Slashed subsidies send shivers through European solar industry

COPENHAGEN -- Generous government subsidies made cloudy, chilly Germany the world's biggest market for solar power.

More than half the world's solar energy is produced in Germany, where the solar industry employs 80,000 people, even though the country sees just an hour's worth of sun on an average December day and gets half the annual sunshine of Arizona.

But the party is about to end.

Germany, Spain, Italy and France -- the industry's four biggest markets in Europe -- are slashing so-called feed-in tariffs for solar power, spurring industry complaints that home-grown companies will struggle to compete with low-cost Chinese producers.

On July 1, Germany will cut the price paid for electricity from roof-mounted solar panels by 16 percent and that from larger solar power stations by 15 percent. The cuts will come three months later than originally planned as a concession to producers who said they needed more time to prepare for the new market conditions.


"Things were too liberal in Germany," said James Britland, an alternative energy analyst at Allianz RCM in London. "The government realized it was costing them too much money. The volume rise was too big as installations were way higher than expected. Spain had a gold rush in solar, and Germany saw a similar thing was happening to them last year."

The German solar industry association, which has 800 members, says cutting the subsidy would kill the industry's momentum at a time of fierce competition with Chinese manufacturers making a play for expected growth in the U.S. market.

"The industry will be threatened by a wave of insolvencies and the loss of thousands of jobs," said Carsten Körnig, the association's managing director. "This endangers the existence of many companies."

Currently, utilities must buy solar power at 39 euro cents (52 U.S. cents) per kilowatt hour for 20 years. That is nearly eight times the market price, and the difference is passed on to consumers, who pay an average $5 extra each month in electricity fees per household.

The feed-in tariff turned 500,000 Germans into profitable residential energy producers. They proudly say solar energy has got nothing to do with heat, as the modules produce energy even in diffuse light, albeit not as much as they would under bright sunshine. According to industry reports, Germany's photovoltaic energy production rose from a paltry 32 million kilowatt hours in 2000 to 4.4 billion kilowatt hours in 2008 as subsidies rose from almost nothing to more than €1.5 billion per year.

It is all too much, too soon, as far as the government is concerned. Solar power delivers close to 2 percent of Germany's electricity now, or the equivalent of 1.5 million homes -- nearly double the 2008 amount. German magazine Der Spiegel reported that more than 3,000 megawatts' worth of solar panels were installed in 2009, more than four times the amount the industry had previously forecast.

"The German industry says they cannot survive in a competition with the low-cost Chinese manufacturers of solar panels, but they need to find a way to be a premium product with a strong brand," said Michael McNamara, an analyst at Jefferies in London. "Right now they're just painting a gloomy scenario as a negotiation tactic with the government."

Spanish market collapses

Germany's government feared subsidies were pushing its solar market down the same path as that of Spain after the two countries received about 75 percent of the world's photovoltaic panel installations in 2008.

Spain's long-term goal had been to produce 400 megawatts of electricity from solar panels by 2010, but it reached that milestone by the end of 2007. In 2008, the country connected 2,500 megawatts of solar power into its grid and briefly overtook Germany as the world's top solar market.

Then the Spanish government cut subsidies, and the market collapsed. Spain cut the rate paid for photovoltaic power by about 29 percent effective Jan. 1, 2009, and put a limit on new solar installations.

The Spanish government is now discussing even more cuts from 2012 rates in return for letting developers build more solar parks. Developers were hoping the additional cuts would be limited to between 15 and 25 percent, but the newspaper Expansion reported this week the government is considering cuts by as much as 40 percent.

"The solar industry wouldn't have survived losing Spain and Germany back to back," McNamara said. "The key here is the German market will remain open and uncapped, unlike Spain's."

Even with subsidy cuts, German solar capacity will still grow from 9,000 megawatts this year to an estimated 66,000 megawatts in 2030, the government estimates. Meanwhile, other key European solar markets are seeing government subsidies slashed this year as well.

France cut its solar subsidies in January by 29 percent after the installed capacity more than doubled from 105 megawatts in 2008 to 250 megawatts last year. Electricity from rooftop solar panels will now be fed into the grid for 57 U.S. cents per kilowatt hour, down from 80 cents in 2006. The new subsidy system will pay more than that for building-integrated installations on schools and health centers and less for ground-based photovoltaic plants.

