The terawatt era of PV: ‘Solar will be the gas of today’

It looks like the global solar industry grew more than 30% in 2023 as solar module prices fell and supply chains settled down. This puts PV on course to surpass global coal and fossil gas capacity in the next few years.‍

• ‍The top-line: When the numbers for 2023 are finalized, there could be another 320 to 413 gigawatts of solar installed around the world — bringing global capacity to nearly 1.5 terawatts.‍
• The current take: “Solar's not just sort of one of the fastest growing renewable energy technologies. It's one of the fastest growing, most important energy technologies, period. Solar will be kind of like the gas of today,” said Michelle Davis, head of global solar at Wood Mackenzie, on The Carbon Copy podcast this week.‍
• The mixed outlook: BNEF and WoodMac analyses diverge through 2030. BNEF projects more than 700 GW to be installed yearly at the end of the decade, while WoodMac projects 350-370 GW by then. The differences revolve around Chinese growth, grid capacity in top countries, and market constraints — not cost.

After a tumultuous period of growth in the COVID era, solar may be on track for more incremental growth through the end of the decade. But the industry is still set to become a dominant source of global power capacity. 

It is becoming “a mature industry that continues to be quite large every year. But incremental growth is getting a little bit harder,” said WoodMac’s Davis. 

In this week’s episode of The Carbon Copy, we talk with Davis about module pricing dynamics, the outlook for China and the U.S., and trends in manufacturing and battery attachment.

Sign up for Latitude Media’s Frontier Forum on January 31, featuring Crux CEO Alfred Johnson, who will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024.

Transcript

Stephen Lacey: There are not that many technologies on track to get us to net-zero emissions by mid-century. Advanced nuclear, carbon removal, electric transport, we're seeing varying degrees of ramping in these areas, but they're all behind where we need them. But renewables are mostly on the right trajectory, in particular solar.

Michelle Davis: If the last bit of 2023 plays out how we had forecast when we published our most recent reports at the end of 2023, there's like one and a half terawatts of solar capacity installed globally by the end of 2023, cumulatively.

Stephen Lacey: Michelle Davis has been mapping the US-distributed solar market for nearly a decade for Wood Mackenzie. She recently became the head of Global Solar at Wood Mack, where she now takes a much broader view on how the technology is getting built around the world.

Michelle Davis: So I've had to really kind of broaden my horizons in terms of the solar industry over the last six months.

Stephen Lacey: A terawatt and a half of capacity is four times greater than global nuclear capacity. And yes, variable solar has a much lower capacity factor and much different impact on the grid than nuclear, but solar is expected to double, maybe even triple, in another decade. And while nuclear generation is flat at around 10% of electricity supply, solar is now at 5% and could hit 10% by the end of the decade. And that scale really hit Michelle as she started compiling data for a recent presentation.

Michelle Davis: I gathered some data from our power team on what the generating capacity in the US looks like out to 2050. And because I had never really had to do this before, it really struck me that according to our outlooks, by 2050, 40% of the generating capacity, just electricity-generating capacity in the US will be solar. And that doesn't include any distributed stuff that's reducing load before the grid even has to serve it.

Stephen Lacey: And around the world, a gigawatt of solar is getting built every day, and that's leading utilities and grid operators to the same conclusion as top solar analysts like Michelle.

Michelle Davis: Solar is not just sort of one of the fastest-growing, most important renewable energy technologies, it's one of the fastest-growing, most important energy technologies, period. It will be basically the energy industry in the next couple of decades. Like [inaudible 00:02:27] solar will be kind of like the gas of today.

Stephen Lacey: There's almost universal recognition that we are firmly in the solar era, but outlooks on how fast the technology will grow are mixed, and that's because there's a mix of constraints like market design, trade barriers, and grid capacity that could cap yearly growth.

Michelle Davis: I'm sort of seeing it becoming an evolving, a mature industry that continues to be quite large every year, but incremental growth is getting a little bit harder.

Stephen Lacey: This is The Carbon Copy. I'm Stephen Lacey. This week, a look at global solar dynamics. I'll talk with Wood Mackenzie's Michelle Davis about the tech and deployment trends that will shape the next decade of expansion.

