New Jersey and Portugal, almost bookends on either side of the Atlantic Ocean, show promise as two of the hottest potential markets for solar internal rates of return (IRR). That’s according to Lux Research’s Solar Demand Forecaster issued on Sept. 6, which projects growth for the leading photovoltaic technologies through to 2016.

The report found that New Jersey had the highest potential IRR, followed by Portugal, Australia, Italy and India, in that order. IRR is a key figure investors use to evaluate whether to invest in a project. Potential investments or projects with high projected IRRs are the most desirable for investors.

“Put simply, it provides an apples-to-apples metric for investors to compare demand and project growth for solar across disparate markets,” Lux said in a press release.

“This research is more about the potential for strong solar markets,” said report author and Lux Analyst Matthew Feinstein. “We are using levelized cost of electricity analysis compared with local retail electricity rates to calculate IRRs and general competitiveness. However, these don’t take into account a market’s ability to finance solar, a low overall energy market, like in much smaller countries, or stability over time—which may shy investors and developers away.”

Perhaps that’s why there hasn’t been much talk of Portugal in the past.

“Portugal has been on the radar,” he said. “It has good irradiance and subsidies, and its proximity to other strong European markets bode well for the country.”

The country’s IRR for major solar technologies could create a market installing nearly 400 megawatts annually in 2016.

“But financing in the country has always been a major constraint—this is why the actual installation numbers don’t match up,” Feinstein said.

While Portugal may soon be a much larger market for photovoltaics, for now Italy and Germany remain Europe’s most stable markets, with returns hovering near 9 percent and 22 percent through 2016, respectively, because of their annual solar incentives step-downs, according to Feinstein.

In the U.S., New Jersey topped the list because high prices for solar renewable energy credits (SRECs) pushed IRRs into the 40 percent range in 2010 and early 2011, according to Lux.

But it will begin to suffer because of a dramatic oversupply in SRECs, which may force pricing collapses. California’s photovoltaic market, on the other hand, will see steady growth because of its step-down incentives and renewable portfolio standard laws.

Also emerging in the research is Australia.

“Australia is offering pretty good incentives, though I believe their distributed incentives are coming under fire—favoring more of a utility-scale market, like that 10-megawatt project,” Feinstein said.

However, Australia needs to entice solar companies to build offices and production facilities to further push market demand, according to Feinstein.

While Lux doesn’t include the impact of step-down incentives in the research directly, it is an important consideration for investors, according to Feinstein.

“Particularly in those geographies looking to build a solar industry within their borders, not just import panels,” he said. “Stable returns over time are very much by design in countries like Germany and Italy, as system-cost reductions keep IRRs rising to counter step-downs in subsidies. This will help these markets remain strong in the near-term.”

Image courtesy of NREL.