The past decade of solar energy has been all about a series of boom and bust cycles. Germany's generous solar tariffs drove the industry for most of the 2000s before the country cut subsidies to the bone. The U.S. investment tax credit (ITC) has helped drive a boom in installations, but its extension in late 2015 also lead to a decline in demand for 2017 because utilities have little urgency to sign solar contracts. Even China's solar boom suddenly went bust in mid-2016.
A bust cycle has happened in nearly every country that has a significant solar market, even if they've been caused by different forces. But that trend may be coming to a close and that would be great news for the solar industry's health long term.
Solar no longer driven by subsidies
Every boom and every bust in the solar industry can be traced back to subsidy changes for solar installations. Sometimes subsidies help and sometimes they hurt, but the fact that they change often brings a lot of uncertainty into the solar industry.
These subsidy changes have made it tough for manufacturers to match supply with demand they expect to materialize. For example, Canadian Solar (NASDAQ:CSIQ), JinkoSolar (NYSE:JKS), and SunPower (NASDAQ:SPWR) expanded solar capacity in 2016 expecting demand to grow, but were slammed by an oversupplied market and falling panel prices. Now, they're forced to cut back because of an expected decline in demand in 2017.
First Solar (NASDAQ:FSLR) saw conditions so bad that it decided to upgrade all of its manufacturing capacity to meet an expected boom in demand in 2018 and beyond.
Already in 2016 solar energy began competing head to head with fossil fuels in competitive contract bids around the world. Mexico, Chile, and the UAE are just a few of the locations where solar won based on cost, not subsidies. This changes the dynamic for utilities and other energy customers because they'll start buying solar based on its competitive cost. This should lead to more stable and growing demand, a departure from the boom and bust cycles.
Why 2017 is the calm before the storm
Solar energy's cost competitiveness has been coming for years, but in 2016 countries around the world saw just how competitive it is. And that changed how they viewed the industry.
Mexico, for example, needed new electricity capacity and opened an auction for wind, hydro, cogeneration, combined-cycle natural gas, and solar. It turned out that solar won 74% of the available capacity, including projects from Canadian Solar and SunPower, and wind won the other 26%. A second auction later in the year added even more solar to the pipeline.
Countries like Chile, Brazil, and Argentina also opened auctions because of the low cost solar they saw for neighbors. But the solar floodgates won't open immediately. Even a solar contract won in April 2016 won't lead to an actual power plant until 2018. Auctions taking place early in 2017 will mostly be for plants expected to be completed in 2019 or beyond.
This creates a strange dynamic for solar manufacturers. The industry is oversupplied today, leading to low panel prices. But visibility into demand for 2018 and beyond is strong as contracts are signed. This year will be the calm before demand begins growing from these new energy contracts.
Similar trends half a world away
Latin America is expected to be one of the biggest growth drivers in coming years. 2016 saw around 1.9 GW of installations, according to GTM Research, and by 2020 installations are expected to grow to 9.2 GW. But it isn't the only region where cheap solar energy is leading to a growing number of available contracts.
Japan, India, Germany, Saudi Arabia, and Spain are just a few of the countries planning solar auctions for 2017. And as these auctions are completed more guaranteed backlog will be added for 2018 and beyond.
The key word in that last sentence is "guaranteed." The previous model of designing a feed-in tariff in countries led to an installation rush, hence the boom and bust. And feed-in tariff rates would change periodically, often with little notice. Now, solar companies are getting guaranteed demand in countries around the world many years in advance. In return, countries are getting a predictable amount of solar energy at affordable prices. Everybody wins.
Is the solar boom just beginning
Now that demand is reaching a point where it's more predictable and the number of suppliers of solar panels has dwindled to a few large suppliers we could see a good opportunity for investment. Canadian Solar, JinkoSolar, SunPower, and First Solar are four of the largest manufacturers in the world and have development arms that can bid for projects around the world. Maybe the industry has finally moved beyond the oversupply problem that has plagued their businesses for so long.