There are two views of the global solar market emerging, both bullish but different. In its recent solar PV outlook, Bloomberg New Energy Finance projects well over 700 gigawatts of installations per year by 2030. Now, Wood Mack expects about 370 gigawatts yearly by then. There are nuances to the BNEF analysis that incorporate unknown solar capacity that's unassigned to a particular country, and taking that buffer out, we're probably closer to a half a terawatt. But whichever forecast you take, we're still looking at 350 to 500 gigawatts being installed a year. That is a lot of photovoltaics. But growth, according to Wood Mack's analysis will start to slow. And so I sat down with Michelle to understand what that means exactly.

Michelle Davis: So we saw enormous amounts of growth over the last three, four years. At one point I was looking at it and it's like, average annual growth over the last four or five years has been like 30% across all global installations. But then this year and next year, we're kind of hitting past that inflection point and growth rates are actually going to slow in many different markets, China being one of them. So growth's actually flat over the next several years. Solar is going up that S-curve. We were on the steepest part of the S-curve for several years, and now we're sort of hitting that inflection point where growth starts to slow. In that sense, solar is a mature industry, which that sort of evolution of that S-curve is natural for an industry to sort of move through.

Stephen Lacey: So that's a good point. When you get to the flatter part of the curve, what are the contributing factors that slow growth down? Is it the grid constraints? Is it the amount of solar that markets can handle? What are those factors that are causing that flat growth rate?

Michelle Davis: Well, the biggest markets that are leading to the flattening are definitely China and Europe, and kind of secondarily, the US. And I would argue that in all three of those markets, you're seeing slowing growth because of grid capacity constraints. This could be an issue in the future a little bit more so that it is today, but cost competitiveness doesn't really seem to be holding back solar. It's very cost competitive. It has high demand. There would be more solar installed if it wasn't for some of these other bottlenecks and challenges for the industry.

So thinking about China specifically, despite the fact that the capacity doubled in 2023, a lot of that was due to government procurements in locations that they call energy bases, so sort of like renewable energy locations throughout China that the government designed and designated as places where renewable energy projects could get built. But as a lot of that's come online, we anticipate that that capacity won't be at exactly the same growth rate as it was the year before. Doubling again, that would be quite astounding. And then furthermore, grid constraints are starting to limit project potential in a place like China. The land capacity and grid capacity constraints are starting to actually limit installations, or at least the volume that developers can put in the pipeline.

Stephen Lacey: So we've seen explosive growth for solar since COVID and in the US alone, I think there are just over four and a half million solar systems installed, and half of capacity according to Wood Mackenzie was installed since 2020. So this period was marked by really strong growth but also all sorts of havoc and supply chains, labor shortages, shutdowns that contributed to all sorts of problems with equipment availability. And so it's been a very chaotic story. How would you describe this post-COVID growth period in solar?

Michelle Davis: Yeah, I think the way that I would describe it is that the industry was sort of preparing to be at this level of growth, but then in 2020 and 2021, COVID kind of put it on pause. So the levels of growth that we started to see in 2021 and 2022, especially in distributed solar, you sort of have to make a distinction between distributed versus utility scale, that was always set to happen. There was just a little bit of a blip because of the challenges related to COVID and a lot of the supply chain constraints that were experienced.

A couple of different things happened sort of under the surface. First, solar costs were coming down quite a lot in the lead up to COVID, and they actually sort of flat-lined, or in many cases, increased as a result of the pandemic. Obviously whenever costs go up, that's challenging for an industry, but there was also a lot of demand. There was flexibility on the part of offtakers, particularly for utility scale. There was still a lot of demand for solar and offtakers were willing to go with increased prices for the most part. So that sort of was a resilient aspect of the industry.

In distributed, the loan market really has pushed a lot of the momentum in the residential solar industry for the last four or five years. And in the pandemic, interest rates had been low for a long time, but in the pandemic they were even lower. So I would actually argue that the pandemic, because low interest rates have been such a big factor in fueling affordable loans for residential solar, the pandemic, at least in the United States, actually helped drive more residential solar than ever before.

