My previous article showed that there has been an unprecedented level of investment in renewable energy over the last decade. Let's consider the drivers for this in more detail and look to the future.

Policy measures introduced in Europe and North America kick-started the market for wind turbines and solar photovoltaic (PV) cells and helped build what are now multi-billion dollar global industries. More recently, China has taken over as the main destination for investment and has also become a major manufacturer.

Policies are often categorised as either 'push' or 'pull' measures. The former include incentives such as R&D funding and tax breaks, while the latter provide a price signal for deployment via feed-in tariffs (FITs), for example.

It is unclear how long it would have taken the industry to reach critical mass without such policy measures. In the last two and a half years, the global solar PV industry, for example, jumped from 50 gigawatts (GW) of installed capacity to just over 100 GW, yet it took decades to add the first 50 GW.

As we gain experience with producing wind turbines and solar PV modules more efficiently and at a larger scale, and investors become more comfortable with financing projects, the cost of each unit produced starts to fall.

Raw materials costs also have an important role to play. If we look at PV, the decline in installed system prices is primarily due to falling costs of producing modules, which in recent years has at least partly been driven by the sharp fall in polysilicon prices. Polysilicon prices fell 65% in 2011 and around 40% in 2012, according to a US solar industry publication. Prices are expected to recover in the coming years, however, as demand starts to outstrip supply.

In 2008 to 2012, annual average PV module prices on the global market fell by $2.60/W according to the US Department of Energy , with this accounting for 80% of the overall decline in installed prices. By comparison, the costs of hardware such as inverters and costs associated with customer acquisition and financing have remained flat. These 'balance of system' costs are expected to fall further in the coming years.

By 2020, the US is aiming for a total installed cost of $1/W for utility scale PV, $1.25/W for commercial-scale, and $1.50/W for residential installation prices.

Australia has been part of the global solar boom. By December 2013 around 3 GW of capacity had been added, or around 1.2 million systems. The vast majority of this has been in the residential market. The average price of an installed 1.5kW residential system in Australia ranged somewhere between $2.25-2.75/W in 2013, according to Solar Choice .

As in most European markets, the initial boom here in Australia was brought on by generous FITs introduced by a number of state governments. This proved to be both economically and politically unsustainable and all the FITs have since been removed. However, the PV market continues to be supported by the federal Renewable Energy Target (RET) scheme.

So where is the renewables industry heading?

In its Medium Term Renewable Energy Market Report  from 2013, the International Energy Agency predicts that global renewable generation will reach 25% of power generated by 2018, an increase from 20% in 2011. Driven primarily by the rapid growth in wind and solar PV, renewables are predicted to become the world's second most important source of electricity aside from coal by 2016.

In January this year, a Deutsche Bank report  predicted a 'second gold rush' in the global solar PV market over the next two years. It claims that solar is now competitive without subsidies in at least 19 markets around the world and that more markets will reach grid parity as installed solar system prices continue to decline.

In the bank's report, Australia is identified as being one of the countries where grid parity is becoming a reality. However, the return on investing in a solar PV system in Australia is still not as attractive compared with some other markets. According to the report, the internal rate of return of solar is around 3.4% in the residential market in Australia compared with 10.6%, 12.7% and 13.2% for Japan, Italy and California respectively. These are markets with higher end-user electricity prices and lower installed system costs.

New business models such as leasing arrangements are expected to drive the next phase of the market here in Australia, particularly in the commercial segment. These models have been highly successful in the US but are still relatively untested here. In the meantime, the industry is focused on the upcoming RET scheme review.

Photo by Online Photography School.