Italy solar policy: What happens next?

With Italy’s revised solar policy draft finally approved, analysts explain what happens next in the world’s No.2 solar demand market. (Hint: High inventories and lower prices.)

May 12, 2011 – Italy’s revised solar policy draft has been approved, setting out a two-year transition period; in 2013 incentives will be based on reaching installed capacity targets. Annual subsidies are being capped at €6B-€7B by the end of 2016. The policies also extend a deadline for ground-mount projects to August 31 (vs. May 31).

Smaller is better? The policy provides for uncapped rooftop markets for <1MW projects during the transition period (through 2012), as well as <200kW ground-mount systems operating under “net-metering.” But larger non-net-metered systems (>1MW on roofs and >200kW on ground) will be subject to quotas and permitting process.

Though the 2010 backlog probably won’t be fully connected until August of this year, one might argue that smaller systems (e.g. <200kW rooftops) would be faster to connect and help speed things along. However, there’s still been a high mix of smaller systems in the past couple of months, points out Credit Suisse analyst Satya Kumar, in a research note. With incentives based on grid-connection, and connections typically happening 8-9 months after requested, construction financing will likely be held up to be timed closer to connection, he explains (though project owners might get compensated for interconnection delays preventing incentives).

Out of the fog… With the now-all-but-official policy, Italy hopes to provide long-term market visibility with a set transition period, while maintaining economic costs sub-€6-7B, and cumulative target of 23GW of cumulative installations by 2016, explains Kumar. At the current 650MW/month connect rate, 3.7GW of leftover 2010 inventory, and 1.3GW shipped in 1Q11, he now sees only 1.5GW new shipments through year-end. His new annual demand estimates in Italy (sell-in) are 2.8GW in 2011 (from 6GW in 2010) and 4.3GW in 2012 — eventually matching sell-through/grid-connection, which he projects at 6.5GW in 2011 (up from 2.3GW in 2010), and back down to 4.3GW in 2012.

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Italian shipment and interconnection forecasts through 2012. (Source: GSE, Credit Suisse estimates)

…and into supply problems. Now that the Italy situation is clearing up, look for everyone to get back to worrying about supply, demand and pricing trends. A bounceback in Italy’s solar market, combined with a seasonal pickup in Germany and the US, should help stabilize panel prices (or at least slow down declines), which have sunk by nearly a half-dollar to $1.5-$1.6/W in just the past five months, Kumar writes. But there’s a kicker — low 2Q11 sell-ins mean any pickup in Italy won’t fully absorb the 6GW-7GW of panel production in 2Q-3Q. “We think the ultimate resolution of supply/demand will require lower panel prices.”

The result, Kumar argues, will be the first “genuine supply-driven downturn” time in seven years, similar to what happened in 3Q08-4Q08 when demand deteriorated due to the credit crisis. (A 2H08-1H09 slump was financing-driven, after which demand quickly recovered, he says.) He sees solar poly supply growing from 20GW in 2010 to 27GW in 2011 to 34+GW in 2012, but solar wafer/cell capacity “is well in excess of these estimates,” he says. Assuming Italy is around 3GW in 2011 (and reports are Germany could decline significantly this year to 4GW), Kumar doubts that the rest of the world can soak up 24GW this year.

So those panel price declines over the past few months may not stop after all. The imbalance of too many GW of panels being produced and not enough demand “can only be resolved when pricing drops to much lower levels of <$1.3/watt levels by year end,” he advises.

Lux Research’s Jason Eckstein also points out the growing disconnect in Italy’s updated numbers, with “wild announcements” of up to 3GW in “phantom systems” (completed but not grid-connected installations) that, if true, would push the Italian market already beyond its 2011 cap and effectively close down the market for this year. As a result, module players and project developers are rerouting inventories to other markets (e.g. the US) in the assumption that they won’t be able to make the narrow window of pre-cap system installations. (Eckstein points to several vendors likely most impacted by fleeing Italy: First Solar, Uni-Solar, SunPower, and Chinese players Trina, Yingli, and Suntech.)

Click to Enlarge
Italian shipment and interconnection forecasts through 2016.
(Source: GSE, Credit Suisse estimates)

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