Germans show green investors and politicians how to build Solar


The amount of solar which has been installed in the UK over the last 2 years has become a focal point for both the government and renewable commentators, with the recent High Court judgement declaring the feed-in-tariff cut 'unlawful'. But when you compare the amount of solar installed in Germany and other European countries with that installed so far in the UK it is difficult to understand the government's position. The British public should understand that this is a bit of a storm in a tea cup, because no scale has been achieved in solar in the UK yet - our efforts are dwarfed by Germany.

Global Solar Capacity

It is estimated that the UK has a total installed solar capacity of 661 MW, about 1% of global installed capacity(68GW, or 68,000MW) and which grew at 28,000MW in 2011. The growth in solar is largely due to feed-in-tariffs introduced in Europe to meet renewable energy targets and in particular Germany which has installed capacity of 25,800MW (38% of global installed capacity).

As you can see from the chart opposite total UK solar capacity installation figures pale in comparison to Germany -25,800 MW versus 661MW.

European countries made up 75% of solar installed in 2010. Big solar programs include Italy with around 12GW, Spain, France and the Czech Republic. China and America are also growing their solar capacity, both adding more than 1GW this year alone.

China increased its target for 2015 this year from 5 to 10GW, hoping to get 50GW by 2020 (almost matching Germany's target of 52GW), but had only 0.8GW at the end of 2010. The US had only 2GW at the end of 2010, with much based in sunnier states such as California.

There is also increasing solar activity in the Middle East and surrounding areas, with a 10MW solar park in Abu Dhabi, where more large projects are planned, and a 400MW project in Oman that has been announced today.

2011 Installations in the UK

In the UK there has been a lot of fuss over 'unsustainable' solar growth. In December 180MW was added to UK Solar, taking the total installed under our feed-in-tariff to 593MW. In Germany in the same month 3000MW of capacity was added (shown graphically below). This is not just over 15 times the amount which was installed in the UK in December, but five times, in one month, the amount installed in the UK since the feed-in-tariff was introduced in April 2010.

New solar photovoltaic installations per month over 2011, data from DECC and Bundesnetzagentur

Recent proposals for the UK solar Feed in Tariff to be cut from 43.3p to 21p per kWh have been found unlawful, a decision that the government is currently in the process of appealing. The outcome of this legal process is uncertain, but the tariff cut is all but certain, just slightly delayed. The skill with a renewable subsidy is to reduce them methodically and predictably in a way which industry is able to plan for. In this way renewable power can achieve sufficient scale to drive costs down to the end consumer. Germany regularly reduce their tariff, as they do every year, by 15%, this may fall even further, to a 24% drop, if new installations pass a certain limit. The issue in the UK seems to be that the Coalition Government do not have a consistent vision for renewables that they understand, or that the Treasury buys into. The renewable agenda has really been inherited from the previous Labour govenment and so the issue has become a bit of a political football. Where, one might ask, is David Cameron? Who is driving this forward?

Falling costs of solar panels and energy prices

The aim of introducing solar in the UK is to try to reduce the long term cost of power in the UK consumer. It has been predicted that solar energy will reach grid parity i.e. it will cost the same as the average cost of power from the National Grid. At the moment this seems a distant hope, but in Germany in the summer solar is of such a scale that during peak demand electricity prices have been capped. In Germany solar is reducing the ability of electricity companies to hike prices during peak demand.

There are two key factors in achieving grid parity. The first is the rising cost of fossil fuels and the second is reducing the cost of installing solar in the UK. Economies of scale are so important here. In Germany a study recently showed that it cost $2.80 per watt to install solar power compared to $5.20 per watt in America. In other words, the scale of the German industry makes the process half the cost of that in the US.

Of course it is not just the scale of the German industry, but the scale of production facilities and in particular Chinese production facilities which is helping drive costs down. The Chinese solar Feed in Tariff was brought in in August last year, at a rate of around 11p per kilowatt hour to help domestic demand. At the same time though Chinese solar companies receive benefits from the government in the form of loans and favourable land renting laws. This has been contested by the US solar industry, and there is currently a trade dispute around the “dumping” of cheap Chinese solar panels on the US market. However, the Chinese action has meant that the Chinese solar panel production industry has been able to produce at very low cost, and to continue production and expansion even when demand has been weak. This has meant that the cost of solar energy has gone down rapidly, but it has also meant that companies that produce solar panels have come under intense competition, particularly damaging for US solar companies such as Solyndra.

