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EU Debt Crisis, Quantitative Easing and the U.S. Solar Market

published: 2011-07-25 9:30

For the last several years, a combination of smart feed-in-tariffs and falling prices has positioned the EU, led by Germany, Italy, and the Czech Republic, as the world leader in photovoltaic (PV) solar energy developments. In 2010, solar installations increased 110 percent over the previous year.

The Euro zone has 75 percent of the world's installed capacity, which represents 30 GW of solar generated electricity. Germany leads the pack with 7.2 gigawatts followed by Italy (2.3 GW), Czech Republic (1.5 GW), and France (719 MW).

The EU's solar growth in the first half of 2011 has been a different story. Revisions in feed-in- tariff polices have dampened demand, which has led to a stockpile of inventory and falling modules prices. In addition, the EU debt crisis continues to expand and dominate financial headlines, even after a significant bailout package. This event could have long-term implications for the solar industry in the Euro zone as well as other markets.

EU Debt Crisis

When the extent of Greece's financial problems first became known, many EU policy makers contend that even combining the three worse economies in the EU - Greece, Ireland and Portugal, the affect of a recession or restructuring the countries' debt would not have enough punch to cause turbulence in the EU or global economy. The tune has changed; European governments have come to the realization that the Greek crisis poses significant risks that have the potential to spread throughout the continent.

In fact, Greece, Spain, Portugal, and Italy have suffered from the recession more than any other member states of the EU. Greece's economy constitutes about 1.5 percent of the EU economy. German and French banks, (the EU's two largest economies) hold a significant portion of the country's $450 billion sovereign debt. The chief economist for the European Central Bank (ECB), Juergen Stark, stated that if Greece defaulted on its debt, it could lead to a “Lehman” crisis for the EU banking. A default could stymie growth, create massive job loss, and produce other economic hardships.

While Greece seems to command most of the attention, Italy, which has the Euro zone's third largest economy, has severe debt problems of its own. The country has an economy four times the size of Greece and Ireland combined. One financial expert said that the EU banking system could not survive a bailout of the size the Italian economy would require. The EU debt crisis seems to be contagious; Spain's credit costs have reached a nine-year high. Financial experts have also raised about France's debt problems.

What do potential debt defaults mean for the EU solar market?

Negative changes in the economy affects investment flows for solar technologies. The balance sheets of solar manufacturers and developers will suffer because of cost of capital increases and access to credit becomes more difficult. In addition, expect a debt crisis of any magnitude to result in governments making substantial cuts in incentives that have driven the phenomenal growth of the solar industry.

QE3 and the U.S. Solar Market

The U.S. banking system does not have as much exposure in Greece as its EU counterparts. Nonetheless, a default would cause a disruption in worldwide credit markets, which could potential spell “recession” for the American economy. Solar and other exports to the EU, especially Germany and Italy, which are already soft, will decline. Solar developers and manufacturers, at the least, will experience an increase in borrowing costs. A worse case scenario - the credit market could dry up as occurred in 2008.

Since the credit crunch of 2008, the Federal Reserve has propped up the weak U.S. economy with a series of short-term stimulus policies, including two rounds of “quantitative easing” (QE). QE refers to a monetary policy in which the Feds uses a government check to purchase securities. In theory, the security sellers deposit the checks in their banks. The banks then loan money to businesses and consumers, which expands the country's money supply and grows the economy.

In 2009, the Fed bought $1.25 trillion of mortgage-backed securities and $175 billion of agency debt securities in carrying out QE1. The quasi-public agency also purchased securities. QE2 provided $600 billion dollars to support the economy. To date, the various “fixes” have not created the momentum and jobs the Fed's envisioned for the overall economy.

The solar sector has been an exception. Earlier this year, the Solar Energy International Association (SEIA) reports the solar industry as America's fastest growing industry. While the U.S. GDP grew 2.8 percent in 2010, the solar sector experienced a 67 percent expansion in market value. Solar and other renewable energy resources have directly benefited from the American Recovery and Reinvestment Act of 2009, which included loan guarantees, tax credits, and other incentives. However, other sectors economy, especially housing, have not had the robustness required to help meet growth targets.

In fact, after stabilizing for a few months, the unemployment rate rose to 9.2 percent in June.

In addition, the Feds lowered the economy's growth range projection from 3.1 to 3.3 percent to 2.7 to 2.9 percent. Based on these figures, Federal Reserve Chairman Ben Bernanke stated in his last conference that a third round of quantitative easing might be on the horizon.

Quantitative easing creates more liquidity in the financial markets. However, recent history (2009) has demonstrated bankers refuse to make loans when uncertainty exists in the financial markets. A default by a member state would create more chaos in the credit markets than what occurred after the Lehman Brothers failure.

Absence a policy that obligates them to make loans to businesses and consumers, most bankers are more likely to use the funds to strengthen their own balance sheets and purchase cheap assets than lend the funds to finance rooftop installations or large-scale solar developments or installations.

Even without significant support from the banking industry, solar continues to show strength through the first quarter of 2011. However, the expected surge in demand to make up for decline in the EU market has not materialized as expected, according to Axiom Capital analyst Gordon Johnson. Industry insiders expect the U.S. market to double its installed capacity over the 878 MW completed in 2010, due mainly to the number of utility- scale projects it will add to the grid.

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