
2. More sub-$30/MWh bids—and maybe even another record low
Although 2018 was the first year since 2012 which didn't produce a world record-low solar PV tariff, technology costs have continued to fall rapidly, with global average utility-scale solar costs falling another 15% last year. We believe that ultra-low PV costs still have room to fall as low as $14/MWh under optimised assumptions, and the recent cratering of average bids in Egypt, Jordan, the UAE under US $30/MWh suggest 2019 is likely to see more pricing at a similar level.
There are several upcoming tenders in the first half 2019 that could play host to more ultra-low prices. The twice-delayed auction in Mexico, to be held in January 2019, could deliver another record, as could the 2.25 GW of solar PV set to be auctioned in 2019 under Saudi Arabia’s revised renewable energy program. The first auction held in the country was won by ACWA Power for US$23.4/MWh. However, these ultra-low tariffs are starting to have broader market impacts. In Latin America, some developers are looking to PPA or merchant markets for higher returns on investment.
3. Revised policy targets will determine the market’s long-term growth
The first few weeks of 2019 have already seen clarity on policies and targets relating to solar PV in both China and Saudi Arabia. Before these announcements, we forecasted that these will be the first and eighth largest installers of solar PV to 2023, so how these markets evolve is critical for the trajectory of global demand. In China, the National Energy Administration has released guidelines clarifying measures to promote subsidy-free solar PV. The announcement – though lacking in details – provides investors with much-needed clarity as to how solar will be promoted in China following last year’s 531 decision to effectively end the award of feed-in tariffs to new projects.
In Saudi Arabia meanwhile, a revised 2030 renewable energy target of 58.7 GW by 2030 – of which 40 GW will be solar PV – has been announced and an auction timeline specified for 2019. The plan is far more practicable than the original 200 GW MOU, but the jury is still out on how Renewable Energy Project Development Office (REPDO) solar PV and wind project tenders will co-exist with the Public Investment Fund’s activities to develop 70% of the country’s new solar target.
In Europe, too, we should see more clarity for solar as we move through 2019. EU Member States are to release their draft National Action Plans by the end of January 2019. These plans will set in place their targets for growth in renewable energy to 2030 and how they intend to meet them. Final plans are ratified by the end of the year. The EU has committed to reaching a renewable energy share of 32% of total final consumption, building on the bloc’s 20% target for 2020. Solar PV will have a key role to play in meeting this goal and the new National Action Plans should include a raft of new targets, policy measures and auctions to boost growth in the region’s solar market
4. Another entrant to the subsidy-free club in Europe
Spain, Portugal and Italy have been at the vanguard of subsidy-free utility-scale solar PV, with multiple gigawatts in the development pipeline. This year will see the first wave of those projects delivered. As costs continue to come down, 2019 is also set to be the year that the trend spreads beyond Southern Europe. In the UK, there has been no support scheme available for large-scale solar PV since the Renewables Obligation closed in the first quarter of 2017. Nonetheless, there is 2.3 GW of projects with that either already have or are awaiting planning permission in the development pipeline that could be delivered without subsidy.
Most project developers will be looking to sign power purchase agreements with corporate offtakers. Lightsource BP has already announced it is to develop 300 MW of PPA-backed projects, some of which will likely be delivered during 2019. We see solar PV costs heading towards £40/MWh (US$51/MWh) in the UK, a price level which makes projects look attractive to potential offtakers compared to power prices. As most European markets still offer some kind of support scheme for large solar projects, the UK is likely to be the only country to join the subsidy-free club in 2019, but others will follow as support programs come to a close over the next 2-3 years. Subsidy-free solar in Europe is here to stay.
5. Big business goes big on corporate solar procurement in the US
An increasing portion of U.S. utility PV demand is being driven by corporate, non-utility entities looking for savings or to reach voluntary renewable energy targets. 56% of these corporate buyers are from the technology and data sectors. In Q3 2018, corporate procurement has seen the largest surge in market share of any utility-scale segment, growing from 13 to 15% of utility PV in development in a single quarter. The fastest growth has been in ERCOT and PJM. As of the latest Solar Market Insight report, 25% of all projects announced in 2018, representing 2.9 GW of new PPAs, were corporate procurement driven, and this share is expected to rise modestly in 2019 due to eagerness from corporate buyers to sign PPAs before expected interest rates rises and the 30% investment tax credit (ITC) expires.
Outside of the U.S., 2019 should see increased corporate procurement activity in Europe. In part this is due to the large pipeline of low-cost unsubsidised projects in development, particularly in Spain, but the regulatory environment should also begin to look more favourable. The EU’s revised Renewable Energy Directive, adopted in December 2018, states that Member States must remove barriers to the signing of long-term power purchase agreements for renewable energy where possible.
6. More projects trading hands, particularly in the U.S.
Last year saw an uptick in global secondary market activity, a trend we expect to continue in 2019. We tracked almost 21 GW of solar PV asset transactions globally in 2018, up 38% on the previous year – though a large proportion of this was down to Global Infrastructure Partners’ acquisition of SunPower’s 4.7 GW U.S. utility-scale pipeline. Financiers are becoming more comfortable with solar as an asset class; and strategic investors and asset owners have increasingly been looking to acquire projects earlier in the development cycle, taking on increased development risk to capture a greater share of the project’s margin.
In the U.S., where 47% of all solar asset transactions took place in 2018, we expect to see an increase in activity with sponsors looking for early-stage, large-scale portfolios in advance of the ITC step-down. Elsewhere, India should see more M&A activity as markets consolidate in the wake of highly aggressive auction bidding; and in some South East Asian markets, the transition away from FITs will be followed by an increase in M&A.