The Future for Solar Energy and what this means for environmental investment

The problem for the solar industry is that demand has been created by countries like Germany introducing feed-in-tariffs to bolster demand at a point when the pure ecomonics do not stack up. Germany has a progressive energy policy and is particularly motivated to continue due to its anti nuclear stance.

The problem in other countries, such as the UK, is that at a time when the government is acutely conscious of rising short term costs due to the financial crisis, political decisions are being made almost in a panic, without the long term future in mind. The German example should be a beacon to UK politicians and should be a lesson to David Cameron, that long term policy is a good idea and can work for the UK consumer. The way that the Coalition has dealt with the solar industry so far is a shambles and needs better political leadership.

 

Fund context:

For the UK investor though there are still opportunities to invest in solar. One to consider with an IFA is to review the Goldfield Solar EIS companies which are currently raising money and buying solar panels subject to the 43.2p rate. However, investors need to be able to take a 25 year view and be aware that it may not be easy to sell the investment in the future. In an equity portfolio most managers are advising steering clear of clean energy companies because of the financial headwinds many face. The problem with being reliant on government tariffs is that these are steadily reduced over time, leading to a steadlily falling profit margin for existing manufacturers. However, others say that if you are taking the long term view valuations today look attractive and are below those you could find in 2008 right after Lehman Brothers collapsed.

Useful links:

Bloomberg New Energy Finance: Home

European photovoltaic industry organisation: Publications

Bloomberg: Solar Capacity Rose 54% to 28 Gigawatts Last Year

UK

Business Green: Solar appeal decision delayed until next week at the earliest

Bloomberg: British Solar-Capacity Surge Defies Huhne’s Plan to Curb Subsidies

The Guardian: Price of solar panels to drop to $1 by 2013, report forecasts

Mark Hoskin Blog: Barkering mad solar cut shows lack of judgement

Click Green: Government lose appeal bid over unlawful feed-in tariff solar cuts

Germany

Think Progress: Germany Installed 3 GW of Solar PV in December — The U.S. Installed 1.7 GW in All of 2011

Reuters: German solar boom strengthens critics of subsidies

China

Business Week: Solar Stocks Rise on Surging German Installs, China Growth

Seeking Alpha: What Investors Should Know About China's Upcoming Solar Feed-in-Tariff

Green Tech Media: 3 GW of Solar in China in 2012? Can China jump-start its domestic solar market?

Bronte Capital: The extent of Chinese solar subsidies and their implications

Reuters: China to double solar capacity by year end: report

Italy

Reuters: Italy solar capacity seen up to 12.5 GW end: 2011

US

Interstate Renewable Energy Council: U.S. Solar Market Trends 2010 [PDF 801.62KB]

USA today: Possible U.S., China trade dispute looms

Green Tech Media US Has an Average Solar System Price of $5.20/W

Middle East

The National: Solar Energy Firms Still in the Dark

Reuters: German funds plan $2 billion Oman solar project

Tags: UK, Europe | Clean Energy |

Comments (1)

  1. Today the government lost its Appeal against the 'unlawful' tariff cuts. The feed in tariff for solar under 4kwpeak will remain at 43.2p up until 3rd March.

    By Mark Hoskin on Jan 25, 2012 at 10:56 AM

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Mark Hoskin is a Partner at Holden & Partners. Holden & Partners are Chartered Financial Planners who provide financial advice to high net worth clients, the majority of whom have a significant interest in ethical or environmental issues.

Mark Hoskin graduated with a History degree from Keble College, Oxford and went on to become a Chartered Accountant with Price Waterhouse. He cofounded Holden & Partners in 2003 and is a Certified Financial Planner and Chartered Financial Planner. Holden & Partners set up Worldwise Investor to help both advisers and investors understand quickly and easily how they can benefit from ethical and environmental investment in the UK market.


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