News detail: Energia Ambiente & Utilities

Italy and California: Alternate Paths to Accelerating Solar Energy Markets

By Philipp Kunze, Managing Director, Solaria Germany GmbH and Dr. Marc van Gerven, Executive VP, Marketing and Sales, Solaria Corporation

"Many believe that the solar industry’s rapid growth around the world is a result of uniform, generous government support in every major market. A closer look, however, reveals that each of today’s fast-growing solar markets has a unique structure due to key differences in government incentive programs. These differences are worth understanding, as some solar markets—such as Italy’s and California’s—move closer to grid-parity and, thus, independence from incentive programs.

Italy and California have emerged as the solar markets with the biggest potential for growth in the world. A variety of factors common to both led to this, including high electricity rates, favorable policy frameworks and similar electricity demand patterns. But as much as these markets have in common, in terms of strong foundations for the growth of solar, the two will likely grow further apart due to key differences in their market structures.

Most importantly, Italy offers a feed-in-tariff (FIT) incentive structure that requires electric utilities to buy renewable energy at above-market rates set by the government. This is also the structure used by a number of other European countries. The FIT turns solar systems into attractive investments for owners via a guaranteed revenue stream for the energy that’s fed back into the electric grid.

By turning solar systems into fixed-income investments, the FIT structures the Italian solar market so that system owners evaluate their solar investments purely on an internal rate of return basis. Essentially, they compare a solar installation with a bond or another long-term asset. This simple and lucrative incentive structure was designed to create, and has led to, explosive growth in Italy and is expected to triple the country’s installed solar capacity by 2010.

The U.S. and California, on the other hand, operate more like a traditional electricity market. The largest solar incentive is the federal investment tax credit (ITC), a one-time, 30-percent tax credit or rebate for solar system purchases. After the ITC is applied, however, the value of solar systems is not based on a government-determined price for electricity fed back to the grid, as in Italy. Instead, system owners merely offset their own electricity consumption, or in the case of third-party project developers, sell the electricity at competitive rates to their customers. In this way, owners compare electricity rates from utilities with those produced by a solar system and then decide which is a better deal. This makes California one of the few markets in the world where solar actually competes with conventional electricity rates.

By far, California is the largest U.S. solar market, representing about 60 percent of grid-connected U.S. installations in 2008. Like in Italy, high electricity rates, sunny climates and strong policies (in addition to the ITC) are driving fast growth in the state. Not only are California and Italy both racing toward global market leadership, but the two are also racing to be the first to reach grid parity—where the price of solar energy equals that of traditional electricity.

Grid parity is often referred to as “the holy grail” of renewable energy. Once reached, the market opens broadly, leading to a paradigm shift in the way energy is produced and consumed. In the case of solar, grid parity is expected by some to lead to a massive increase in decentralized power generation. Decentralized, or distributed power reduces the amount of energy lost in transmitting electricity because the electricity is generated where it is used, often in the same building. This also potentially reduces the size and number of power lines, substations and other power assets that must be constructed.

At the same time, most decentralized installations will remain tied to the electricity grid, meaning they will change the overall electricity generation and consumption patterns on the grid. As decentralized solar systems become more ubiquitous, these changes and their effects on the electricity market should not be overlooked.

California may, in fact, be the first solar market ready to test the impact of grid parity and widespread adoption of solar. As solar deployments increase in California, the state plans to decrease its solar incentives, which will steadily bring solar into direct competition with grid electricity. Consequently, normal market forces should serve to encourage solar technologies that address real-world electricity demand patterns in the state.

Already, electric utilities in California are exploring how solar can be used to improve operations. In 2008, this exploration was lent support by an extension of the ITC that for the first time allowed electric utilities to take advantage of the tax credits. This is likely to continue pushing decentralized installations toward power plant-like operation, where systems are designed to address specific patterns of electrical demand.

Tracking is one technology helping solar systems achieve power plant-like operation. Trackers orient solar systems toward the sun throughout the day, increasing production during afternoon peak electricity hours, when electricity demand is highest and production most valuable. Since trackers help solar systems produce 20 to 30 percent more energy throughout the day, they boost the value of a solar system when the value is based on a FIT, and even more so, when regular demand patterns and the time-dependent cost of electricity generation is taken into account. That is why in the U.S. the majority of utility and commercial PV installations are moving to single-axis tracker installations.

As solar moves toward grid parity, FIT countries will need to adjust their policies so that solar technologies become standard energy technologies, addressing the needs of the electricity markets. In allowing owners of small PV installations to use their solar generated electricity themselves, the Italian PV legislation has already moved in this direction. To achieve a market where PV is regarded as a fully recognized part of the solution, larger installations and utilities have to be included in this mechanism too -- like they have recently been included in the ITC legislation in the U.S."