After a year of turmoil, Jonathan Gifford looks at what lies ahead for the European solar sector
The dreary weather seemed to reflect the mood. On 24 October, the industrial east German landscape was shrouded in thick autumn fog as Q.Cells, a company that had been one of bright lights of Germany’s solar sector, officially came under Korean control.
The Saxony-based company was once one of the largest solar photovoltaic (PV) manufacturers in the world. It is now officially Hanwha Q.Cells, with the original company having descended rapidly into bankruptcy early in 2012.
While Q.Cells’ fall from grace demonstrates just how perilous a market it is at present for solar manufacturers, its acquisition by Hanwha should not be considered as a disaster for the European solar industry. The firm’s German, Malaysian and Chinese plants manufacture enough PV panels each year to generate 2.3 gigawatts (GW) – just short of double the total amount of installed solar-PV capacity in the UK.
Hanwha’s acquisition of Q.Cells is, however, indicative of just how fast the PV manufacturing landscape is changing, and what impact these changes could have for consumers of PV and for the larger-scale implementation of solar on the global stage.
Political will
In most of the world, PV remains a subsidised industry. This is changing rapidly, however, as the price of solar panels drops spectacularly – around 50% in 2012 alone – and the cost of installing PV falls as economies of scale become established.
However, in key markets in continental Europe, government subsidies are still required for solar to compete with established energy technologies. Because of this, the solar PV industry remains exposed to changes of government, or sudden alterations to energy policy. This is exactly what has happened throughout Europe, particularly in Germany, Italy and Spain.
In Germany, the Renewable Energy Act (EEG), the legislation that brought in the feed-in tariff (FIT) scheme that underpinned the growth of solar, has undergone a major shake-up.
Germany remains the world’s biggest market for solar PV, with half of global solar-PV capacity installed in the country – very close to 30GW, as of 31 July 2012, according to the German Federal Network Agency. However, recent changes to the EEG are seen as delivering a fatal blow to the domestic PV manufacturing sector, which was already struggling to compete with imports from China.
The key changes, and what the Deustche Bank describes as the “third phase” of the EEG, are: reduced FIT payments; a market premium option; a 90% cap on FIT-eligible PV electricity; and the addition of a 52GW capacity threshold for PV. Additionally, and perhaps decisively for large solar developers, PV installations bigger than 10MW will no longer qualify for FITs.
A second ominous sign for solar in Germany was delivered in August, with the announcement of another fundamental revision of the EEG as part of a new energy and environment plan. One of the anticipated outcomes will be a greater emphasis on the production of renewable energy when it is required – rather than simply when there is sun or wind available.
Another will be a reassessment of the cost of the FITs and how that cost is borne by taxpayers. The German FITs, for wind and PV, are predicted to cost €12.7 billion in 2012 and environment minister Peter Altmaier has signalled that the EEG surcharge should be increased further.
The changes will mean that the amount of solar installed each year in Germany will fall from now on. The latest figures from the German electricity network agency show that between July and September 1.85GW of new PV capacity was added to the grid. It is a remarkable result, but shows that developers and installers are rushing to connect projects before the EEG is changed forever.
“I would say that in Germany we will never have a single month again where it will have 900MW or more [of solar PV] installed,” says Goetz Fischbeck, founder and chief executive of Smart Solar Consulting. “This is not really a surprising or a positive result, just the logical consequence of the way that the EEG was changed.” Fischbeck anticipates a decline by as much as 50% for the German PV market in 2013.
Italy is the only European nation to come close to Germany’s application of solar PV. Figures from the Italian network agency in October showed that 15.9GW of solar capacity has been created, spread across 450,000 installations, and that the annual subsidy cost for the past five years amounts to €6.4 billion.
Under the most recent iteration of the legislation underpinning renewable energy development, the Conto Energia, the funding limit for the legislation is €6.7 billion.
Fischbeck believes that there is sufficient funding for another 2GW of capacity. “That’s going to last until the middle of next year,” he predicts. After this date, it is plausible that new solar development under subsidies could come to a shuddering halt.
A classic and well-documented example of a solar market collapsing is provided by Spain. In 2008, overly generous FITs – and ample sunshine – lead to a solar bubble forming almost overnight.
In that year more than 40% of the world’s installations were in Spain, following 2007 legislation that paid €0.44 for every kilowatt-hour (kWh) of solar energy generated. It led to a rampant and overheated market, and suspension of the solar support scheme was inevitable. As the Spanish PV market had the regulatory brakes applied, manufacturer Q.Cells was one of the first to cut back manufacturing staff, shedding 500 employees in August 2009.
Solar 3.0
While Spain’s solar past is instructive in terms of what not to do, it is also demonstrating a future without FITs – where a solar installation can be justified without subsidies from the state. This was always the stated goal of solar subsidy programmes, but the transition from the simple FIT calculation to a more nuanced equation, where PV is a genuinely competitive source of electricity, has not been an easy one.
