With nearly half of a record 7.5GW in solar installations pushed through in December alone, Germany faces a key decision: will it tighten its FiT belt even further starting in July, or will it explore a Spanish-style installation cap to cool an overheated market?

January 11, 2012 - With nearly half of a record 7.5GW in solar installations pushed through in December alone, Germany faces a key decision: will it tighten its FiT belt even further starting in July, or will it explore a Spanish-style installation cap to cool an overheated market?

Germany installed 7.5GW of solar PV systems in 2011, exceeding the previous record of 7.4GW set in 2010, according to the Bundesnetzagentur. Impressively, 3GW of that was installed in December alone -- 40% of the entire year's installed capacity was pushed through in one month. (Nearly 4.2GW was built out in the final quarter.) For the entire year, solar power systems in Germany produced over 18 billion kWh of electricity, 60% more than 2010 -- roughly equivalent to the electricity consumption of the state of Thuringia, and theoretically enough for a year's worth of power to 5.1 million households.

These big year-ending numbers are as unsurprising (crammed through to beat a 15% reduction on Jan.1 2012, plus spurred by mild weather and low prices) as they are critical to the near-term future of Germany's solar industry. At the current pace, merely an additional 225MW capacity between now and April would escalate the planned midyear cuts to another 15% -- i.e. making 2012's cuts twice the rate of 2011. The other option, proposed by Economy Minister Philipp Roesler (and rejected by Environment Minister Norbert Roettgen), would institute a 1GW cap on new installations, following the path of Spain which soared and retrenched in 2008-2009.





Solar currently contributes ~3% of Germany's electricity, with ~10% expected by 2020. As prices continue to fall faster than subsidies, by 2013-2014 solar could match support levels of large ocean-based wind farms in initial market segments, notes Carsten Körnig, CEO of the German Solar Industry Association. "What the solar industry now needs are reliable political conditions [to support] the continued expansion of renewable energy sources and for maintaining an attractive climate of investment in Germany," says Körnig. "It's the only way to ensure that the contract between generations contained in the energy transformation will work."

With Germany deciding which way to go, harsher FiT cuts or a hard install cap, one thing is clear: the next stage of policy adjustments will, after maybe squeezing prices a bit more, "ultimately guide Germany to a grid parity model," says Maxim Group analyst Aaron Chew in a research note. "Demand elasticity at $1.00/W has at last kicked in." The 1GW cap is too severe for the market (Germany had already expected 3GW-4GW), but a more reasonable cap might be explored, say 4GW, Chew thinks.

Chew takes a look at the other related numbers in this equation: module prices sunk -50% in 2011, but even at ?0;80/W (equivalent to $1/W, at today's ~$1.25 USD/EU valuation) that's still enough to generate ~7% project IRRs using the Jan-July lower FiT structure. A further -15% cut in July would change that equation to ?0.65/W ($0.80/W) to get 7% IRR. And that, he says, would leave the FiT rate below electricity rates of ?0.20/kWh (the graphic below illustrates the FiT stepdowns) -- and that would be the tipping point for solar economics. "As organic electricity savings drive greater returns than subsidies, we believe the German solar industry will be forced into a major adjustment as project economics transition" from a FiT model to grid-parity model, he writes.



German FiT rates, including projected midyear cuts. (Source: Bundesnetzagentur, Maxim Group)