The impressive growth in Germany’s green power has altered the structure of its electricity sector, but the Merkel government appears to prefer to keep the staus quo rather than respond to a growing call for significant market reform. Jeremy Bowden investigates.

Germany's rooftop solar FiT
The recent cuts to Germany’s rooftop solar FiT rate have raised concerns in some quarters that these changes will destroy investor trust in the sector

Germany is fielding complex new problems as rapid growth in green power changes the structure of its electricity sector. Renewable energy groups say a redesign of the power market itself is now needed to ensure a successful continuation of the transition towards a fully renewables-based system.

So far, generous feed-in-tariffs (FiTs) have driven renewable capacity growth, pushing its production share to over 20 per cent in 2011. But now solar in particular is becoming a victim of its own success as the gap between market prices and solar FiTs – even after recent cuts are taken into account – continues to widen especially at times of peak production, when solar can now meet over 40 per cent of German demand. While there is concern over the FiT cuts, renewable groups and others say the priority is now to tackle the market’s reaction to the flood of cheap renewable power, which is making it increasingly difficult for all renewables to become commercially viable.

A recent study shows Germany’s solar capacity has caused mid-day prices to fall by 40 per cent since 2008, while average levels have been cut by about 10 per cent. Night-time prices, on the other hand, are up as margins on power from non-renewable plants are squeezed during the day – making them more costly to run at night and less profitable overall. Solar and other renewables, whose fuel costs are zero, are always taken first by the German grid, which prioritises sources based on marginal cost.

A spokesman for Germany’s Photovoltaic Association (BSW-Solar) said the market must be redesigned “to reflect the true value” of green power, rather than having prices determined purely on a supply-and-demand basis. Daniel Kluge of the German Renewable Federation (BEE) sees a variety of different possibilities. One would be to divide the market into two sections – one for renewables, and the other for conventional and nuclear – with “intelligent connections between the two”. Another option would be to revise the pricing system to include a substantial payment for maintaining capacity, which would help improve the economics for wind and solar – and gas, which is needed as flexible back-up. However, Kluge recognises that redesigning the market harbours many potential obstacles, not least with EU competition law.

“Higher market prices or FiTs are needed in the new morning and evening peak times to encourage renewables production then,” said Kluge. “Storage will be more important in future years to ensure we can deliver the [green] power when it is needed by the grid,” rather than when it is produced. “Different kinds of green power complement each other,” he added, stressing that more attention needs to be paid to geothermal, biofuels, pumped storage and combined heat and power.

Impact on solar

Meanwhile, the faster-than-expected growth in solar installation has driven up the cost of the government’s FiT programme. According to the German press, members of Chancellor Merkel’s government say the policy has become a massive drain on coffers. Philipp Rösler, Germany’s minister of Economics and Technology, has called the growing solar costs a “threat to the economy”.

Germany’s response has been to slash FiT rates this year (see box). While this has been widely criticised by environmental groups, many acknowledge that much of the current growth momentum is likely to continue anyway. Solar capacity alone has skyrocketed from 6 GW in 2008 to 25 GW by 2011, with 5.2 GW installed in the year to October 2011. This amounts to half the world’s total installed solar capacity. More than 100 rural communities are already 100 per cent renewable, and the industry employs more than the country’s nuclear and coal sector combined.

Germany's gross power consumption
Development of renewable energy’s share of Germany’s gross power consumption

To achieve its original aim of 52 GW of installed solar capacity by 2020, Germany now only needs to install 3 G W per year. Some PV market sectors saw demand jump 45 per cent in the first two months of the year, according to BSW-Solar, with other estimates suggesting that 2 GW was added in the first quarter of this year alone. Although the bulk of this is likely to be due to a rush to install capacity before the FiT cuts come into effect, BSW-Solar also acknowledges that dramatic cost reductions in solar installations – the cost of PV systems fell by more than 50 per cent between 2006 and 2011 (€5/Wp to €2.2/Wp) – mean there should be less need for financial incentives, provided that market prices are not undermined by supply surges.

However, Kluge said it was “hard to say” whether renewable momentum could be sustained given such sharp cuts, adding that there were signs that demand could fall sharply, threatening thousands of jobs in the solar PV sector.