Italy, considered by analysts the first market where solar is likely to become competitive without subsidies, is considering a gradual decrease in tariffs between 2011 and 2013. The current scheme guarantees operators between 48 cents and 65 cents per kilowatt hour, depending on the type of plant and capacity. That is about six times more than coal and natural gas-powered plants charge. Last year, Italy installed 574 megawatts of new photovoltaic capacity, taking the nation's total capacity to more than 1,000 megawatts.

Italy's cuts did not stop U.S.-based SunEdison, a division of MEMC Electronic Materials Inc., from announcing this month that it would invest between $270 million and $340 million to build Europe's largest photovoltaic solar plant near Venice. The 72-megawatt facility, which will take up 9 million square feet -- or as much as 120 football fields -- will generate enough energy to power 17,000 homes upon completion by the end of this year. Currently the largest solar plant in Europe is in Olmedilla, Spain, at 60 megawatts, followed by one in Strasskirchen, Germany, at 50 megawatts.

"The Italian solar market will be the first to not need subsidies to break even," McNamara said. "It's sunny there and they have high electricity prices. They are close to grid parity now, and they may break even by the end of this year. But that means they still don't yet have a profit margin without subsidies. Subsidies will remain critical for a few years."

Pressuring solar panel prices

The subsidy cuts are likely to continue to push the cost of solar panels lower, analysts say.

Last year, panel costs fell by more than 50 percent to below $2 per watt due to cheaper raw materials. This year, developers facing lower feed-in tariffs in Germany and elsewhere might agree to pay no more than $1.55 per watt, analysts say.

Germany accounts for roughly 40 percent of the industry's consumption and each of the major publicly traded solar companies -- including First Solar Inc., SunPower Corp., Trina Solar Ltd. and Suntech Power Holdings Co. Ltd. -- derives at least a third of its sales from Germany. Their shares have fallen between 9 percent and 23 percent so far this year.

"For investments to remain profitable under the lower subsidy scheme in Germany, solar module prices need to drop another 25 percent to 30 percent," McNamara said. "That will not happen this year. We think module prices will fall only 15 percent."

Manufacturers of photovoltaic panels with cheaper production facilities in China are best placed to survive the lower profit margins and capitalize on market growth. But even Chinese producers of solar panels may see their revenues fall 40 percent in the second half of this year because of the reduction in the German tariffs, which is likely to lead to more mergers and acquisitions as weaker companies are swallowed up by stronger ones, analysts say.

"The industry remains very active and the subsidy cuts will bring grid parity closer," said Britland, the London energy analyst. "China and India are potentially huge markets. But the winners are always going to be the low-cost Chinese producers at the expense of the German companies."

U.K. boom?

With slower growth in Europe, solar panel manufacturers are looking at China and the United States to increase sales. The two countries are expected to drive the building of at least 5,000 megawatts of solar installations between 2009 and 2011 as they stimulate solar power as part of plans to boost economic growth, according to a report by investment firm CLSA.

Germany is expected to remain the world's biggest solar market until 2013, when the United States will catch up to it and China will be slightly behind. The United States is expected to install at least 1,000 megawatts this year. In October, California became one of several U.S. states to approve a feed-in tariff for solar-energy producers. Vermont and Oregon are also running various incentive programs.

Meanwhile, feed-in tariffs may create a booming market for solar power in another country more famous for rainy weather: the United Kingdom.

Britain will start subsidizing photovoltaic power to the tune of 62 U.S. cents per kilowatt hour -- or more than 10 times the price of regular electricity -- starting in April under an incentive plan that will pay homeowners and communities for power both used on-site or fed into the national grid. The British government expects solar power installations to balloon from 5 megawatts last year to 250 megawatts by next year, creating as many as 30,000 jobs in the process.

Is that kind of growth healthy or sustainable? The jury is still out.

"The U.K. is an emerging market for solar," Britland said. "In a few years it may end up like Germany, but it's too early to tell now."

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