Commodities 2023: Europe's solar power sector set for record growth in 2023

Europe's solar sector is set to continue booming in 2023 with the economic viability of projects improving despite an inflation-driven rise in project costs.

Following record growth in 2022 with some 41 GW set to be added, new installations are forecast to accelerate in 2023 with 54 GW to be added, according to sector association SolarPower Europe.

Meanwhile analysts at S&P Global Commodity Insights have lifted their outlook for European solar additions over 2022-2027 by 5-6 GW/year.

"Despite some short-term uncertainty created by inflation, revenue caps and market reform, the fast-tracking of distributed solar and the repowering of projects help sustain solar capacity growth in Europe," S&P Global head of low carbon electricity analysis Bruno Brunetti said.

"Western Europe will continue to lead the solar boom with the share of solar in the power mix set to double from around 8% currently to almost 20% by 2030," Brunetti said.

Globally, the 1 TW installed solar capacity milestone was reached this year with Europe still accounting for around 20% of the total.

Solar age dawns

Investment in solar in Europe accelerated in 2022 with the technology seen as a rapid solution to reduce dependence on Russian fossil fuels.

"2022 might be remembered in Europe as the year the solar age began," SolarPower Europe's Director of Market Intelligence Michael Schmela said in an interview with S&P Global, adding that solar ticked all three boxes of the previously assumed energy trilemma – sustainability, affordability, and security of supply.

With sky-rocketing wholesale power prices and sharply rising electricity bills, solar's attractive business case improved further in 2022.

Capture prices for solar in Germany have averaged Eur233/MWh in 2022 to Dec. 20 versus Eur101/MWh in 2021, based on hourly tracking of generation and prices by S&P Global.

"Strong corporate renewable energy procurement targets underpin solar growth, both via PPAs and GOs," S&P Global's Brunetti said, noting EU solar GOs were forecast to average around Eur6/MWh in 2023.

PPA pricing platform Pexapark was quoting a 10-year PPA index for European solar at Eur83.52/MWh on Dec. 20, up 29% from year-earlier levels.

Regional price signals can differ significantly as demonstrated by weak prices in Spain with Pexapark's Spain index pegged at Eur52.54/MWh, compared to Eur92.86/MWh for Germany, Europe's leading solar markets.

Inflation-driven cost gains

Solar prices are driven by many factors with PV modules alone accounting for 45% of average utility-scale project costs in Germany with module prices back at 2019 levels after a 60% rebound.

Module price gains were expected to abate as supply chain bottlenecks get relieved and commodity prices trend down, according to S&P Global's outlook for solar.

Polysilicon prices eased in Q4 2022 to $35.48/kg, down 8% from Q3 2022 after prices quadrupled since Q2 2020, according to S&P Global data.

Germany saw some of the biggest cost increases with average capex for a utility-scale solar project up around 30% over the past two years to $640,000/MW, according to S&P Global data.

Solar LCOE were expected to soften again in 2023 and decline in the longer term, according to S&P Global, which sees German solar LCOE falling from the high $50s/MWh in 2022 to around $35/MWh in 2030, while those in Spain were set to drop from around $40/MWh in 2022 to the low-mid $20s/MWh by 2030.

Germany may lift support for solar in auctions with the regulator currently assessing project costs after wind and solar tenders in 2022 went undersubscribed for a variety of reasons.

Maximum bid prices for 20-year sliding premium support contracts have dropped below Eur60/MWh over recent years.

The government also waived a 20 MW capacity threshold for a 1.5 GW emergency fast-track tender in January for projects ready to come online next winter to help improve security of supply.

GERMAN WIND, SOLAR TENDER SCHEDULE 2023

Source: BNetzA

Solar coming home

Meanwhile, growing dependency on China has become an issue for the sector with the EU supporting efforts to bring solar manufacturing back to Europe.

EC President Ursula Von der Leyen also proposed a raw materials club and plans further support to counter the US's Inflation Reduction Act (IRA) which has similar goals to REPowerEU.

Many challenges remain for Europe's multifaceted solar sector ranging from residential roof-top panels to mega-projects on former lignite mines.

Boosting grid infrastructure and workforce skills are some of the most important beyond a stable regulatory framework, according to SPE.

Two thirds of the EU's installed 209 GW solar capacity is still on roof-tops with the commercial roof-top segment growing fastest ahead of utility-scale ground-mounted projects.

SPE's Schmela forecasts the rooftop segment to be bigger for longer than expected, with the residential battery sector also becoming viable amid rising electricity bills.

Europe's home battery market is estimated to reach 9.3 GWh installed capacity by end-2022, more than tripling since 2020 with around 1 million European homes hosting a battery in connection with a solar rooftop system, according to SPE.

"An occasionally overlooked technology, batteries have essentially become a standard component of household solar systems in leading markets," Schmela said.

Mandatory requirements for solar panels on new building or renovation projects as envisaged by the European Commission will help to accelerate the energy transition to solar.

S&P Global's Brunetti said one major uncertainty for 2023 was the planned reform of European power market design intended to break the link between power and gas prices with a great number of models being debated but no clear direction on how or whether to move away from the marginal price model.

EU SOLAR: 2022 CAPACITY ADDITIONS, OUTLOOK TO 2026 (GW)

Source: SolarPower Europe (Dec. 19 report in GWdc)