The pain in the global solar market today can be traced back to the moment when Europe’s commitment to subsidising renewable energy began to surge about eight years ago.

Germany, a green power pioneer, led the way in 2004 when it strengthened its subsidy system by boosting its solar photovoltaic feed-in-tariffs, the name for the payment of guaranteed premium rates for renewable electricity. Other countries followed, including Spain and Italy, setting off what became the solar PV boom years of 2004 to 2008.

Manufacturers started building new factories to cash in on the industry’s explosive growth, initially in Germany and then in the US and especially China.

At first, the burst in supply was matched by demand, but as the years went on, this changed.

“All manufacturers around the world ramped up production from 2004 and lots of new entrants came in,” said Jenny Chase, head of solar analysis at Bloomberg New Energy Finance, the research group. “Then they found that since everyone else had done the same thing there was massive overcapacity.”

Average solar panel prices, which had been more than $4 per watt in 2008, began to tumble and by the second quarter of this year had fallen to just 76 cents.

That spurred more installations, which increased from a global total of about 16 gigawatts in 2008 to more than 70GW by the end of last year. This meant countries in Europe began meeting their solar power targets faster than expected and many started ratcheting back their subsidies.

Global demand kept growing, but not enough to match supply. This year, there is expected to be up to 35GW in demand, but an industry capable of producing 50GW of solar cells and modules.

“Capacity has been outstripping demand for some years but not as much as this year,” said Ms Chase. “This is the worst year I’ve ever seen and I’ve been following this industry since 2005.”

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