7. Large-scale solar-plus-storage comes into the spotlight, but remains a niche solution in emerging markets
Following three headline-grabbing solar-plus-storage procurements in 2018 from Xcel Energy ($30-32/MWh), NV Energy ($31-37/MWh), and PG&E (567.5-MW across four projects), the solar-plus-storage space started 2019 off with a bang. Seven projects have been proposed in Hawaii that would add 262 MW of solar and over 1 GWh of storage at prices as low as $78/MWh. Wood Mackenzie currently estimates that 1.4 GWh of energy storage installed across the whole US and forecasts 8.8 GWh of front-of-the-meter solar-plus-storage capacity installed in the US by 2023, growing at an 82% CAGR starting in 2018 and led by California, Arizona, Colorado, and Hawaii.
Outside the United States, solar-plus-storage procurements, while still in their infancy, are already starting to compete with combined-cycle gas turbines (CCGT). In the Middle East and Africa, utility-scale solar-plus-storage can already compete with CCGT in Morocco, and will be competitive in Jordan, the UAE, and South Africa on an LCOE-LCOS basis by the early 2020s despite heavily subsidised gas prices. Even once it is cost-competitive, large-scale solar-plus-storage procurement will still be driven by government tenders and unable to displace new-build CCGT until electricity markets in the region are restructured to value the full value stack of front-of-the-meter storage. However, it may be able to displace open-cycle gas turbine systems (OCGT), which are costlier on an LCOE basis and more comparable as a flexible peaking resource.
Globally, 2019 will see solar-plus-storage will continue to expand as prices drop below benchmark prices of peaking plants, utilities and states pass favorable policies like clean peak standards, and stand alone solar’s all-in cost continues to decline. Particular progress is expected in island power markets in Southeast Asia and the South Pacific as well as in the Western US.
8. Mono PERC and Bi-facial modules keep CAPEX costs marching down
Next-generation module technologies will offer increased performance and unit cost reductions in 2019. In 2019 41% of global module manufacturing capacity will be dedicated to mono PERC production, up from 36% in 2018. This year will also be the first where we will see substantial installations of bi-facial modules. While industry standards have yet to be codified and several stakeholders await additional performance data before making procurement decisions, 2019 will see several flagship projects incorporating bi-facial modules, particularly in desert environments. By the end of 2019, as global blended module prices fall below $0.25/Wdc, global average CAPEX will fall to US $0.95/Wdc – this is skewed by high-cost projects in Japan, however, and most countries in Asia will see average CAPEX fall below US $0.80/Wdc.
9. A make or break year for mega project plans
2018 saw mega-project announcements stall the progress of solar PV markets in India and Saudi Arabia: in India, Solar Energy Corporation of India (SECI)'s 10 GW tender has been repeatedly delayed; while in Saudi Arabia the previouslymentioned 200 GW MOU has been shelved. As a result, 2019 is set to be a make-or-break year for the concept of tendering very large volumes of capacity through a single request for proposals (RFP). Such large programs have yet to demonstrate economies of scale efficiencies in hardware, soft costs or construction timelines.
According to Wood Mackenzie’s Global Utility-Scale PV Project Tracker, there are over 63 GW of single-developer mega project capacity (500 MW+) in the global pipeline, 84% of which is comprised of projects in pre-construction phases. Although these project announcements could drastically alter the trajectory of the global market in 2019, fewer than 10 GW of mega projects are operational globally, half of which are in China. Many of the in-development projects are concentrated in India, China, the Middle East (Oman, Kuwait, Iran, UAE), and Australia.
Although they face similar logistical challenges, single-developer mega-project announcements differ from the solar parks model, where many developers construct projects on shared land. Regardless of policy environment, these megaprojects face unique project execution risks across land, permitting, financing, construction logistics, interconnection, and site security. The level of coordination between developers, tendering bodies, utilities, and grid operators is extremely high, and local government support is typically crucial. They can also create liquidity issues if mega projects can't be portioned off and sold into secondary markets after interconnection. As 14.7 GW of contracted projects are set to commence construction this year, 2019 will reveal whether mega-projects are a scalable solution.
10. Oil and Gas majors embrace solar in upstream and power
As the energy transition accelerates, oil and gas majors are increasingly making strategic moves to adapt to the changing energy landscape. From large private utilities to battery manufacturers to EV charging infrastructure companies to rural solar home system companies in Sub-Saharan Africa, the most forward-thinking oil and gas Majors are moving into the electricity space. Despite a lot of challenges, including much lower rates of return than upstream investments, they are well-positioned to succeed because of their strong balance sheets, scale, global presence and brand, and commodity trading and risk management expertise.
There are also opportunities for renewables to complement oil and gas (and metals) extraction. Solar PV has been applied as a mainstream solution to offset diesel consumption for energy intensive mining operations in places like SubSaharan Africa, Australia, and Chile for several years. Increasingly, solar PV is also emerging as an obvious opportunity for upstream oil and gas companies to integrate with their extraction operations in remote areas. Wood Mackenzie has tracked over 50 planned or operational resource extraction projects (mining, oil, or gas) globally, powered in-part or full by solar PV.
Along those lines, solar PV, CSP, and wind projects will increasingly be co-sited at on and offshore oil and gas fields to power drilling and even hydraulic fracturing. On-site solar PV or wind capacity can reduce the need to burn oil or gas at the well head, freeing more fuel to be sold at international market prices. In countries with heavily-subsidised domestic energy prices, the export price delta is particularly high. These integrated projects will lead to a demonstrable reduction in scope 1 emissions (defined as direct emissions from owned or controlled sources) – this is increasingly a requirement of some of the oil and gas Majors’ key shareholders, and some – including Shell – already have emissions reduction targets in place. 2019 should see further efforts by oil and gas companies to reduce their own emissions, with solar PV well-placed to capitalise.