Utilities vs. renewables support

Germany’s big utilities have all suffered sharp falls in revenue and profit to accommodate renewable expansion and the nuclear shutdowns. They are continuing to implement complex restructuring plans, while seeking billions of euros in compensation. After excluding the country’s utilities players from any dialogue over its decisions during and after Fukushima, the Merkel government recently held a meeting on energy strategy with them. However, renewable players were excluded from this discussion, provoking concerns from the BEE, according to Kluge.

“We don’t see enough engagement from the government,” he explained, pointing out that the nuclear phase-out means renewables are now even more important to the country’s energy security – yet despite this, tariffs are being cut beyond what had been planned. His organisation’s expectations for total future renewables investment have fallen since the nuclear phase-out decision. “We put this down to the environment created by the government,” particularly, “a lack of impetus for years for the heat market and the biofuel sector.”

Kluge added that it was becoming increasingly difficult to find new long-term renewable investors, not only because of solar and other FiT cuts, but also because “regulations are missing or not positive enough”. He said wind investment fell after the government’s decision in 2010 to prolong the lifetime of nuclear plants, but it has remained subdued since the decision was reversed. However, the momentum behind wind should soon get a boost from offshore development and repowering as installed equipment ages, with a doubling of onshore capacity and a tripling of energy yield possible with significantly fewer turbines, according to estimates.

Judging by its actions, the government appears keen to take the pressure off utilities and build on Germany’s existing renewables success, rather than encourage it further at present. Some policymakers claim the generous solar tariffs have been a financially inefficient way of saving carbon, compared to alternatives like large wind farms. One analysis by Ruhr University suggests German FiTs cost €35 billion ($45 billion) to increase the solar contribution to the grid by just 0.6 per cent, and puts the total bill for solar development so far at $130 billion.

The FiT cuts do indeed appear to have revived Germany’s giant utilities somewhat. E.ON, the country’s largest utility by market value, says it expects a slight rise in profits this year and next. Its main competitor, RWE, says it anticipates stable earnings in the next two years. In the past, FiTs had been opposed by large utilities, energy-intensive industries and the Ministry of the Economy, as they help to replace large centralised production with distributed renewable power. While Germany’s four biggest utilities make up around three quarters of total power generation, they only own 7 per cent of green power, which is largely held by individuals, communities, farmers and small and mid-size enterprises. The BSW-Solar spokesman said solar will be able to continue growing without FiTs “soon”, but he questioned the government’s assertion that FiTs must be cut because the current plan is too expensive and the grid cannot cope. He says prices would only have to rise 1.9 per cent from current levels to increase capacity by 70 per cent by 2016 – from about 4 per cent of total capacity now to 7 per cent – which would only lift the renewable surcharge marginally above the current 3.6 ct/KWh, (or from about 12 per cent of the retail price now to 14 per cent in 2016).

Economic impacts

An overwhelming majority of the German public are happy with the solar surcharge level, according to recent surveys. And while the retail power rate in Germany is almost twice as high as in France, where nuclear dominates, industrial exemptions mean the economy is not put at a disadvantage. As far as grid modifications, BSW-Solar’s spokesman notes that solar is a source now distributed among over a million producers (the millionth was added last December) throughout the country, which simply require more intelligent reversible grids rather than massive new lines in order to cope.

“The cuts in support that have already been implemented have brought the costs of the expansion of solar power under control,” said Carsten Körnig, chief executive officer of BSW-Solar. “The transformation of the energy system costs money, particularly in its initial phase. The investments associated with the continued expansion of solar power, however, will hardly increase, and they will pay off,” he said.

PV panels
Solar enthusiasts are keen to utilise PV panels, causing a jump of up to 45 per cent in the early part of the year

Despite the rapid expansion of renewables, little has so far been done to address the capacity shortfall expected as a result of Chancellor Merkel’s decision to shutdown nuclear, or to ensure sufficient flexible back-up when the sun and wind are not available. About 40 per cent of the country’s nuclear-generating capacity was closed in the wake of Japan’s Fukushima meltdown, while the remainder will be phased out by 2022 – effectively re-implementing the plans of Germany’s earlier Social Democrat/Green coalition government.