Stephen Lacey: So out of this period, supply chain security has been top of mind for almost every industry, clean energy included. I'm wondering what are the big stories for the reorientation of supply chains coming out of COVID. Did everything go back to status quo? Were there some fundamental changes that have reshaped the industry? China, of course, still dominates every part of the solar supply chain, but I'm just wondering, have there been any real material changes that have come out of this period?

Michelle Davis: I think the most material changes are in procurement behavior. Folks in the industry prior to the pandemic typically would just procure equipment in a just-in-time type of manner, and historically that worked and was appropriate for the industry. Now I think everybody thinks about it a little bit differently. They want to make sure that they line up equipment and they procure equipment in advance. You don't want to risk buying too much equipment or paying too much for that equipment. But developers definitely have a bit of a different attitude about procuring way in advance. They also consider different factors in terms of reliability of when it will be delivered. So people might be willing to pay a higher price if it means that they get some of those items, whereas before, price competition was kind of the main thing dictating procurement in the solar industry.

Stephen Lacey: The global solar market is diversifying, solar is spreading everywhere around the world at this point. But the market has largely been shaped by Europe, the US, and China. And China, which has successfully achieved its mission to dominate clean energy, dwarfs everyone. And that's not going to change, says Michelle.

How big is China's role in this industry right now and will that story just continue to persist? I mean, this story of, the last 15 years of solar has been the story of China. Is the next 15 years going to be the story of China?

Michelle Davis: When it comes to manufacturing, yes. China has over 80% of the manufacturing capacity for every important component in a solar module. And we track factory expansions and announcements. And even if all the different announcements, whether in China or in the rest of the world come to fruition, the share that China makes up isn't really going to change that much, like maybe a couple percentage points as other countries around the globe build out module manufacturing. So the sort of very simple and short answer to your question is that we just expect China to continue to absolutely dominate manufacturing. That's not going to change anytime soon.

Stephen Lacey: Yeah. So what does that mean for production capacity, for module supply? We are now entering a period of module oversupply again and we're seeing pricing fall substantially week over week. What does pricing look like right now in 2024 and what does that say about the market dynamics of module supply?

Michelle Davis: Well, in terms of pricing trends just for Chinese modules, we do expect some further declines throughout 2024. Depending on what module technology you're talking about, modules can be 15 to 18 cents and we expect that they might go down a couple more cents, maybe 12 to 14 or 15 or something in that range over the next year. We anticipate that that will be the floor. That will sort of be the trough in module pricing because markets are going to respond. The current situation is that lots of factories are operating at somewhat low utilization rates.

And the fact of the matter is that as we continue with pricing being so low, some factories are either going to close certain lines or close entirely, planned expansions aren't going to actually manifest. There will be consequences, and that's something that we've started to write about a little bit more at Wood Mackenzie is that there will probably be a certain level of market correction. And so by 2025 or so, we do anticipate that pricing will start to go up a little bit more. Not a whole lot, but basically 2024 should be the floor for some of those module prices.

Stephen Lacey: There have been a number of efforts through the Inflation Reduction Act to scale up both battery and solar manufacturing here in the US. There's been a lot of attention on battery manufacturing because of the rise of EVs and a ton of the new activity that we've seen as a result of the new EV tax credits has brought a lot of battery manufacturing, retooled factories, new production factories. How has this impacted solar? So there are also specific tax credit requirements for solar cell manufacturing. Are Inflation Reduction Act incentives creating the same level of activity in domestic solar production as they are in battery production?

Michelle Davis: That's a good question. I would say the IRA has generated a lot of interest in module manufacturing. I think we're tracking something on the order of over 120 gigawatts of module manufacturing announcements. Not all of those will materialize of course, but that's 10 times what the US currently has today. I think potentially a difference with the battery manufacturing industry is that the US would virtually have to build cell manufacturing, which is just modules made up of a bunch of cells. They'd have to build a cell manufacturing industry basically from scratch. There's no cell manufacturing in the US to speak of. There have been some announcements as a result of the IRA, but we expect it'll probably take at least another few years for that to actually manifest. And without cell manufacturing here in the US, it makes building out that fully domestic supply chain and truly taking advantage of some of the domestic content incentives in the IRA a lot harder.

