Solar Energy in Developing Markets: Taking Stock on Global Trends

By José María Valenzuela

The headlines on solar markets have been reserved for the story of innovation and market saturation. These phenomena have driven the cost of solar PV modules down along with the balance-of-plant cost for PV systems. With such a positive cost record, the announcement of high-level government commitments from China and India on solar PV development provided a very positive, yet misleading, image that the solar revolution is truly an ubiquitous phenomenon. In fact, great variations in performance, policy, and market mechanisms exist across developing countries and regions, and solar markets in these regions should be analyzed and discussed on a case-by-case basis.

China has made headlines not only because of its growing solar market, which, according to the most recent official targets, is expected to reach 70 GW by 2017; but also because of the global leading role of companies like Yingli and Hanergy. On its own, India has committed to install as much as 100 GW by 2020, with an associated green transmission corridor. These provided a fantastic perspective on the growth of solar energy outside the developed world.

Nonetheless, the most recent standardized global statistics by the IEA portray that by 2012, global solar energy in power generation barely surpassed 100 TWh, and the ratio of power output in developing countries to that of OECD countries was 1 to 8. In 2010 the gap was even larger, about 1 to 20, with most of solar generation in developing countries occurring in China and India, and hence accountable for closing the gap between OECD and non-OECD countries.

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Figure 1. Solar generation (GWh). Sources: IEA, Energy Statistics for Non-OECD Countries, 2014 Edition; Energy Statistics for OECD Countries, 2014 Edition.

In 2013 the investment portfolio on renewable energy declined further on from 2011 and 2012. This turned out to be good news for solar, since a key reason was the reduction of costs for the PV system. In 2013, the total investment in solar energy declined by 20% but there was an increase of over a quarter of installed capacity to 39 GW. From Bloomberg New Energy Finance’s most recent statistics for 2014, we know that renewable energy investment has recovered, with solar PV costs still decreasing and installed capacity accelerating. While we know that the future for solar energy is bright, until now solar energy has not proven to be an effective technology for energy diversification either as a way to enhance energy security or mitigate GHG emissions.[1] When will the solar revolution happen? What drives a country to substantiate a strategy to commit to solar energy? And alternatively, when will government and regulators find themselves in the middle of a solar energy revolution?

Not all countries have the urgency for diversification and even in most developing countries, decarbonization is still not urgent, nor even a mid-term necessity. As pointed out by a UNEP-Frankfurt School review, countries with sufficient and reliable access to coal and inexpensive natural gas would see little margin to push forward solar markets in their country. But there might be other reasons that drive the change.

We have seen positive developments in relevant middle-income countries other than India and China. Brazil for example, conducted successful auctions for solar energy in 2014 and is preparing a second auction, which might get the country surpass 2 GW of solar PV installed by 2016. Mexico provides a contrast: as a middle-income country with a growing domestic power demand and access to technology and business expertise for large-scale projects, there has been neither significant policy for pushing forward solar PV projects nor relevant investment in the sector. Brazil shares with India and China an industrial strategy to champion early their manufacturing industries, which are normally accompanied by trade policies and subsidized capital markets to secure that policy-driven market growth will lead to manufacturing investment. These successful experiences provide an excellent incentive for policy makers to move forward with such state-guided initiatives.

Even without these state-guided conditions, solar is already cost competitive in two types of markets, where it would seemingly require no particular industrial policy for solar technology to spread. The first is markets with no access to inexpensive fossil fuels or traditional renewable resources like hydropower. This is the case of Honduras or Nicaragua in Central America, countries with complete reliance of foreign fossil fuels, no infrastructure for LNG and until recently, and no access to electricity trade with neighboring countries. While solar technology has been deployed in Nicaragua, it has not in Honduras. The impact of fossil fuels imports is so relevant that the macroeconomic policy of a country like Honduras is built upon the balance of payment effects of oil imports, a topic worth further reading (e.g., the report by Yépez-García and Dana). While solar PV systems might be cost competitive at the counter, the capital markets in a country like Honduras suffer from strenuous conditions that increase the cost of capital and reduce any cost-competitiveness of the technology. In such cases subsidized capital from official development agencies and develop banks have become the only short-term alternatives to initiate a market.

The second is retail power markets, where solar power generation can be cost competitive against utilities retail prices, therefore providing an opportunity for the development of distributed solar generation. We have seen regional markets in the US and Europe burst in the absence of an incentives policy. But if a country faces strenuous conditions in financial markets, this is also reflected in domestic markets, which serve potential distributed generators, like small and medium enterprises (SMEs) or households. Similarly, public funding to lower the cost of capital would allow for better business conditions. At the retail power markets, subsidies into each consumer electricity bill also play a significant role in undermining the development of solar. In Mexico, where a differentiated strategy has been developed, high-consumption households facing unsubsidized tariffs have double incentive to invest in solar system as a way to reduce consumption and gain access to subsidies. This has become the backbone of the PV retail market in the country.

Mexico and Chile are interesting cases. As much they do not hold active industrial policies as Brazil, nor do they engage in technology-specific subsidies either for fostering production or consumption (but Mexico provides household electricity consumption subsidies). While much less explosive than those in Brazil, markets have been steadily developing under privately driven projects. But Mexico and Chile are exceptional for having sound macroeconomic policy, and with comparatively lower capital costs. According to the Ministry of Economy and Finance of Peru, only Chile is in the range of the A’s of borrower rating agencies, while Mexico and Peru are found between the lower A’s and higher B’s, and the rest of the region’s major economies are clearly rooted in the B’s, except Argentina and Venezuela, who perform poorly at all odds.

There is a role to play by multilateral development banks, but their limited capital and capabilities will hardly lead to solar energy revolutions across the globe or in any particular region, like in Latin America. The necessary conditions for most of the developing markets can only be addressed by local institutions. But it is clear that for developing countries the main challenge will be to commit to a one-type-of-policy path, either building upon state-driven policies that require serious fiscal commitments, or a sound macroeconomic policies and liberalized approach. Committing to one path and successfully implementing it are both challenges themselves. Hence, we shall see a great diversity in the performance of solar markets, which will require region- and country-specific analysis. Debates concerned with worldwide energy transition should be careful not to stop too early by falling into the increasingly common fallacy, “China is a developing country; all developing countries are China”.

[1] Energy security understood as a set of expectation on the normal operation of an energy market, which comprises the both normality in physical operations, and normality in the affordability of the resource or the technology. In practice this is normally understood as lack of disruption in the supply and stability in prices. These conditions have to be met without major disruptions into other linked systems or environment, for example, if extraordinary fiscal, industrial, or defense policies are adopted.

 

José María Valenzuela is an independent expert in the analysis of institutions in the energy sector, associated with the Future Energy Leaders’ Programme at the World Energy Council. He holds a BA from the School of International Studies at El Colegio de Mexico and a Master of Public Administration in International Development (MID) degree from the School of Public Policy and Management at Tsinghua University. During 2013­–2014 he was responsible for developing the policy and goals for renewable energy in Mexico as an official at the Mexican Department of Energy. Twitter: @josemaria_mx