Promoting Solar Energy
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| Promoting Solar Energy |
Unusual developments often occur in the energy marketplace. Germany’s leading role in the development of a solar photovoltaic industry and its ranking as the number one solar marketplace in the world over the last several years would have to be one of them.
The German numbers simply speak for themselves. The country has set ambitious renewable energy development goals through its Renewable Energy Sources Act (EEG) passed in 2000 and subsequently revised in 2004. Through the policies and incentives established through EEG, Germany’s 12.5 percent quota for renewable energy’s contribution to electrical power generation set for 2010 has already been met this past summer, several years ahead of schedule.
But they are not stopping here. Environment Minister Sigmar Gabriel has set more ambitious targets for 2020 and 2030—generating 20% and 45% of electricity from renewables respectively. Compare this for a brief moment with the renewable portfolio standards (RPS) set by 20 U.S. States. How many utilities--SDG&E, SCE, PG&E--are going to actually realize their mandated portfolio standards in the years ahead? And how?
What’s going on in Germany…Lessons for California?
Policymakers in Germany have first of all realized that the country finds itself in a precarious energy situation because of energy security issues, green environmental pressure and a law on their books that calls for a movement away from nuclear power. Germany now imports 76 percent of its natural gas, 44 percent of which comes from Russia, a country that has in the past curtailed natural gas shipments to its western neighbors to support its own agenda. Ironically, the U.S. in 2007 is trying to increase its reliance on imported natural gas.
The German reunification process that started in the 1990s unearthed a serious environmental mess in the former “East Germany” where dirty coal—mostly lignite—was burned with little if any pollution control. Consequently, not to mention the present CO2 implications of burning coal, there is a lot of green environmental pressure to move away from heavily polluting lignite on which the country relies for 25 percent of its electrical power generation.
The same percentage of the country’s electrical power generation also comes from 17 nuclear power plants. A federal commitment to shut them down by 2022 still exists on the books, though there is increasing speculation that doing so may be delayed or, if political consensus emerges, the law deleted from the books. Realizing its ambitious CO2 emission reduction targets may be extremely difficult for Germany without nuclear power to anchor the country’s thrust into a more sustainable, carbon-constrained renewable future.
Wind…setting the stage for solar
Germany’s global leadership in solar energy stems from a variety of factors—one of which is the renewable culture that has flourished in the country and that has also made wind technology such a success there. Germany’s leading position in wind is not a recent development as there is a great history of wind in the country. More than 30,000 windmills were operating in 1900. Few of these remain, but by the end of 2005, Germany had an installed capacity of 18,428 megawatts at 17,570 sites.
The rate of growth of wind has tempered in recent years—the country is simply running out of great wind sites—so the industry is now turning its sights on repowering existing installations and developing offshore opportunities. Official sources cite a 100 TWh potential that would constitute a 30 percent market share of the country’s electrical power generation.
Besides the country’s interest in addressing its energy security and the environmental issues, the reason for Germany’s renewable energy growth is simple—the introduction of a high feed-in tariffs.
Feed-In Tariff described
Electricity that is generated by renewable technology is bought by the utility at above market prices. For example, if the retail price of electricity is Ec 15kWh then the rate for green power might be Ec 40 kWh. Paying for the price difference, and this is key, is spread over all of the customers of the utility. The Government sets the policy, but all residential consumers through rising electrical rates pay for the policy.
The presence of feed-in tariffs have pushed Germany’s solar pv market from one that was initially environmentally driven to one that is now economically driven. Germany’s many different high feed-in tariffs have resulted in a solar company’s dream.
Consider the following. Developers and homeowners installing a solar pv system in Germany received an introductory rate in 2000 of Euro cents (Ec) 50.6 per kWh. This feed-in rate was then locked-in by homeowners and developers for 20 years. Also initially sweetening the pot was the availability of low interest financing. To entice homeowners and developers to move quickly, the EEG spelled out a planned annual decrease of a locked-in, feed-in tariff between five and 6.5% each year depending upon how the solar panels were installed—in an open field, on the façade of a building or on a rooftop.
The results from these high feed-in tariffs are not surprising. Solar electrical generation increased from 64 million kWh in 2000 to 2 billion kWh in 2006. To be sure this remains just a small part of Germany’s success in its renewable energy program, nevertheless pv with a 2006 year-end capacity of nearly 1,800 MWp now produces 0.3% of Germany’s electricity supply.
This is still admittedly a small contribution to Germany’s overall electrical production. But on a global scale, Germany is the uncontested world leader in solar pv installations. It is a world leader in the amount of solar kWh generated and also a leader in the number of solar energy jobs created. And each year, the amount of avoided CO2 emissions increases.
Setting aside environmental issues, the high feed-in tariffs can make the installation of solar panels a wise investment. According to a 2006 Lehman Brothers study, depending upon how much solar insolation is available at the installation site, a solar pv investment can deliver an internal rate of return (IRR) of from 4.3% (700 hours) to 8.8% (1,000 hours).
Compared to Southern California, Spain, Italy or parts of the developing world, German solar insolation levels are low. This suggests even higher rates of return outside of Germany if similar programs existed. So why are the Germans pushing solar pv development? According to the government, there are many other social benefits, the least of which are the billions of euros being invested in new production capacity.
With success of the program in Germany, other aggressive programs may emerge elsewhere—like what appears to be happening in Italy and Spain. If so, German manufacturers will be well positioned to export to, and eventually, profit from a continued rapid and steady demand for solar panels. Not only are solar manufacturing jobs being created for skilled workers, primarily in Germany's new federal states with historically high unemployment rates, there are also many solar installation jobs being created. And importantly, these jobs can’t be sent offshore because the pv panels are being installed in Germany.
