In its efforts to make a quick course correction, the German ship of state may inadvertently be navigating into turbulent straits that could capsize its own solar industry. At particular threat are the module manufacturers. The residential market segment is also expected to contract significantly
A recent report released by Berlin-based Apricum GmbH, a strategic management consultancy that specializes in cleantech and renewable energies, reveals the possible ripple effects of the government’s proposed feed-in tariff (FIT) policy – now scheduled for implementation on April 1. And the findings are daunting. According to the analysts, the new policy could nearly swamp two segments of the nation’s solar industry: large-scale ground-mounted installations and photovoltaic manufacturing.
No room to maneuver for ground-mounted
Under the proposed FIT plan, large-scale project developers that finish installations by June 30, 2012, still will be eligible to receive a subsidy for a full 20 years. Starting July 1, sponsors of ground-mounted systems that generate more than 10 megawatts (MW) will not be entitled to funding and will have to sell their output directly on the wholesale markets.
To date, the largest commercial ground-mounted deployments have been in southern and central Germany, where land is at a premium; but irradiation is higher, enabling systems to operate at full capacity for relatively extended periods of time. On warm summer days, especially around noon, southern Germany’s solar plants generate well over 12 gigawatts (GW) of power.
However, even in southern Germany, the report finds that the cost of operating substantial ground-mounted systems would be close to prohibitive without the upfront funding that the FITs have provided. The Apricum analysts have predicated their findings on the assumptions that:
- The price tag for hardware would be rock-bottom (which won’t be much less than what is charged today, given the tight margins in the photovoltaic manufacturing sector); and
- The project sponsor would receive no more than an eight percent return on equity.
They concluded that a great deal of "give" still would be required in a project’s "downstream" costs (installation; project development; engineering, procurement, contracting) – about 37 percent in southern Germany and 90 percent in northern Germany – in order to justify going forward. In the short-term, "dumping" of "extremely cheap" Chinese modules may provide some budgetary breathing space to developers, but the future for ground-mounted systems looks bleak.
The analysts are more sanguine about the scenario for commercial photovoltaic systems in the next echelon down, 100 kilowatts (kW) to one MW. Especially in southern and middle Germany, fewer reductions would be required in downstream margins, thus giving developers a better chance of succeeding. In northern Germany, at least 47 percent discounts on downstream goods and services would be needed to continue doing business.
The analysts conclude that overall, "Only systems with excellent performance ratio and significant economies of scale are still attractive. Formerly attractive, very large systems (>1 MW) will disappear completely and, as a result, the commercial segment is expected to contract significantly, but to continue existing."
Solar modules being squeezed out of market
For the German hardware application service providers, there is little room for price maneuvering under the new policy, particularly, in the module sector, unless manufacturers across the value chain continue to bear losses. To date, many of Germany’s module manufacturers have sold mainly to the domestic market, with the consequence that "the expected volume and margin decline may prove fatal," said the Apricum analysts, adding, "Players that have inefficient cost structures or have failed to build significant activities abroad are now facing an 'existential' threat."
German photovoltaic modules are five to seven euro cents more expensive than Chinese tier-one modules in the current market. However, even predicated upon the purchase of tier-one modules sourced from China, there is no room for a reduction in modules at the ground-mount or large commercial rooftop scale. The scenario is only slightly better in the residential rooftop market, in which a distribution margin must be included in the price tag.
The analysts predict that a "continuous demand-supply gap will lead to spot market prices based upon the cash cost of manufacturing, which can be substantially lower than these prices, but will be unsustainable in the long term." Subsequently, "dumping of tier-2 and tier-3 Chinese players will push module prices even below US$1/W in the short term" – a situation that Apricum predicts will serve as a clarion "call for the industry to move into new regions that will drive the PV industry for the next decade."
Hitting the roof
The exclusion of large ground-mounted plants will likely push the country’s market toward rooftop systems, however, beginning on January 1, 2013, systems under 10 kilowatts will only receive subsidies for 85 percent of produced electricity, so producers must use the remainder or sell it themselves. Larger facilities will have a 90 percent subsidy cap.
The residential segment (<10 kW) will require a downstream cost reduction between 15 percent (in the south) and 37 percent (in the north). Thus, the possibilities for viability in the southern and middle regions of the country look fairly good, except for those very small (<2 kW) systems with poor irradiation or performance ratio (shadowing, east or west orientation), as well as systems that are expensive/difficult to mount. As a result, the residential market segment is expected to contract significantly, but to continue production.
Shock and awe
Although this action by the German authorities was anticipated, its severity was not; and stocks of solar companies around the globe plummeted immediately as a result. According to Bloomberg News, Suntech Power Holdings Co. was down five percent; Canadian Solar Inc., six percent; and SolarWorld AG by seven percent. Trina Solar Ltd. fell 9.7 percent, even after forecasting an increase in shipments this year.
However, the plan is not set in stone and may change dynamically before the April 1 implementation date. Among the rumors floated in Berlin: The policy may be watered down for large-scale power plants, according to members of parliament in the center-right coalition.
Germany added 7.5 GW of panels last year, bringing its total capacity to 25 GW – more than double the government’s target, and nearly as much as the rest of the world combined. The new policy targets 2.5 GW to 3.5 GW in installations during 2012 and 2013 – a more than 50 percent decrease in comparison to the 2011 level – and, thereafter, would reduce generation by 400 MW annually, to reach from 900 MW to 1.9 GW in 2017.
The move is backed by Chancellor Angela Merkel, who had been advocating the deployment of renewable energy to replace nuclear power plants nationwide. However, it has been met with explosive pushback, in the Bundestag (lower house of Parliament) and Bundesrat (the upper house), as well as among industry leaders.
"The provision is dangerous, as it would destroy investment security and may be expanded to subsidies for wind and biomass," warned Carsten Koernig, the head of the BSW, the German Solar Industry Association, adding, "What’s planned here is a solar exit law. The energy overhaul won’t succeed like that. Tens of thousands of jobs in one of the most important industries of the future are in danger …. We fear a rollback in clean- energy and climate policy at a time when Germany wants to lead."
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