On February 23, German Economy Minister Rösler and Environment Minister Röttgen announced the most drastic cuts to the German solar feed-in-tariff (FIT) to date, drawing fiery dissent from the solar industry and opposition parties. The announcement came only shortly after the latest scheduled cut to the solar FIT of 15% came into force in January. Although this action by the German authorities was anticipated, its severity was not, and stocks of solar companies around the globe plummeted as a result.

The draft of the new EEG law (“Erneuerbare-Energien-Gesetz”) now envisages changing the solar FIT system in four ways:

1. a one-time cut of FITs equivalent to 20–35% effective March 9

2. a further automatic monthly reduction amounting to 8–13% p.a.

3. a limitation of FIT payments to 85% or 90% of energy produced

4. an authorization for the government to further ad-hoc adjustments of the tariffs.

At the same time, the ministers proclaimed a target corridor of 2.5–3.5 GW of annual installations in 2012 and 2013 (a more than 50% decrease compared with the 2011 level), to decrease to only 0.9–1.9 GW in 2017.

At the heart of the proposed changes lies the admission that the feedback system as implemented, which coupled FIT cuts to the power installed in the preceding year (termed “atmender Deckel” or “breathing cap”), has utterly failed. The feedback process was so slow, and the (German) solar industry has grown so agile, that the German market frequently outmaneuvered the FIT legislation. In effect, windfall profits were created for project sponsors and installers, propelling yearly installations beyond the government’s targets. Until last week, German project developers were still plowing through Gigawatts of project pipeline to be installed before the summer. The problem was exacerbated by infrequent FIT cuts only every six months, which led to enormous installation rushes shortly before the cuts. This phenomenon has now been corrected with the monthly, more gradual cuts.

As a result of global overcapacity, module prices declined drastically toward the end of 2011, which undisputedly necessitated a further FIT reduction beyond the 15% already implemented at the start of 2012. However, the key question arises: is the announced reduction too much, in effect strangling the German PV market? Is the industry capable of realizing the significant reductions in system cost required to preserve financial viability of projects? First of all, windfall profits beyond a reasonable return on investment will be a relic of the past. Given the squeezed margins of the PV manufacturing industry, however, only minor price reductions for modules, inverters and other hardware will be feasible. The only remaining origin of further cost reductions is the “downstream” portion of the system cost, including installation, EPC, project development and land rent. According to Apricum’s analysis, the ground-mounted segment will be hit hardest, with downstream cost reductions between 37% (south Germany) and 90% (north Germany) being called for. As a result, we expect that the ground-mounted PV segment will suffer a near-complete breakdown. The rooftop segment between 10 and 100 kW and beyond 1 MW will be hit similarly hard.

By contrast, the residential segment (<10 kW) will require only a downstream cost reduction between 15 and 37%, and the large commercial/industrial segment between 100 kW and 1 MW will require a reduction between zero and 42%. These figures are certainly severe, but appear achievable in many cases through a further professionalization of the downstream industry and margin reductions for all involved players. Consequently, we expect these segments to contract significantly, but to continue being viable. It is important to note, however, that installations will be constrained to better-performing systems with highly optimized performance ratios in the sunnier southern part of the country. Shadowing and suboptimal module orientation will become exclusion criteria.

Taking into account the EEG changes, Apricum expects total PV installations between 3 and 4 GW in 2012, down from 7.5 GW in 2011. The longer-term perspective on the German PV market is equally pessimistic. The industry will be challenged to reduce costs in the face of inflationary pressure on wages and material costs and rising project development costs caused by the increasing complexity of projects on the scarce land and rooftops left. Adding to the challenge, PV manufacturers have little scope to further reduce hardware costs.

Despite the doom and gloom, there are some positives to be noted. The draft of the EEG law suggests that the tariff may be changed (even increased) instantaneously if a three-months moving average of the new installations falls outside of the target corridor, thus providing some stability to the industry. A further faint glimmer on the horizon may be the perspective for a more solar-friendly socialist/green coalition government in 2013, should the unpopularity of the current government last. Also, since the residential segment has now officially reached grid parity, with the FIT tariff falling below consumer electricity prices of around 21 EUR cents (excluding VAT), residential systems will be increasingly sold as an energy cost saving instrument independent of subsidies, rather than as a financial investment.

A short-term upside potential may be provided by Chinese second- and third-tier module manufacturers, which will be tempted to dump modules into the market. These players may even sell below cost of goods sold, attempting to achieve any possible revenues. Depending on bankability and willingness of both installers and customers to sacrifice reliability for price, this phenomenon may give a short-term boost to market segments already declared defunct. These unsustainable practices, however, will be put to an end as the manufacturers in question run out of cash or Chinese regional governments cut the lifeline.

The expected tectonic shift in the market may effectively be the death knell for many remaining players in the ailing German PV manufacturing industry, which has still relied to a high extent on the domestic market. Not only revenue, but also margins are threatened as any module pricing above tier-one Chinese level will be extremely tough to achieve, further threatening cash flows. Furthermore, downstream players that have inefficient cost structures or that have disproportionate exposure to the segments hit worst, having failed to build significant activities abroad, are now facing an existential threat.

Despite fierce opposition, Apricum expects the announced changes to be implemented with only minor modifications. The resulting turmoil will not be the end of the German PV market, but it will lead to a significant contraction. Ultimately, the change serves as a final wake-up call for the industry to look beyond the traditional European FIT-bolstered PV markets, into those new regions that will drive the PV industry for the next decade.

Author:

Apricum – The Cleantech Advisory

Apricum is a global transaction and strategy advisory firm dedicated to renewable energy and cleantech. Apricum’s team of experts combines decades of industry experience in cleantech, consulting, and corporate and project finance with an in-depth understanding of renewable-energy market dynamics.

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