Powering on: The finances of solar energy in Europe

The dramatic effect of the feed-in tariff on the German PV industry has led to similar measures being introduced in other European countries. With the German market pausing for breath after staggering growth in recent years, can these other countries emulate its success? If they do, will there be sufficient capital to allow the supply chain to keep up? A recent EPIA conference on finance for PV examined these issues, as Edward Milford reports.

Surveying the German PV industry at the end of 2005 was enough to make anybody draw breath. The dramatic success of the feed-in tariff had led to an explosion of both manufacturing capacity and demand for PV installations. Though the market relied on significant support from the German consumer (roughly €800 million in 2006, around 1% of energy bills) the politicians can point to around 35,000 people employed in a new industry, moreover, one which is enjoying very rapid growth with many German companies among the world leaders.

Spain is host to two important manufacturers of solar cells and has a rapidly growing domestic industry isofotón

By comparison, 2006 has been something of a year of consolidation; domestic demand in Germany has not grown (but nor has it slipped back), and though this has made life more difficult for companies getting used to rapid growth, it has allowed other elements of the value chain, particularly the supply of silicon, to begin to catch up.

Background to the German feed-in law

The changes to the feed-in law in 2000 and 2004 introduced different premiums for different renewable energy technologies. Germany has had a feed-in law since 1991, when the original rate of about €0.08.5/kWh was set for all renewables. This turned out to offer wind energy developers an economic return, and installed wind capacity in Germany grew rapidly during the 1990s, but it was not enough to make PV installations viable. Instead the German government introduced the 1000-roof programme in 1991 to supplement the feed-in act. Installed capacity of PV was small, at about 3 MW a year during the early 1990s, rising to about 12 MW a year by 1999. While modest compared with today’s figures, the professional experience gained by installers, and the greater public understanding of PV, has undoubtedly been a factor in the subsequent rapid growth.

The feed-in tariff in Germany has always been kept very simple. PV systems have to be connected to the grid, and every kilowatt hour generated has to be bought by the utility with the price paid fixed for 20 years. The rates are now banded depending on the size and type of installation, with the highest rates paid for small, building integrated systems, and lower rates paid for larger, ground-mounted arrays. At the moment there is no cap on the amount of installed PV that will qualify. While the price after installation is fixed for 20 years, the support offered to new installations joining the scheme declines by 5% a year (though once installed the rate stays the same for the life of the project). Part of the logic of the feed-in tariff is that it will create sufficient demand to allow volume price reductions. The industry estimated this as 5% per year and will need to show that it can deliver this reduction if it is to retain the widespread political support that it currently enjoys.

The first differentiated feed-in rate for PV was introduced in 2000, and resulted in a jump in installed capacity from 12 MW in 1999 to 40 MW in 2000. When the rates were revised in 2004, the installed capacity jumped from 150 MW in 2003 to 600 MW in 2004 ,and then 750 MW in 2005 and 2006, giving the country a total installed capacity of 2.5 GW. (In 1999 it was 57 MW – the total installed capacity has grown by a factor of nearly 50 in the subsequent seven years!)

Globally, the PV industry has also continued to grow rapidly, with an estimated 1.5 GW installed in 2005 (half in Germany), some 40% above the 2004 figure. Most of this growth has come from grid-connected systems, though the off-grid market has also continued to expand. Following a significant support package in the early 1990s, Japan had the largest installed capacity at that stage; now, with the developments in Germany and continuing interest in the US, 75% of the global market is in just these three countries. There is no intrinsic reason why the growth seen in Japan, Germany and the US cannot be replicated elsewhere. (To put this into perspective, however, China alone installed about 150 GW of new power generation capacity in 2006. Buying every single photovoltaic module produced everywhere in the world would have met just 1% of this increase in capacity in just one country. China’s own target of 300 MW of PV in 2010 will barely be noticed in its overall energy mix.)

The Spanish example

Germany’s success has not gone unnoticed and other European countries have now introduced feed-in laws tailored to PV, notably the larger, European Mediterranean countries Spain, France, Italy and Greece. At present, Spain is the second largest PV market in Europe, albeit just a fraction of the size of Germany, with 71 MW of manufacturing capacity, and a 21 MW domestic market in 2005 (estimated to reach 38 MW in 2006). It also has two significant domestic module manufacturers (Isofotón and BP Solar), and in Acciona a very active regional installer in the Navarra region in northern Spain. The Spanish feed-in tariff is working towards a government target of 128 MW in 2010, though the cap in the system has been set at 400 MW.

However, the Spanish feed-in law has had a number of complications. First, the size of the systems that qualified were originally limited to 5 kW, and was only more recently raised to 100 kW. This meant that larger installations had to be conceived as a sequence of small ones in parallel, which resulted in significant extra paperwork as each had to have a separate application and structure. Second, each application required five separate permits; often coming from local bodies which operate autonomously, and each making a different interpretation from their colleagues in other regions. Obtaining all five permits takes an average of some 300 working days – well over a year. (Larger systems require additional permits on top of these five!)

A 2 MW solar installation in Germany photowatt

A new version of the law is due at the end of April 2007, with the tariff expected to be set at €0.41/kWh for smaller installations, and €0.22/kWh for larger installations. This has led to a development bubble, with nearly 600 MW of projects seeking funding. However, a requirement for a guarantee of 2% of the necessary funding may weed out some of the more speculative of these.

