This week the economist published an article criticising the German feed-in-tariff. The article wasn’t totally atrocious and it highlighted some of the current issues facing the German solar market. However it did leave out some key points that would have changed the articles’s conclusion. Being a fan of both the Economist and the feed-in-tariff I had to respond.

In addition, although I didn’t mention it in my response as I hate nit-picking, the author made a factual error by implying that the solar panel’s made by First Solar incorporate silicon. Since the key differentiator of the world’s largest solar manufacturer is that they don’t use silicon, this error raises doubts about the author’s level of expertise or research.

You can read the article using this link and my reply is shown below.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=15213817

My response:

Sir,

Whilst your article makes some valid comments, it misses two key points.

Firstly, according to the Bundesnetzagentur (Germany’s grid regulator), large utility-scale photovoltaic installations accounted for fewer than 20% of the solar market in Germany in 2009. The rest of the market is made up from smaller rooftop systems. This is not the case for wind energy (since their performance decreases disproportionately with size). This means photovoltaic installations compete for the retail electricity price rather than the wholesale electricity price. Since retail prices can be four times greater than wholesale ones, solar energy has an easier cost target than wind energy.

The second point is that the cost of energy from photovoltaic systems is predicted to decrease at a faster rate than the energy from wind turbines. The basic components that make up a wind turbine have been costed-out for far longer than those making up a solar installation. According to the European Photovoltaic Industry Association, economies of scale and technological innovation will bring solar energy to cost competitiveness with regular grid prices by the middle of this decade, including in cloudy Germany. This means the end of subsidies is well-within sight.

It is clear that the German solar market became overheated in 2009, and in fact many within the industry have themselves called for the feed-in-tariff to be reduced faster than originally planned. However considering the above factors, alongside the fact that many of the world’s leading solar companies are German as a result of subsidy, Germany’s pioneering feed-in-tariff should be considered a resounding success.

‘Where should we put solar panels anyway?’ This is a question I’m often asked and to which I always reply, ‘everywhere!’ Glibness aside, what the question is usually getting at is to do with market segmentation. There are many different types of photovoltaic (PV) installations. One of the remarkable aspects of solar technology is just how scalable it is. Solar panels are used in both pocket calculators and in giant solar farms covering hundreds of hectares. The economics of each application are very different however and it is important too understand which applications represent the largest markets.

As I’ll discuss the, UK feed in tariff is designed to strongly influence the type of solar installations built in the UK, but what kind of solar installations are best and what should we expect in the UK?

Let’s look at what’s going on in other countries around the world. In Germany, the world’s biggest solar market by far this year, grid-connected solar systems are defined in three categories; residential, commercial and utility scale. Residential scale is the smallest type of installation and refers to all installations less than 10kW (~60m2) typically found on private houses. Commercial scale refers to installations between 10kW and 100kW (600m2) typically found on the roof of a factory, office or warehouse. Utility scale refers to all installations above 100kW and these are typically ground-based installations on fields (also known as solar farms) and can cover hundreds of hectares.

These three types of installation are quite different from each other in terms of price and the technology used. Which type of installations are the most popular? Figures published by the Bundesnetzagentur (the German grid regulator) state that the market in 2009 is divided into 17% in the residential scale, 17% in utility scale and 66% in commercial scale. This means that because residential installations are smaller, there are many more of them in number than utility scale installations.

Large plants are cheaper due to economies of scale, however the planning process can be long and complex, and it can be difficult to find banks willing to loan money for such projects. Rooftop plants on the other hand have a much easier time getting planning permission, and often are fully funded by the owner, so don’t require a loan. This explains why commercial scale rooftop plants dominate the market.

In the US, rooftop installations also dominate, and there is an additional reason why. In the US there is no feed-in-tariff, rather a complex array of grants that vary from state to state (California has the best).

Solar installations generate money by selling electricity to the energy utility at the regular unsubsidized rate. This means if you generate energy at the place where you use it, you get the same price of electricity that you would have to buy it at, the retail price. On the other hand, if you have a utility scale power plant, this requires the utility to distribute the energy for you and you only get the price that other types of power stations get, the wholesale price. Since wholesale electricity prices are roughly half that of retail electricity prices, its much better to have a solar installation in the same place as where you use it, i.e. on your roof.

So what does this mean for the UK? Well, as we are led to believe from the governments initial announcement, the UK feed-in-tariff will be strongly weighted towards smaller installations. This means that the larger your installation the less you will be paid for the electricity it generates. This cutoff is quite severe, with the rate dropping from 36p to 31p per kWh for installations over 4kW, to 28p for installations over 10kW and down to 26p for installations bigger than 100kW.

