A reduction in the price of solar panels means the return on investment for solar energy installations is better than ever in Germany. In response, the construction rate in the second half of this year has skyrocketed. Toby Ferenczi discusses the implications for the world’s largest solar economy.

 What would you say if your financial advisor told you about an investment product that had guaranteed returns of 15%, was extremely safe and was government backed for 25 years? If you happen to live in Germany you may well be being told just this. Under Germany’s Renewable Energy Act (the EEG), anyone with a solar photovoltaic system can sell the energy produced to their local utility at a fixed and elevated price (in English this is often called a feed-in-tariff or clean energy cash back scheme). Germany introduced this scheme in earnest back in 2004, and since then the country has been the world’s largest solar energy market (except in 2008 when Spain introduced their own feed-in-tariff) meaning that over half of the world’s solar panels are installed in Germany. So if solar has been booming in Germany since 2004, what’s so special about what’s happening in 2009? The reason is that this year could well be Germany’s biggest year for solar installations by a factor of two, despite a major recession.

 According to the Münchner Merkur, a local Munich paper, the utility E.On is currently connecting 200 solar installations to the electricity grid in Bavaria every day, a level so high that it is struggling to keep up with demand. One leading industry analyst claims that installations in Germany will reach close to 4GW this year; equivalent to a market size of €16bn and a surface area the size of 4000 football fields. This is particularly staggering given how quiet the industry was at the beginning of the year when no banks were lending and investors were nursing their wounds. Since the end the second quarter however, many people have become aware of the window of opportunity, including everyone from families to major investors. Most installations (80-90% of market) are small rooftop installations, but some of the largest solar parks in the world are also currently under construction in Germany.

 The explanation for the surge comes from simply looking at the return-on investment. Under the EEG, the feed-in-tariff is supposed to decrease for new installations each year by around 10% with the hope that eventually solar energy will survive without subsidy. In the aftermath of the financial crisis, the price of solar panels fell by 30% or more, meaning that the amount of money you can get back from your investment is unprecedented. Many Germans now appear to be taken with the idea of investing in a solar electricity system, something they can see and touch, rather than the ambiguous stock market that hurt them so badly.

 There is of course a dark side to this solar energy bonanza. Whilst the feed-in-tariff was supposed to create an economic incentive for renewable energy, it wasn’t supposed to help rich people get richer. Supporting the scheme costs the German taxpayer a significant amount, so a policy that creates an unbeatable financial product for people with access to roofs or land raises some ethical questions. Several reports of the ruthlessness with which landowners pursue the construction of large power plants have emerged. Millions of euros are at stake in making sure solar parks are finished before the year-end to have access to this year’s feed-in-tariff, and some landowners have been accused of not taking the well being of local communities into account.

 The newly elected German government will certainly be scrutinizing the situation very closely as they are expected to make a decision on the feed-in-tariff reduction in the next few weeks. Anti-feed-in-tariff lobby groups claim that the law is now simply handing money to the swathe of Chinese manufacturing firms that can now produce solar products at lower cost than the German firms.

 The feed-in-tariff will undoubtedly and necessarily take a big cut next year, but this will hopefully lead to more sustainable growth of the solar industry. As the price of solar electricity decreases further, the moment when it competes with conventional energy on its own terms will be brought forward. When consumers are able to make bumper returns from solar without the governments help, that will be an investment product worth fighting for.