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.

Spain gives perhaps the best case example of how a strong feed-in tariff system can either make or break the solar industry in which it is introduced. The Spanish feed-in tariff (FIT) was designed as a mechanism for incentivising investment in solar installations and was introduced in 2007. Traditionally, the high cost of solar plant and installation deterred investors who identified that despite the high levels of solar radiation across the Iberian Peninsular, yields would be minimal at best simply due to high initial outlays.

The FIT is a system which guarantees fixed, premium rates for solar producers who feed electricity in to the national grid. The high rate paid for each unit of electricity is met by the utility companies who in turn spread that cost over their customers. Therefore, in Spain with the introduction of the tariff system in 2007 with the rate of 0.44 euros offered for units of energy fed-in to the grid by solar producers the interest generated in the Spanish photovoltaic (PV) market was overwhelming. Indeed, combined with extensive coverage from the Spanish media along with Zapatero’s PSOE government’s commitment of making Spain the leading producer of solar energy in Europe by 2020, there was a phenomenal boom in the PV sector with the number of solar installations rising dramatically.

The UK government and in particular the Department of Energy and Climate Change (DECC) since passing the Energy Act in 2008 have been moving towards a similar tariff system and in June 2009 announced that they would introduce a Clean Energy Cash Back system in the first quarter of 2010. In order to do so, they have undertaken a meticulous consultancy process in order to ensure that the mechanism which is introduced does exactly what it is intended to do i.e. make the UK solar industry strong and viable in the long term by attracting investment in the young sector. Spain certainly offers an example of how to attract investment in the short term. However, the Spanish example also offers stark examples of how not to set up a tariff system for long term industry health. The essential problem with the feed-in tariff which was established in Spain was that it was unable to cope with market fluctuations which arose as a result of the initial success of the tariff.

A recent report by the New York Times highlighted the failings of the Spanish solar legislation. Problems stemmed from the fact that politicians expected a steady stream of investment over a period of years. However, the massive interest which was generated in the fledgling industry encouraged a wave of investment in the first few months. The massive take up of solar installations was unexpected and caused the Spanish government to reduce solar incentives by 30 per cent without warning. Because the Spanish feed-in tariff failed to be market responsive, many investors who had already ordered deliveries of solar product from China, were left in the situation that they had no market in which to install it. With regards to the Spanish legislation, Julie Blunden of SunPower Corp was quoted in the New York Times,

“The most important lesson, which everyone has learned, is that if you’re going to establish a feed-in tariff, you need to figure out how to make it market-responsive.”

This will be the key lesson for the British government, how to introduce legislation which encourages growth in the new solar industry without setting a tariff level which is too high. In Spain, the government’s level of 0.44 euros was artificially high and therefore created the problem of an influx of investment which the government could not manage. Therefore, when the PSOE government reduced incentives by 30 per cent with many investors having already ordered large quantities of solar plant from manufacturing bases in China, the proverbial rug was pulled right from under them. Talking specifically about the legislation changes which had the detrimental effects on the Spanish PV market Santiago Seage, the CEO of Abengoa Solar SA commented on the situation saying,

“What’s important for the regulation of solar is stability. Unfortunately, up to now, we have had too many changes and if the context changes, you can make mistakes in business decisions.”

Spain has already experienced a dramatic reduction in photovoltaic installation in 2009 with 375MW compared to 2008 installations of 2,500MW. Spain will now fail to live up to its ambitions of becoming the European Union’s leading renewable energy producer by 2020 essentially because Zapatero’s government has neglected the tariff scheme across the country. The introduction of a 500MW project cap along with the withdrawal of essential subsidies has seen the solar industry stagnate and since the new year, decline. Members of the solar industry in the UK will therefore be hoping that the British government emulates the example of Germany rather than Spain in the way that they choose to roll out the much talked about feed-in tariff next year.

China has reinforced its commitment to moving forward to a more progressive, green economy by agreeing with First Solar the construction of a 2GW solar facility in Ordos, Inner Mongolia. The construction of the large solar facility will begin in June 2010 and is expected to be completed by 2014 in a multi-phase operation expected act as a demonstration of the Chinese governments resolve to make giant leaps towards a renewable energy economy.

 With the solar feed in tariff legislation making the headlines in the UK under the guise of the Clean Energy Cash Back Scheme, the Chinese project will be taking advantage of a similar tariff system with the price of electricity guaranteed at a premium rate over a period of years. Tariff systems such as this have generally proved to be extremely effective means of generating investment in new solar sectors.

 Mike Ahearn, CEO of First Solar commented that,

 “The Chinese feed-in tariff will be critical to this project. This type of forward-looking government policy is necessary to create a strong solar market and facilitate the construction of a project of this size, which in turn continues to drive the cost of solar electricity closer to ‘grid parity’ where it is competitive with traditional energy sources.”

Certainly, it is expected that with the Chinese feed-in tariff policy in place, there will be a number of other large investments in the Chinese photovoltaic (PV) market over the coming months and years. China is also the largest manufacturer of PV product needed for solar projects around the world and is therefore attracting much interest from those wishing to provide turn-key products from manufacturing, construction and installation.

“This major commitment to solar power is a direct result of the progressive energy policies being adopted in China to create a sustainable, long-term market for solar and a low carbon future for China. We’re proud to be announcing this precedent-setting project today. It represents an encouraging step forward toward the mass-scale deployment of solar power worldwide to help mitigate climate change concerns,” announced Mike Ahearn.

With China and in particular the capital, Beijing under the spotlight in recent years with concerns over pollution and carbon emissions, China is now making a very powerful statement to the world that they are about to be at the forefront of the solar revolution.

In a bid to increase profitability among its offshore wind farms, China has introduced a feed-in tariff system designed to make the generation of electricity via wind farms economically viable. China has recently been a leading advocate of the tariff system as the Beijing government seeks to diversify both the economy and the means of energy generation. With the New York Times last week announcing that green power is taking root in China, the move to encourage the take up of wind power generation comes as no surprise as the Asian government is supporting all kinds of renewable energy, especially solar and wind.

The Chinese wind feed-in tariff system will inevitably attract investments in the offshore wind generation industry there with the hope that it will enable the clean, wind energy to compete with that generated via coal fired plants. The guaranteed premium rate which will be offered to wind generators will be met by the existing grid operators with the additional cost being spread over all electricity consumers. The idea is that bigger, more profitable wind plants will receive a more generous tariff rate in order to help them catch up with the bigger wind farms.

The tariff payments are set at around 0.51 Yuan the equivalent of £0.05 per unit of electricity fed in to the grid, depending on the size of the wind farm. Compared with the rate paid for coal fired electricity (0.34 Yuan) the wind farms will e set to receive a generous payment. The announcement by the National Development and Reform Commission (NDRC) stated that the scheme will,

“change current inconsistent pricing, foster clear expectations and facilitate investments in the sector”.

The previous system which operated regarding wind power electricity purchasing involved public bidding using low-rate tariffs which did not enable most wind farms to gain grid connectivity, a hindrance which meant that at least 20 per cent of China’s wind power producers were unprofitable. With the feed-in tariff system generally regarded as by far the most effective means of generating capital in green energy, China will be set to succeed in its bid to diversify its economy and become a major player in the world of green energy production.