The European Union has long been the biggest market for solar in the world. At 67 gigawatts, it accounted for 69.9 percent of all installed capacity since 2001. Strong government policies and plummeting module prices have ensured that over half of the EU's solar, 37 gigawatts, has been installed in the last two years alone.

But the tides are changing. Many countries are scaling back their feed-in tariffs, and the resolution of the EU-China trade dispute has imposed new restrictions on supply coming into the marketplace.

How will these conditions translate in terms of European solar demand? The answer to this question depends on which market segment we are looking at.

EU-China Deal Fundamentals

The arrangement between the EU and Chinese companies has two parts:

  1. A price floor for 90 Chinese companies, widely believed to be $0.74 per watt
  2. A volume cap on how much those companies can sell into Europe annually, believed to be 7 gigawatts

There are some nuances to this arrangement. However, the bottom line is that there are now artificial restrictions on supply into Europe applying to the manufacturers that supplied about 60 percent of the EU market last year.

Utility PV Market

The conventional wisdom is that big projects in Europe are dead for 2013 and 2014. This is based primarily on two factors. First, larger projects are more price-sensitive than smaller projects. Second, a primary source of revenue has been cut back as reductions in feed-in tariffs (FITs) kick in across Europe. Germany’s is on a degression schedule, the U.K.'s is facing cuts at the beginning of 2014, Italy’s expired in July, and the Spanish government has spooked most developers with its tactics. With reduced policy support and the price floor, many developers don’t think that they can make the economics work.

A notable, yet mostly unmentioned, exception to these dynamics could be in Germany, where merchant projects can choose between the feed-in tariff and the new “market premium.” This payment gives renewable generators the difference between the FIT and the average price of wholesale energy, plus a management premium. To date, 3.9 gigawatts of solar PV have been integrated into wholesale markets with this mechanism. Now, this may not be a saving grace for all large projects -- but it means that the pressure of FIT reductions will be dampened as long as the premiums aren’t also scaled back too far. In the U.K., Renewable Obligation Certificates will also continue to spur some demand in this segment.

Commercial, Industrial PV and Self-Consumption

Commercial and industrial projects will face the same twin threats of rising costs and falling revenues. However, they have access to another potential source of revenue: retail electricity rates. While some commercial and industrial projects will still go forward under the FIT, self-consumption projects will become more common as long as policies evolve to better facilitate them.

The FITs fell below the cost for retail electricity in Germany this year, making self-consumption for commercial and industrial projects viable. The combination of high retail rates, good insolation levels, enabling regulation (such as net metering), and lowered system costs is emerging in several countries across Europe. Southern France and Italy (under 200 kilowatts) both offer some of these characteristics, and the U.K. may be on track as well. However, many challenges still remain for the self-consumption trend.

Residential PV Market

The residential market is the one that holds the most promise. Residential consumers are less price-sensitive, so the floor will not have as serious an impact. In Germany, the residential market has been steadily increasing, even as the FIT decreases. All across Western Europe, demand from the residential sector has been relatively steady. As installers lose out on opportunities in other market segments, they may rush to the residential space to take advantage of more favorable economics. In other words, developers may look to other domestic markets before moving out of the country.

It is worth noting that a potential impact of the price floor on the residential market could be consumers seeking out higher-efficiency products. As prices stabilize around $0.74 per watt, companies will try to differentiate themselves with more efficient products -- and consumers could be poised to benefit from this trend. Self-consumption in the residential market has also led to demand for other products, such as heat pumps and battery storage, to optimize on-site electricity usage.

Although there has been some discussion of market saturation, the main headwinds to the residential market are regulatory and financial. As long as prohibitive interconnection policies aren’t put in place, enabling mechanisms like net metering exist, and financing is available, the residential segment will continue to grow.

For more European PV market intelligence, see our free white paper on the EU-China deal here, and check out our Global Solar Demand practice within GTM Research.

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Adam James is a Solar Analyst for GTM Research covering global downstream markets and the CEO of the Clean Energy Leadership Institute. Previously, Adam was a Research Assistant for Energy Policy at the Center for American Progress, where he specialized in clean energy and international climate policy. You can find him on Twitter at @Adam_S_James.