The frenzy to capitalize early on declining feed-in tariffs has also sparked private research and development efforts that have led to unexpected advances in production efficiency. As a result, production costs are falling, and so the German government anticipates that the fees paid for photovoltaic power will thus move far more quickly towards matching the "plug-in" price for conventional electricity.
In fact the private sector response to the feed-in tariff incentive has been so substantial, that during the third quarter of 2007 the German government was considering recommendations to accelerate the rate at which the feed-in tariffs would decline. EEG has recommended an increase in the annual “tariff degression” for new plants of 2 % from 2009 and a further 1 % from 2011.
Why are the feed-in tariffs working so well?
In analyzing why feed-in tariffs have worked so well to support the solar pv industry in Germany, especially in comparison to efforts in the United States, it is important to realize that properly structured feed-in tariffs stimulate both the demand for, and supply of, solar pv panels. The combination of insolation levels, electricity costs, and the prevailing costs of pv-generated electricity are some of the predictors of solar pv market development. On the demand side, despite low insolation levels in Germany, the comparatively high prices for residential electricity of Ec 22 kWh has set the stage. The high feed-in tariffs, however, provide a substantial economic incentive—call it greed if you may. German farmers reportedly view the availability of the high feed-in tariffs through a solar investment as a good retirement annuity.
Once a developer or homeowner locks in a rate, that rate, like a fixed mortgage, is good for 20 years. The annual “tariff degression” does not apply to installed projects…only to new projects coming online. And with the Euro near an all time high against the US$ (On October 19, 2007, Euro hit $1.43) the 2007 feed-in rate for residential rooftop installation is equivalent to $.71 kWh. How does that compare with net metering rates available from San Diego Gas & Electric and other utilities across the state and country?
Another important distinction between net metering rates and feed-in tariffs is that the latter focuses solely on the power generated. If you generate 3,000 kWh, you get paid at the enormously high rate for all power generated—an incentive to size your installation as large as possible. This is significantly different from a net metering arrangement where the pv panel owner is only compensated for any surplus generated and at a price less than what one pays for any purchased electricity.
In parts of the San Diego Gas & Electric utility region, for example, there is a tremendous amount of sunlight. Consistently generating surplus electricity, however, leads to the payment of monthly minimums. At the annual settlement of the net metering contract, the utility keeps the value for any excess electricity generated. This results in perhaps an unintended consequence of keeping solar installations small, or perversely, to not conserve electricity. During particularly sunny stretches in the San Diego desert, knowingly running a monthly surplus provides little incentive to conserve electricity. To a certain extent, if you don’t use it, you lose it.
Greed as motivation
The same “greed” that has developers and homeowners stampeding to get projects installed at the high tariffs available also evokes greed on the supply side. German manufacturers, as well as those from around the globe, are gearing up to increase capacity so that they can participate in the market where installing solar presents such a lucrative investment opportunity. Over the long run, this will result in increased capacity and economies of scale that will reduce the price for solar modules and speed the intersection where the price of pv power meets the price of grid power.
So is it working?
Success needs to not only be measured by increased installations but also by increased manufacturing capacity. Only then can the wisdom of this government policy be validated. Increased capacity will result in increased economies of scale and the cost of photovoltaic electricity will ultimately fall and compete with the grid. This appears to be happening.
For example, in November 2007, SCHOTT Solar inaugurated industrial mass production of thin-film solar modules at its Jena manufacturing site. The 75 million euros investment will result in a module capacity of 33 megawatts per year and add 180 jobs.
According to Udo Ungeheuer, Chairman of SCHOTT’s Board, the investment creates a second source of revenue for the company’s photovoltaic activities and will improve the company’s position among the world’s leading manufacturers in the field of thin-film technology. Although SCHOTT Solar has plans to expand its production capacities for thin-film modules to 100 MW per year by 2010, the company says its main focus lies on manufacturing wafer-based cells and modules. By the year 2010, SCHOTT Solar plans to expand its production capacities to 450 MW per year with respect to both cells and modules.
And SCHOTT is not alone. The company’s expansion is just one of 29 global manufacturing news announcements archived by Solar buzz from early November 2007 to June of 2007. See http://www.solarbuzz.com/news/NewsManu.htm.
Certainly the presence of German feed-in tariffs cannot explain all of these investments. The dynamically growing market in Germany, however, is at least providing one good example of effective government policy at work within the world’s largest photovoltaic marketplace. Even in the absence of a strong solar resource, strong financial incentives in Germany are creating a sustainable solar industry. Accordingly, one wonders what could be done in California, given all of our sunlight, the enterprising character of the state’s residents, and all of our pressing energy issues if more appropriate incentives and policies were in place.
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Chris Gadomski, a principal with SMIdirect in La Jolla, CA, develops business for his clients through marketing communications and internet web content search engine optimization strategies. Gadomski teaches Energy and the Environment, and the Economics and Finance of Energy at New York University’s School of Continuing and Professional Studies. He acknowledges and thanks the research efforts of his graduate students Andres Castellanos, Doug Horn, Matt McDermott, Abha Singh and Warren Wilczewski in the Masters of Global Affairs Program.
All rights reserved, story reprintable with permission and citing source: Chris Gadomski, www.smidirect.net
Chris Gadomski
SMIdirect
7825 Fay Avenue, Suite 200,
La Jolla, CA 92037
858.605.0688
chris@smidirect.net
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