Formerly, developers and investors could consider a FIT of X, multiplied by Y years, at Z initial cost. Without FITs, however, calculating return on investment is a more complex matter incorporating savings through the self-consumption of PV electricity, the wholesale price received for any energy sold back to the grid and, for large-scale utility PV developers, negotiating contracts with utilities.
“The key message at this time is that PV companies are delivering clean power solutions to people,” explains Gerard Reid, a partner and founder of green-energy investment consultants Alexa Capital. “But ultimately ‘solar 3.0’ is that you are delivering power solutions to people.” This adjusted sales pitch for solar PV to potential clients and investors is taking time to evolve, but pilot projects are emerging.
In October, German company Conergy announced a small project in Spain that makes economic sense, entirely without subsidises. The installation is located on the roof of the La Sal Varador beachside organic restaurant, in Barcelona Province. The 8kW project covers much of the restaurant’s roof and has been designed to allow the restaurant to consume 95% of the power produced during daylight hours.
The cost of the electricity from the roof, calculated over the 25-year life of the system, will be around €0.10 per kWh, while the utility charges €0.15 to €0.17 per kWh – delivering considerable savings during the day. The fact that the technology’s green-energy credentials align with the environmental ethos of the business is also a factor behind the installation.
“The solar plant represents a further element of our overall concept, allowing us to use green electricity for our restaurant in the day and reduce our electricity bill at the same time,” says owner Ricard Jornet. “But, above all, we will also reduce our vulnerability to future electricity price rises.”
It’s worth noting that the fit between a solar array’s energy production and the demand profile of the user is essential, and Conergy studied the usage patterns of the restaurant before designing its system. When they do align well, the economic viability for solar becomes simple. Load shifting – taking measures to align a PV installation’s generation and supply – could help also.
Conergy is not alone in working on unsubsidised PV projects in Spain; Gehrlicher Solar has also announced projects in the country, although on a larger scale.
One of the projects is a 250MW utility-scale power plant in the south-west of Spain. The project will cost around €250 million to build. The German developer says that it plans to sell the electricity directly on the wholesale electricity market, into a pool or directly to a company trading on that market.
Fischbeck is unsure that the long-term electricity price stability required for a solar PV power plant, which has a minimum working life of 20 years, can be guaranteed, however. “By selling the PV electricity at around €0.06/kWh, they expect to be profitable,” says Fischbeck. “But with more and more wind and solar power in the grid – which have almost zero variable cost – it could be that eventually expecting to achieve a sales price of €0.06/kWh for PV electricity at peak production times could turn out to be too ambitious.”
Falling costs
The cost of €250 million for 250MW of installed solar PV capacity is worth noting in the Gehrlicher Solar proposal as it hits the €1 per watt of installed cost, which has long been a milestone goal for the PV industry. Underpinning this is the rapidly falling price of PV modules and the reduced costs associated with installing them.
The collapsing price of PV modules, itself a symptom of a vastly oversupplied market, is causing manufacturers considerable problems, as is evident in Q.Cell’s woes. And it’s not just the European manufacturers that have been hit. GTM Research released a report in October indicating that 180 existing PV panel makers globally will go under or be acquired by other firms by 2015.
“Profitability in the PV supply chain will continue to be extremely challenging until and unless there is significant capacity rationalisation in China,” wrote Shyam Mehta, senior analyst at GTM and author of the report. “We expect this to start taking place in 2013.”
The price war and the continuing difficult period for manufacturers could also have a more profound impact on the market. With nonexistent profits, the quality of PV modules produced could fall.
Research and development (R&D) programmes also run the risk of being cut, undermining much of the good work done by firms to bring module efficiencies up and prices down.
Market analyst Paula Mints, from Navigant Consulting, has long been arguing that a reduction of R&D could be a fatal error for manufacturers and badly damage solar’s long-term prospects. At the PV Power Plants conference in Vienna in 2012, Mints said that rapidly falling prices could result in solar PV becoming an unsustainable industry.
“Prices are held down now by very high levels of inventory, very high levels of capacity and reduced incentives,” said Mints. “The rumours of extremely low prices, that is really the reselling of inventory, and that is held down by manufacturers that are selling it below cost … Companies don’t have the money to make improvements.”
Consequences for solar PV’s reputation if modules and installations start underperforming with warranties from companies that no longer exist could be dire. It could represent a disaster for the industry and a blow to renewable energy proponents. Despite this, and the problems being faced by PV manufacturers, consultant Gerard Reid remains hopeful that the transition to a sustainable, unsubsidised market for PV in Europe will occur. “It’s a painful process to revolutionise the world,” he says, “but you can’t have a revolution without pain. It’s not a revolution otherwise.”
