Sales in Europe’s solar market increased 23 percent in the last quarter of 2011, surprising many, according to a new report from NDP Solarbuzz. The report found that the steep decline in module prices led to the unexpected growth, which is expected to spill over into at least the first quarter of 2012.

Growth was biggest in Germany, which saw a 63 percent year-over-year increase in solar in the quarter.

“The strength of the market in the fourth quarter of 2011 took most people by surprise, Germany in particular, but also the U.K., for example,” said Dr. Alan Turner, Vice President of NPD Solarbuzz.

Overall, the European market saw an 18 percent increase in solar last year.

“The higher than expected annual growth resulted mainly from the last quarter,” Turner said. That the last quarter’s growth could pull the full-year results up so significantly also was a surprise.

The growth came despite major cuts to solar incentive programs in the some of the world’s leading solar markets of Germany, Italy and France. Each of which was slow to respond to the 40 percent drops in module costs in the last quarter, the report found. The end-of-year increase in business also was attributed to a mild fall and early winter that did not stifle solar installations in Germany.

Looking into the first quarter of 2012, the report anticipated year-over-year growth of 10 percent. The growth will be driven by demand in Belgium, France, Spain, and Greece. The United Kingdom could also see a short-term boom in the first quarter depending on a legal ruling on tariff incentives.

Growth in France in 2012 may be particularly interesting. For the first time, a utility-scale, 60-MW solar project is being developed under a 30 year power-purchase agreement (PPA) with a utility. Greece also is looking into that model for financing projects.

“Although a common concept in the US for example, PPAs have not played a significant role in Europe because the PV market there is driven by incentive tariff programs, most commonly Feed-In Tariff [FIT] programs,” Turner said. “If an attractive FIT scheme is in place, there is really little incentive to go to a PPA approach. However, as FIT scheme terms get tightened, the PPA approach is getting attention.”

Markets Germany and Italy will tighten in 2012, with a projected combined reduction of 37 percent in market size, according to the report. But because of the lower costs of solar and lower incentives in those countries, other countries, like Austria, Bulgaria, Czech Republic, and Romania, are set to grow.

Chinese module manufacturers also said that there could be a module shortage at the end of the first quarter of 2012.

But Turner said there wasn’t too much proof of that happening.

“Undersupply would only happen if demand were to sustain its ‘surprise’ growth. However, particularly in Europe—which still dominates the global market—the implication of the higher than expected growth last year is that policymakers are re-examining incentive levels and considering changes that will smooth out the kind of demand peak seen in Germany in the fourth quarter of 2011,” he said.

He projected the price declines seen in 2011 will slow in 2012.