Markets have fragile ecosystems and, just as in nature, artificial interference can upset the balance and bring fundamental damage to the ecosystem’s structure and the relationships within it.
When governments tinker with an industry’s delicate balance, particularly industry’s with many substitutes and where the most significant competitor enjoys deep direct and indirect substitutes, the outcome will eventually be a virtual jihad of market disorder. The market in Europe for solar installations, primarily PV, provides just such an example.
The feed in tariff incentive model that began so successfully in Germany was an orderly and carefully scripted incentive and the expectation was that the market would have an orderly response to it. Costs were expected to decrease, demand would be stimulated and a robust demand and supply side industry would grow up around the incentive as it gracefully decreased overtime.
Yes, a robust market was stimulated followed by a crash in prices because of an aggressive pricing strategy that almost wiped out Europe’s manufacturing base similar to the importation of the cane toad into various regions to control the population of other invasive species (as well as noninvasive species) but which eats everything in its path, invasive or not; the Water Hyacinth, a beautiful plant imported to the US from Latin America as decorative ground cover but which takes over the landscape in which it is planted obscuring the sun and crowding out other plant life, and many other examples of the unexpected consequences of tinkering with an ecosystem.
Germany’s FiT was rapidly emulated by other countries in Europe, most of which had far less robust economies. The FiTs rapidly stimulated huge and difficult to support markets. These markets were essentially overrun, much as the rivers and lakes in the US were overrun by the importation of the Asian Carp, a species that breeds fast and grows up to be a very large fish that threatens the other fish in the ecosystem.
The overstimulated markets created a demand side ecosystem (installers and system integrators) that was appropriate to the fast growth, but severely outsized for the correction that followed. Meanwhile, imports dominated the market for photovoltaic modules in Europe, crowding out domestic manufacturers.
Governments in the European FiT countries struggled to put on the breaks. In nature, typically when one imported species does its job and then begins creating havoc, another imported species is brought in to clean up the problem after which it becomes the new problem.
The governments in Europe implemented rapid degressions of FiT rates, retroactive changes to control payouts and still the market grew. At one point Europe had >80% share of global demand. In 2013, its share will be between 15% and 23% of global demand, give or take a decimal point.
The governments in Europe did not foresee either the overstimulation of the market (and how difficult it would be to control this), the destruction to domestic manufacturing by imported products, and the devastation of the robust domestic demand side participants (installers, system integrators) when drastic measures were put in place to control the market.
When you include price fixing (setting of prices on technology imported from China) you further strain the potential of the market to stabilize and recover as well as applying pressure to demand side participants who, at this juncture, are simply struggling to survive.
And this is what happens when governments tinker with markets that are fragile due to lack of stable incentives, competition with subsidized conventional energy, have little to no control over their price function and for which a massive change of consumer behavior is required.
The current situation is painful to observe and more painful to participate in. The solar industry must adjust to a low incentive environment where tender bidding is the preferred format for setting rates. New FiTs are on the horizon in some countries and the solar industry should take time before enthusiastically embracing these new incentives to consider the example of Europe. Unfortunately, the after effects of government intervention will happen again – at least when it comes to solar and other renewable technologies.
Conventional energy, preferred by the majority of utilities, continues and likely will continue to receive indirect and direct support. The conventional energy industry (natural gas, oil, coal) would put up a mighty fight to keep these supports in place and if these supports were taken away the true financial cost of the electricity would be immediately apparent and then there might well be true grid parity.
Painful as it may be to learn to operate in the current environment it is better than continuing to rely on the vagaries of government decisions. There really is no time to wait – environmentally humans and the conventional energy technologies used to power progress are the most invasive species on earth. Renewables (particularly solar) are the solution to the damage that has been done and continues to be done.