Transitioning the Solar Industry away from Subsidies

By Jigar Shah

What a difference a couple of years make. Two years ago, the solar industry was over subsidized and doing well. Last year, the solar industry fell victim to the financial crisis, but emerged victorious through skill and determination to achieve another year of positive growth — after many predictions to the contrary. With today’s announcement that Germany will likely cut its solar subsidy substantially, many are asking, “what will this mean?”

The answer is that this means that the solar industry is growing up. As the subsidies in Germany are reduced, Germany’s global marketshare will also come down. This is a good thing. There are many countries that are looking at solar as a source of growth from South Africa to India to the United States. So, how do we increase demand for solar PV?

We as an industry have to send a strong signal that we are willing to adopt a “cost-plus” incentive model based on the cost of modules, installation, and financing costs. Every government around the world is looking to invest in their energy sector to provide much needed stimulus. This cost-plus model is not unknown in other industries. As our industry matures, solar PV will use the same paradigm that guides other electricity generation technologies globally. For most electricity projects, developers are not rewarded for installing equipment – they are rewarded for taking risk. Because of the solar industry’s early maturity cycle, we receive fixed priced contracts for 20 years. Because of the stability provided by feed-in-tariffs the only risk taken is solar radiation and execution risk, undeserving of the high-profit margins of the past year. An industry standard cost-plus model enables the solar industry to grow in a predictable way, attracting growth capital in a rational and hopefully less volatile way.

An example of trapped demand exists today in India. The country faces a rapidly growing economy with households needing affordable and adequate supplies of electricity. This is combined with limited domestic reserves of fossil fuels, the need to import a vast fraction of the gas, crude oil, and petroleum product requirements, and recently the need to import coal as well. For many countries like India, solar represents an important cost-effective way to meet growing electricity demands to maintain GDP growth. And given its long history of solar support, it can ramp up very quickly due to existing engineering, installation, and financing talent with the country. More importantly, it provides this power without incremental energy security and global warming issues.
The strategies used at our industry’s pioneering days have run their course. Now is time to implement the final set of strategies to set the stage for solar’s steady-growth phase. This phase will be characterized by incentives that point to our unique capabilities through a fair and transparent process that are in line with those that are received by the wind, biomass, coal, oil, and natural gas industries. This necessitates a global cost-plus model and the sooner we recognize this the sooner our industry will return back to a state of normalcy.
Jigar Shah is the CEO of Carbon War Room, was the founder of SunEdison, a pioneer in solar power financing.