After a decade of stellar growth, Wood Mackenzie forecasts that solar demand in the Asia-Pacific will decline for the first time this year. Compared to 2017, the region's solar demand will dip 18% to 59 GW in 2018 due to declining installations in China, India and Japan.
"Traditionally the leader of the pack in Asia-Pacific, China's solar installations are expected to fall 30% this year as it is adopting various policy instruments which will reduce subsidies," said Wood Mackenzie's solar analyst Rishab Shrestha.
China has had an unprecedented growth in photovoltaic (PV) installations over the past few years. The 13th five-year plan, published in 2016, set a minimum target of 105 GW by 2020. It met the target in 2017 - three years ahead of plan - as the cumulative capacity reached 131 GW. During 2016-2018, costs declined at a faster pace than the Feed-in-Tariff (FIT) levels as module oversupply continued. As a result, installation frequently surpassed the annual provincial construction quota for utility-scale projects and led to delays in subsidy payments and curtailment.
To regain control of the pace of solar development and reduce the subsidy burden, China implemented several stop-gap measures in May this year. These included cancellations of further quotas for utility-scale projects, quota restrictions on distributed solar of 10 GW for 2018, reduced FIT levels, and the transition towards auctions. These measures are expected to result in demand contraction but will also help lower the pace of subsidy deficit. Even with the contraction, China will remain the largest market for solar installation annually throughout the next five years.
In Japan, high levels of FIT have attracted more than 80 GW of solar pipeline capacity despite the high-cost environment. Developers pushed back on grid connection timeline to realise module cost savings and significant projects remained in development status. The government re-evaluated the pipeline to only permit projects (~50 GW including operational) that have sound business plans that would be grid-connected within the next three years.
Japan is currently transitioning from FIT to auction for projects greater than 2 MW. The past two auctions have been undersubscribed due to several issues such as tight permitting and grid connection timeline, high cost, grid constraints, and limited land availability. Furthermore, the submitted bids for the second auction were all above the ceiling tariff of JPY 15.5/kWh. Due to these issues, utility-scale solar installations will decline significantly. Nonetheless, distributed solar installations are expected to remain stable as FIT remuneration declines along with cost.
"The key trend we are seeing is the phase out of subsidies and transition towards auctions, which is leading to lumpy demand in the region," Shrestha said.
"That being said, Asia-Pacific will still add 355 GW of new solar capacity over the next five years, and this is partly attributable to the reduction in PV capital cost globally."
By 2023, Wood Mackenzie expects the levelised cost of electricity (LCOE) to fall by 25% to US$55/MWh. This makes solar energy more competitive compared to traditional energy sources, such as gas and coal, and could drive additional demand from emerging markets in the region.
Markets with attractive policies such as high FIT (e.g. Taiwan and Vietnam) and Renewable Portfolio Standards (South Korea and Philippines) are likely to benefit the most. Furthermore, as LCOE approaches the wholesale power price levels, as in Australia, for example, voluntary procurement will become a significant driver of solar installations.