Europe’s solar landscape changed forever in 2022, and managing the supply chain, grid and licensing constraints will be key to the continent’s solar energy future.
Talking about 2022 in the middle of 2023 may seem like old news, but the effects of the most pivotal year in decades in the energy market will be visible until 2030. The European Commission doubled solar energy targets to reduce Russian natural gas under its REPowerEU plan. The goal is 415 GW of total solar energy by 2025 and up to 750 GW this decade. The ambition is unprecedented: Europe wants to triple its capacity in eight years. Getting rid of coal is essential, and energy security has also become a priority within the EU’s solar strategy.
On the regulatory front, windfall taxes and caps on member states’ energy companies have increased risk premiums, particularly for projects backed by merchant solar and power purchase agreements (PPAs), with further expansions likely to slow construction.
With electricity bills rising by an average of 38% in the euro area over the past 18 months, the annual capacity growth of distributed solar broke last year’s records. Residential construction reached nearly 15 GW in major EU markets, while commercial and industrial additions reached 13 GW.
Power purchase agreements for companies
According to Wood Mackenzie’s baseline scenario, Europe will add nearly 400 GW of solar by 2030, meaning the EU will fall short of its target by nearly 150 GW – with current cumulative capacity of around 200 GW. The only way to close this gap is to address network, licensing and supply chain constraints.
Power purchase agreements for companies promote electricity-scale solar energy, because stricter environmental, social and corporate governance (ESG) requirements and structurally higher electricity costs encourage starting a business. Spain is still the largest PPA market in Europe, but volumes are accelerating in Germany, France and Poland.
Local opposition and permitting processes continue to slow growth, especially in Italy, and network problems are acute in the Netherlands, where congestion management has been used in recent years.
REPowerEU is investing in rooftop solar due to its modular nature and the vast untapped potential of the continent. The European Solar Rooftop Initiative aims for 52 GW to 58 GW of additional capacity by 2025 under a conservative scenario. This is an ambitious but achievable goal as retail electricity prices are structurally higher and component costs are coming back down. We predict that distributed solar’s levelized cost of energy (LCOE) will drop by an average of nearly 30 percent this decade.
With net metering being replaced by a less generous compensation for consumers’ electricity network exports, the European Commission’s toolkit for maximizing rooftop electricity is based on building mandates that will come into force between 2026 and 2028 and also support energy communities. It is unclear how many member states will apply the mandate, what exemptions will be granted, and whether additional capital grants or tax incentives will help take-up.
Nevertheless, household solar will keep pace until 2030, and the industry must attract low- and middle-income customers and housing collective systems. Energy communities help democratize residential solar energy.
Upfront costs are still the biggest barrier for households to enter the market. Third-party subscription-based ownership models could alleviate financial constraints and mitigate technology risks associated with sub-installations.
Heating and traffic electrification will be strengthened by 2025. Charging stations for heat pumps and household electric cars increase the use of solar energy in residential areas. As the home’s load increases, the electricity costs increase, which strengthens the roof electricity.
Upfront costs are again an obstacle, so heat pumps and electric car chargers require subsidies and interest-free financing, as well as bans on natural gas heaters and combustion engine vehicles.
Along with home energy storage solutions, the electrification of heating and traffic helps to harmonize home energy consumption and peak production profiles, which provides network flexibility. This is an invaluable benefit as governments gradually waive compensation for the export of surplus electricity. Maximizing own consumption only increases.
In the field of commercial solar energy, the 2026-2027 roof authorizations for commercial buildings are significant growth factors. and retail electricity price fluctuations and improvements in installation and operating cost efficiency.
Prices are critical
The instability of the supply chain poses a significant risk to the increase of solar energy in different segments. Equipment cost inflation since 2020 has already led to project cancellations and auction undersubscription across Europe, as ceiling bid prices remain low compared to LCOE levels and corporate PPA prices.
However, the prices of photovoltaic components have started to fall and will continue to fall as demand and supply stabilize. But this story of overall cost reductions could look different if the European Commission achieves its goal of allowing domestically-made equipment to be put up for public auctions, raising costs for developers.
This localization strategy is partly a response to the US anti-inflation law, but it is also an incentive to diversify Europe’s solar technology supply away from China in an environment of heightened geopolitical tensions. If these efforts are strengthened and complemented by local content requirements, we could see solar component prices increase by 10 to 40 percent. It depends on how much the EU re-enforces the entire solar manufacturing supply chain.
About the authors: Juan Monge is a principal analyst in Wood Mackenzie’s electricity and renewables team covering distributed solar market developments across Europe. Prior to his current role, Monge was Senior Conference Content Manager, leading content development for Wood Mackenzie/Greentech Media’s energy transition conference portfolio in collaboration with WoodMac’s research managers.
Daniel Tipping is a solar analyst in the energy transition practice at Wood Mackenzie, focusing on the European PV market and PPA trends. Before joining WoodMac, Tipping worked as an offshore energy analyst at a consultancy in London, where he also helped forecast the dynamics of wind turbine vessels. He graduated from the University of Bristol with a master’s degree in earth and water engineering, specializing in solar and renewable energy technology.
This copy was amended on 31/05/23 to show that the European Solar Rooftop Initiative is aiming for 52 GW to 58 GW of new generation capacity instead of the “nearly 60 GW” stated in our print edition..