The argument behind this is so that all installation deliver an equal return on investment. This implies that the government assumes the cost of energy from a solar installation is 14% lower for a 5kW installation than for a 4kW installation.

Where does this assumption come from? Data from Germany suggests that this is not the case and the 14% drop does not exist. Cost of energy does fall with increasing scale but by how much is unclear and changes constantly with prices of various technologies.

I can understand if the government wants to ban solar farms (although having visited several under construction in Germany last month I think it’s a real shame that we don’t have a single solar farm in the UK, even just from an educational standpoint) but the current FiT structure does something else. It restricts the most effective type of photovoltaic installation, namely commercial scale rooftops.

Germany’s flat feed-in-tariff structure and the US’ grant scheme both allow the market to evolve naturally. If large rooftop installations make the most sense economically then why not let this segment grow fastest? Trying to engineer a feed-in-tariff so that everything grows at the same speed will inevitably slow growth overall.

Let’s hope changes are made while there’s still a chance.

Consultants Ernst & Young have released their annual global renewable energy country attractiveness indices with the big news being that China has knocked Germany from its number one spot, a position which they have enjoyed for the last seven years. The report indicated that in the lead of attractiveness are the US and China followed by Germany, India and Spain.

With various leading economies around the globe vying to become leaders in the renewable energy sector the Ernst & Young indices provides a tangible demonstration of how attractive the competing markets are to investors based on the measures taken by the respective governments. The commitments by the Chinese government to slow climate change through the reduction of carbon emissions has certainly been reflected in their rise in the investment indices.

Once the pariah of the international community with regards to fighting climate change, the Beijing government has demonstrated through legislation that they have a very earnest desire to slow the effects of climate change.

Recently the Chinese government announced 1.8 GW of solar installation throughout the vast country with investment incentivisation coming in the form of the Golden Sun subsidy scheme designed to transform the Chinese solar market from a purely manufacturing base into a world leader in solar PV installation. This, the report indicated was the key feature in China moving up the table from sixth place in 2007 to the joint number one position enjoyed today.

The report will come as an early Christmas present for the nations perched in the top 5 positions as it gives investors a comprehensive assessment of the most viable markets in which to invest based on criteria such as existing infrastructure, incentives and location benefits.

With the success of China as a potential solar PV market, analysts in the UK will not have missed the direct correllation between government action and market attractiveness, something which the report explicitly highlighted. The UK enjoyed limited success, moving up one point to sixth, an increase based on limited government action taken so far in the form of the creation of the Department of Energy and Climate Change (DECC), the introduction of the Energy Act in November 2008 and the recent announcement of the Clean Energy Cash Back system, essentially a feed-in tariff to be introduced in April 2010.

The UK’s position of sixth could be bettered by the next indices published by Ernst & Young at the end of 2010 but will depend greatly on the initial successes of the UK market in the light of the newly implemented tariff system. At the present moment members of the lobby group We Support Solar are arguing that the UK government will have to increase the tariff rate if the UK is to compete with the emerging solar tiger economies with manufacturing bases much closer to home.

For more information on the Ernst & Young global renewable energy country attractiveness indices, please visit:

http://www.ey.com/Publication/vwLUAssets/Industry_Utilities_Renewable_energy_country_attractiveness_indices/$file/Industry_Utilities_Renewable_energy_country_attractiveness_indices.pdf

As a follow up to the recent article on inverters, I thought it would be a good idea to warn you that if you wanted to buy an inverter in time for Christmas I’m afraid you’re out of luck. As result of the huge demand for residential PV systems Germany described on this site below, it is virtually impossible to find an inverter of any size or manufacturer in the whole of Europe at the moment.

The big manufacturers; SMA, Fronius, Mastervolt and the like are all completely sold out and are unclear when their next shipments can be made. Wholesellers are operating on a first come first serve basis and taking orders three months in advance. This means that if you were thinking of installing a PV system in the next few months but haven’t ordered your equipment yet you’d better get a move on. We’ve even heard reports of SMA shipping inverters to German customers without LCD displays in efforts to meet demand. (apparently the displays will be delivered in a few months time when they can be clipped on).

I guess the shortage is a good sign that the solar industry is alive and kicking. However if the feed-in-tariff is announced in the UK soon and it turns out to be a good one, there’s going to be a lot of frustrated people out there unable get involved for the lack of an inverter.