Stephen Lacey: And on the IRA generally, what do you think the impact on the solar industry will be over the next few years, both in terms of production and installation? What do we expect to actually play out?

Michelle Davis: When the IRA was first passed in August of 2022, we modified our forecast and we anticipated that over the next five years, the IRA would increase installations in the US by like 40%. Pretty big impact from a very historic piece of legislation. We still anticipate that that will pretty much play out. The timing has been slower than folks had anticipated. It's taken over a year for different programs and rules to be published by the IRS and other government entities, and there's still more to come frankly, and no one was expecting it to be quite this long or arduous to kind of ramp up a lot of the new stuff in the IRA. So that's installations on the one hand.

On the other hand with manufacturing, I think the IRA will have a notable impact on the manufacturing sector. Again, like I said, we don't anticipate all of that 120 gigawatts of module manufacturing is going to get built. We expect it'll be more like 50 or so over the next four or five years. But assuming that that plays out, that will be one of the biggest expansions of manufacturing capacity for solar that really the US has ever had. One really huge benefit of all that is that it will bring a lot of diversification and more reliability in the solar supply chain, which obviously is welcome, given everything that you and I have talked about today and the US industry, I think, craves not being so vulnerable to different types of political risk.

Stephen Lacey: There are a bunch of other challenges in the US, grid constraints are a huge problem, major interconnection backlogs, you have this major policy change in the top solar market in California that is going to cause residential installations to crash, and there are of course still equipment shortages. What are the strengths and weaknesses in the US market right now?

Michelle Davis: One of the just immediate strengths I would say is just the strong demand for solar. The primary drivers of utility-scale solar procurement at least are corporate buyers signing contracts and voluntary procurement on the part of utilities. That's where the majority of utility-scale solar or how the majority of utility-scale solar is procured in the US. That's compelling. That basically is saying that most utility-scale solar in the US comes from utilities and corporate entities saying, "We need more clean energy."

The weaknesses in the US are definitely all of those things that you touched upon. The sort of unfortunate nature of the way that our governments are set up in the US mean that there's all these levels of bureaucracy when it comes to building transmission and distribution capacity. Democracy has lots of benefits, but that might not be one of them. And we need more grid capacity in order to have this net-zero future, lots and lots of studies show that, a doubling or a tripling of transmission and distribution capacity. There's similar things at play with interconnection queue issues. You have FERC regulations and different ISO regulations and lots of potential changes that are taking place within those processes. There's just multiple different layers that developers have to navigate, and that's really challenging.

Stephen Lacey: So then what's going to happen to the US market in 2024, given all that?

Michelle Davis: So in 2024 overall, we're forecasting that the US market is going to grow 10%. It varies a little bit by segment. We're seeing a little bit more growth in utility-scale than in some of the other distributed segments. It is less than some of the most gangbuster years that the US sector has had, that's for sure. I think this industry is sort of used to enormous growth year-over-year with obviously the exception of 2022, which was the first year the industry contracted in five years.

But sort of getting back to that theme of maturity, I think a lot of industries would be quite happy if kind of on average their growth was in the low teens. Maybe for the solar industry, a lot of folks might think of that as low growth, but the kind of fact of the matter is that this is becoming a mature industry. We're not going to see 70, 80% growth every year. The industry is not multiplying many times over from a small base. It's no longer a small base anymore. It's a big base. It's going to grow to be the dominant amount of capacity in the US electricity-generating market. So I think whether or not it's good or bad sort of depends on on your perspective.

Stephen Lacey: So that brings us into some bigger tech trend questions. I mean, what do you think the most important technology trends are in solar right now? Both... It could be in manufacturing or in power electronics or in downstream.

Michelle Davis: Yeah, I think there are two that I think are important to touch on. One is definitely module technology. One of the reasons for the massive expansion of manufacturing in China is not just obviously increasing the amount of manufacturing of different solar components, but also the type. So we're going to witness over the course of the next three, four years, a pretty big shift from mostly P-type modules, which is just a cell technology, that's mostly the older technology, to predominantly N-type modules, and particularly technologies like TOPCon and Heterojunction. And those are just names for different types of cell technology that are slightly more efficient than the older generations.

