Tuesday, 26 January 2010

German ministers reach consensus on solar tariff cuts

22 January 2010

Key German government ministers have agreed to make double digit cuts to solar feed-in tariffs (FITs), to the dismay of the German solar industry. The country's FIT encourages the construction of solar energy plants by setting a price for the electricity they produce at above usual market rates, for up to 20 years. This means that developers can raise finance against a guaranteed revenue stream and enables higher-cost renewables to compete with traditional fossil fuelled plants.

Environment Minister Norbert Röttgen (Christian Democratic Union) and the Minister for the Economy Rainer Brüderle (Federal Democratic Party) this week both backed a 15-17% reduction, for cabinet consideration in February. The cut would come on top of already agreed a 9% reduction in the FIT for 2010 and a further 9% in 2011, slashing a total of 35% from the tarriff within two years. The reductions are likely to come into force in April. Ground-mounted installations would be hit with an additional 10% cut and very large solar PV plants would also be subject to slightly higher reductions.

The government said the current 9% FIT decline was insufficient in view of 30% drop in roof-top photovoltaic (PV) prices over the last year, and developers are seeing record returns arising from the solar FIT. Excessive subsidies were also dragging on cell efficiency improvements, it argued. The government said it needed to "take the weight off the consumer", who ultimately pay for FITs, for a technology which provides less than 1% of the national grid capacity.

The conservative Bavarian government also announced this week that it would cease approving permits for ground-mounted PV installations on farm land. But since Bavarian planning laws already heavily restrict such installations, the announcement is more likely intended to politically coincide with the federal government's FIT plans.

Some firms have themselves called for deeper FIT cuts, but German solar trade body BSW-Solar attacked the proposed changes, saying they would send many German producers to the wall. Returns on investment would fall to the critical 6%-7% mark, the minimum that German PV developers would consider, BSW-Solar said. The association was deeply concerned that the government intended to make a further 15% cut to FIT at the end of 2010. However, the industry also revised the date it predicts solar electricity prices will reach parity with conventional electricity from the middle of the decade to 2013.

Clean-tech equity analyst Michael McNamara at Jefferies International said he remained bearish on the solar sector despite viewing the FIT changes as partially positive. "It is too early to make any changes to our models, but the impact of this cut would be positive although relatively limited. We believe that the German market will remain very strong if FIT cuts are 15-17% as IRRs [internal rates of return] will still be very attractive. For example, the unlevered IRR of a rooftop installation in Bavaria could easily achieve 7.2% with an installed cost of €3.3/Watt peak (module cost of €1.8/Wp) which is a pretty conservative installed cost estimate."

BSW-Solar believes the double-figure cuts would mean the end of solar cell production in Europe, to the advantage of competitors in China, citing a report by the Baden-Württemberg State Bank (LBBW) published this month. Chinese suppliers have been the main beneficiaries of a boom in roof-top PV installations in Germany over the last two years although German cell producers still rely on the domestic market for up to around half of their turnover, LBBW said. Rooftop PV prices have fallen 30% over the last 12 months, largely due to cheaper silicon prices.

FIT cuts in Spain in the midst of the recession had already sent a shock wave through the German solar cell industry, which is putting its hopes on increasing demand this year from the US. But the equity markets have remained cautious, not least because of apprehensions about FITs. DZ Bank, for example, downgraded bellwether solar stocks Q-Cells and SolarWorld to "sell" in October on this basis. SolarWorld shares were trading at €13.99 ($19.72) today, down 11% on last Thursday's close. Q-Cells' share was similarly down 15% to €10.56 today.