Internal disagreement over the closures has hampered development of an energy policy master plan. And while utilities claim power prices are too low to provide sufficient incentive to build new gas fired power plants, imports of electricity from nuclear power plants in France and the Czech Republic are rising, and the country has also increased its reliance on brown coal to 25 per cent in 2011, up from 23 per cent the year before. The economics for coal are even worse than gas, however, with daytime prices down due to solar and fluctuations from renewable surges playing havoc with inflexible operating rates, which have to be cut when the wind and sun are available. If utilities have to start bidding for emissions certificates for their coal plants in 2013 as planned, coal’s profitability are expected to further deteriorate.

Germany’s government has a difficult task ahead if it is to meet its policy goal of a dramatic shift away from nuclear and towards renewables. While it is right to seek the cheapest route to achieving this, it cannot deny the success that the original FiT plan has had in moving things forward. But it can claim that controlling Germany’s now-rapid green growth is necessary to ensure the major utilities have sufficient funds to invest in essential back-up gas capacity, large-scale renewables and grid modifications.

So far, there is no sign of the government considering any change in market structure, which would require an innovative and far more controversial master plan for energy than FiTs ever were. Such a plan is almost certain to have to wait until a greener government arrives.

Tariff cut details

First introduced in during the nineties, FiTs require utilities to buy renewable energy at a fixed rate for 20 years, and have been praised for providing a stable long-term investment environment. Since first introduced in 1991, when the share of renewables in the electricity sector stood at less than 5 per cent, over 70 per cent of new green capacity has been supported by FiTs. Each tariff and its duration are technology and scale-specific.

Since 1 April this year, a new rate of 19.5¢/kWh has been introduced on rooftop solar up to 10 kW, (conditional on approval by Germany’s upper house, the Bundesrad, on 11 May 2012), see Table 1. The cuts deviate from Germany’s long-term plan, which had stipulated a cut of 15 per cent to 24.4¢/kWh for 2012 in response to an increase in capacity of more than 4.5 GW in the year to October. The rise would have been 18 per cent had a threshold of 5.5 GW been exceeded, and up to a maximum reduction of 24 per cent if more than 7.5 GW had been added.

table 1

In the same period the year before, 7800 MW was installed, suggesting the lowering of FiTs decelerates solar expansion as intended up to this point, since 2004 support for solar power had declined by around 57 per cent. But each cut had been part of a planned series of decreases in line with renewable energy growth.

Felix Matthes of Germany’s Institute of Applied Ecology says the changes will destroy investor trust in the stable, halfway consistent regulatory framework Germany has had up to now. A clause has also been added which, if passed through the Bundesrad, would allow the government to make future tariff changes without having to go through parliament, if installations exceed a “target corridor” of between 2.5 and 3.5 GW. The FiTs also require small producers to consume 15 per cent of their solar power, while the cheapest solar from plants of over 10 MW will no longer receive any FiTs.

Maria van der Hoeven, executive director of the International Energy Agency, said in a recent article that FiTs were simply a start-up mechanism for solar, which is now approaching maturity and should be able to stand on its own. “Renewable energy is swiftly coming of age, reducing the need for public support…. the [FiT] cuts are a sign that some renewable energy technologies are coming into their own and moving towards a stage where public support will no longer be necessary,” she added.

In the case of solar panels easily installed by households and businesses, falling costs and inflexible tariff rates offered much bigger profit margins to investors than planners had foreseen. Critics claim the original schemes should have been more flexible in their response to prices, and better prepared for the speed with which investors could rush into the market. China’s cheap manufacturing boom combined with advances in technology and developments in the supply chain have unexpectedly slashed solar costs.

The main effect of FiT cuts so far appears to be to make installers more cost-conscious, leading to a weeding out of less competitive manufacturers. Casualties include German manufacturers Solar Millennium and Solon, and more recently Odersun and Q-Cells, which used to be the world’s largest solar manufacturer. German developer Solarhybrid – whose projects include the 1 GW Blythe project in the US and a 150 MW PV array in Germany – has also entered insolvency proceedings.

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