So just in a few short years, manufacturing of solar is going to completely change in terms of the technology that's being produced. Those N-type module technologies are a little bit more expensive, but it's usually made up for with higher production of those modules. And that's a big reason that there's going to be sort of this market correction in supply chain like we've been talking about, it's going to be a bit of a... It's a big race and competition to produce the best, most cutting-edge technology, and that's really going to create a lot of winners and losers in the solar supply chain.

I think the other technology trend is just the importance of increasing attachment rates for solar plus storage in the DG space. Putting batteries co-located with solar is pretty standard practice now in utility scale solar, at least in the United States. But in my opinion, solar plus storage attachment rates in the US are not high enough yet for batteries to really be a potential game changer in VPPs. So I know VPPs have gotten a lot of attention this year. I know our friend Jigar is a huge VPP advocate.

Stephen Lacey: Yes, and he's also said that every solar company is going to soon become a VPP company.

Michelle Davis: Right, right.

Stephen Lacey: Do you think that's overstated?

Michelle Davis: I mean, it won't be overstated if those companies also make a concerted effort to increase their attachment rates. But when you think about sort of the scale of how VPPs could contribute, at least when you think about solar plus storage systems and VPPs, just the amount of batteries that are available in any given state besides maybe say California or Hawaii or Puerto Rico, it's just relatively small. VPPs are... This makes sense, but currently a lot of the capacity in VPPs is smart thermostats, which is great. But if you really want a notable amount of battery capacity for either residential or commercial solar plus storage systems, to really play enough of a role in the VPPs that utility could actually make a decision not to build a power plant, we're a long way away from that right now.

Stephen Lacey: So solar is becoming a terawatt scale market. As we look through the end of the decade at the industry's expansion and sort of flattening growth and maturity, what storylines do you feel confident about? What storylines feel a little less clear and wildcard-ish?

Michelle Davis: Well, it's hard not to bring up the potential changes in solar supply chain. I think the US market in particular really learned how quickly things can change if a certain policy or trade restriction goes into place. Things changed overnight and quite dramatically in early 2022 when there was the proposal of a potential anti-circumvention tariff for Southeast Asian countries. Or all of a sudden in the middle of 2022, no one could import modules anymore because Customs and Border Protection was implementing the UFLPA.

In my mind, when I think about big uncertainties, that's one of the biggest ones, I think, in terms of the lever that you could pull. If a certain government or say the EU decides that they also want to restrict polysilicon from the Uyghur region of China, that would be enormous. Overnight, all of a sudden, a huge portion of the polysilicon supply globally can't be used for solar modules in Europe. The potential impact of some of these political risks is now quite large. That's one big uncertainty that I see in the solar supply chain.

Another one, and this is a little bit longer term, is it's obviously fantastic that we have such strong outlooks for solar and it's going to grow to be like 40% of generating capacity in the US by 2050. But that will also present a ton of challenges. The more and more solar that gets installed, the more midday solar prices are just going to crater and be consistently negative. So to me, one of the longer term uncertainties is how long do we have to go until solar is eating itself? Will the industry adapt soon enough by having more batteries on the grid and building projects in a way that increases their grid value so that doesn't happen.

Stephen Lacey: Michelle Davis, head of Global Solar at Wood Mackenzie, thank you so much.

Michelle Davis: You're so welcome, Stephen. I'm so glad I was able to be a part of it.

Stephen Lacey: That's it for the show. The Carbon Copy is produced by me. It's mixed by Sean Marquand, who also wrote our theme song. If you want to read our takes on the solar industry, go to latitudemedia.com/newsletter and you'll get all our news in your inbox. And for other deep dives, you can listen to our companion podcast, we've got Catalyst with Shayle Kann, and The Latitude, which is versions of our stories, so we've got an audio companion to our editorial coverage on the site.

Latitude Media is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. You can learn more about their portfolio and investment strategy at preludeventures.com. Support the show by spreading the word to your colleagues and friends who will find value in these conversations. Word of mouth is really important for growth, and also ratings and reviews. So go to Apple and Spotify and hook us up with one of those as well. We'll catch you next time. I'm Stephen Lacey, and this is The Carbon Copy from Latitude Media.