No Italian solar cap? Get ready to hit the brakes

Italy has officially removed the presumed 8GW cap on incentives for solar power production, but the move creates more uncertainty about supply/demand metrics in an already overheated market.

March 3, 2011 – Italy has approved a new solar policy that removes a cap on incentives for solar power production, a move that preserves incentives beyond 8GW of solar capacity [link in Italian], but seems to open the door for new legislation in June to revisit the country’s solar rules.

Italy’s Environmental Minister, Stefania Prestigiacomo, had made headlines earlier in the week indicating that the government’s 8GW target for PV capacity “is not a cap.” Meanwhile, Italian industry minister Paolo Romani had said the country’s solar power incentives would cost about €35B over the next 10 years. The industry has lobbied for an incentive cut starting next year (Jan. 2012), perhaps to 12GW, and new density parameters of 10 hectares/MW (vs. 17ha/MW), notes Barclays Capital analyst Vishal Shah, in a research note.

There is significant buzz from the solar PV sector about what’s going on in Italy. Preliminary figures from the Gestore dei Servizi Energetici (GSE) for 2010 PV installations suggested roughly 4GW in new capacity for the year — and possibly equally as much in projects still in the pipeline, depending on timing. Shah calculates that, when everything’s finally tallied up, there will have been ~4GW of installed PV capacity in Italy in just 4Q10 alone. Tack on likely continued growth in 1Q11 could approach 5GW-6GW quarterly run-rate. Add in other major markets (Germany, Belgium, US, Japan) and that nearly doubles to 9GW-10GW. Worst-case, only ~3GW was installed in 4Q and similar levels in 1Q11, which puts everyone’s overall demand at 7GW-8GW.

Had the 8GW “cap” been cemented in policy, the industry would “a complete halt of bank financing for new projects relatively soon,” Shah wrote in a research note. Furthermore it would weigh down demand estimates, and increase the likelihood of a supply/demand imbalance in 2H11, he wrote.

But this version of a cap-less (for now) policy, which includes a requirement that projects be grid-connected before May 31 to qualify for the current FiTs (post-May rules are yet to be codified), isn’t great either, he notes — it still heightens the uncertainty with respect to 2H11 supply/demand, and likely increases the risk to financing for ongoing projects. “We expect this policy to result in a significant slowdown in the Italian market in 2Q until pricing expectations are reset for a potential 30%-50% FiT cut in 2H11,” he writes.

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