Evolution of Solar Policy and Durable Market Design

Solar PV has matured dramatically in the last five years, becoming the fastest-growing source of electrical generation in both domestic and international markets.

The origin of this growth is in the combination of advancements in energy market design, business model innovation, and the unprecedented acceleration in capital commitment towards solar component manufacturing.

Clean energy is a global policy priority, and solar PV as an industry is now growing on its own fundamentals. But both energy markets and the financing techniques that support them are changing. As grid parity approaches, policymakers expect the subsidy contribution to PV to diminish. And as PV deployment increases, the burden of grid integration shifts from “socialization by policy” to an engineering negotiation between developers, utilities and grid operators.

Given this growth, and the diversification of solar PV markets that has followed from it, we should identify the fundamental sources of transformation in the energy market, with the aim of identifying those factors that are durable, scalable, and replicable across diverse market conditions.

We can contrast the boom and potential bust of EU markets such as Germany, Italy, Spain and now Romania with the steady demand evident in US markets such as California, Arizona, Massachusetts, and New York.

In the EU cases, blunt and over-rich subsidies to solar developers have predictably resulted in potentially disruptive over-supply onto grids that have not been planned or optimized to support this deployment. Prices to consumers have risen, political pressures have mounted to proactively – and even retroactively – adjust pricing to existing projects, and future development is chilled. Meanwhile, unplanned growth of PV potentially stresses the electrical grid, and undoubtedly stresses the business models of incumbent utilities, with deleterious economic effects now playing out on a continental scale.

The state-level US markets display different characteristics, and much of what has been learned in the US is being exported to European markets in reform. In what is increasingly recognized as one of the most efficient and effective market interventions in support of clean energy, the California Solar Initiative created a system of declining incentive payments specifically linked to increasing volumes of solar deployment. Incentives for certain PV market segments are now approaching zero, with growth established on a self-sustaining basis.