The folks over at Lux Research crunched the internal-rate-of-return numbers and have found the hottest solar markets for investors in the first quarter of 2012 all share a common trait. They're mostly small, sunny European countries that managed to maintain high rates of return in 2011 in spite of a financial crisis that has plagued the continent.
Lux Research examined the internal rate of returns for the six major solar technologies globally to determine the hottest markets for the first quarter of 2012. A quick note on IRR, before the big reveal. There are a number of ways to define "hot market." Lux Research uses IRR, a ratio used to measure and compare the profitability of projects or investments. IRR is the discount rate at which the net present value of future cash flows from a capital investment equals zero. Importantly, IRR provides an "apples-to-apples" measurement to compare demand and project growth for solar across disparate markets.
The top 5 locations by IRR in the first quarter of 2012:
A couple of important caveats. Don't expect wild growth from these markets. The financial crisis in Europe could dampen growth considerably. More importantly, the four European countries and one U.S. state listed above have high internal rates of return between 25 percent and 30 percent, largely because of their location (more sun hours equals greater value) and available subsidies.
However, future growth in these markets is limited by the lack of energy demand. In other words, hot, sunny locales with substantial incentives only get you so far. Installers and investors in the solar industry also need to go where the demand for energy is big -- and growing.
Enter Asia. Matt Feinstein, the Lux Research analyst who led the Solar Demand Forecast, told me in a recent phone interview that a number of Asian countries have high rates of returns that closely trail the top five listed above. In the first quarter of 2012, the rate of return in Malaysia is projected to be 24.1 percent, the Philippines at 22.6 percent and Japan at 20.9 percent.
"South Asian countries are really looking good," Feinstein said. "It's where the future of the solar industry is."
Feinstein pointed to India as one of the fastest growing markets that is starting to see improvements in expertise and supply base. Legal expertise and project financing is lacking in many of these locations. But Feinstein sees that changing as demand for energy and some incentives come on line. It's already occurring and market growth in shifting away from European countries long dominant in solar, like Germany, and towards Asia and North America.