The Italian market

Italy also has a new proposed feed-in law, and, with around 50 MW of PV installed, a nascent domestic industry and market. The Italian feed-in law has a complex structure of bands and types of installations, but with a generous premium on top of the standard electricity prices. Confirmation of the plan is expected from parliament during February 2007. Support rates vary from €0.34/kWh for ground-mounted systems to €0.49/kWh for BIPV. The payments are due to last for 20 years, with an annual degression of 2%.

Previous versions of the feed-in tariff have had caps imposed, and have been swamped by speculative applications. These have not been constructed, and the envisaged growth in capacity has not taken place – though some 78 MW has so far been started, finished or commissioned. The new proposals are intended to get round this with a simpler system. This has led to a lot of proposals, with some 37,000 applications made – amounting to 2.2 GW – two thirds from larger, mainly ground-mounted systems. The law also sets out some tight time-scales for the authorities to respond to applications, though it is not yet clear how effective this will really be!

The new feed-in tariff in France is specifically designed to promote BIPV installations patrick wallet / ademe

The PV industry in Italy is looking for some longer-term stability and consistency, having been beset by stop-go policies over recent years. The country has a lot of desertified land that can no longer be put to agricultural use; this could be used as suitable sites for larger PV systems, and may help generate much-needed income for some farmers. However, there is some concern among companies in the north of Italy that the feed-in tariffs have been set for the sunnier, southern conditions.

France supports BIPV

France has taken a different approach by developing a feed-in tariff which will only apply to building-integrated PV. This must be genuinely integrated and performing some other function as well as well as electricity generation – systems that are simply mounted on a building will not be eligible. With the premium, BIPV systems will earn up to €0.55 / kWh. While the measures are slightly different for France’s overseas territories, which are all in tropical regions, those on the mainland are also supported by tax credits, and in some regions local assistance as well. Potentially, this makes the schemes lucrative, but they will rely on suitable BIPV products emerging. The definitions of what is, and is not, BIPV are due to be published by ADEME, and the industry is watching with interest to see what will qualify. The French are presumably hoping that strong support for these products in the domestic market will help their own industry to develop the capacity and expertise to become global leaders in more specialist BIPV products.


For a country with such a good solar resource, the PV industry in Greece is very small. It is estimated that there is only around 5 MW of PV in operation, with about 500 kW being installed in each of the last two years and only 100 people employed by the PV sector. About 40% of the installed PV is grid-connected, with the rest used for off-grid applications, mainly in the agriculture sector. This is in strong contrast to the solar thermal industry in Greece, which has had strong legislative support for many years and employs over 3000 people.

A BIPV application in Italy epia

Despite this small nucleus, a new renewable energy law was finally passed in August, and the government hopes to get to 20.10% renewable energy by 2010, and 29% by 2020. The feed-in tariff for PV varies between €0.40-0.50/kWh depending on the size, type, and location of the installation, with higher rates being paid to systems on the islands. It also distinguishes between self-producers such as householders, and independent producers. The permitting can be slow taking up to 9 months for larger schemes, and among other things a certificate of origin for the PV will be required.

So far the new Greek scheme has attracted some 170 MWp of proposals. While the 500 MWp targets are quite ambitious – given the state of the grid, the attitude of the monopoly utility and the supplies of cheap lignite for conventional power on the mainland some observers are concerned that the initiative is mainly for show. With their weak grids relying on expensive, diesel-generated power, the Greek islands may seem like logical locations for PV, but additional limits on the fraction of renewables allowed on island grids may be introduced that could restrict PV to 5% of an island’s installed capacity.

European forecasts

To help predict the course of the industry, the European Photovoltaic Industry Association (EPIA) has produced forecasts of expected capacity in 2010 using two different scenarios – a business-as-usual one which assumes current support measures will remain but few new ones will join them, and a regulatory-driven one that assumes other governments will act to match the German model. They conclude that that by 2010, global capacity will be between 3.5 GW on the more pessimistic scenario, roughly a doubling of current output, and 5.6 GW if there is more regulatory support, roughly a tripling. (First estimates of PV capacity in 2006 are 1.5 GW. It should also be noted that some forecasters are notably more bullish, with the in-house consultants at Photon estimating up to 15 GW of capacity in 2010. While such huge factors seem on the face of it very unlikely, the industry does have a history of under-forecasting its own growth.)

The feed-in tariffs are among the various measures designed to stimulate demand in Europe. Together with new support in South Korea, and some resumption of support anticipated in Japan, plus other measures in California and elsewhere, it looks likely that the eventual capacity in 2010 may be towards the higher end of EPIA’s estimate. This raises the question – will there be a shortage of capital to enable companies to achieve these figures?

Can the industry meet this demand?

EPIA’s own analysis of the growth needed in different parts of the value chain (from silicon, to wafers, to cells, to modules, the balance of the system and then the installation) suggests that a total investment of around €14 billion will be needed to hit the 5.6 GW figure. While this may involve eye-watering growth for some thin-film operations and some of the newer technologies such as dye-sensitive cells or concentrating PV, the conventional silicon-based systems should be able to cope.

In particular, EPIA President Winfried Hoffman was confident that the shortage of silicon which has acted as a brake on the recent development of PV will be resolved, both through announced capacity increases from the main silicon manufacturers supported by long-term purchasing contracts from PV companies, and through more efficient manufacturing processes that will gradually reduce the amount of silicon needed per watt.

The industry has a number of key characteristics from a financier’s point of view. Generally, any financial support will either be directly to a company, or in the form of project finance for a specific installation. In both cases, particularly in Europe, the economics are totally dependent on the government-mandated support it receives. In Germany, for instance, it is estimated that without the feed-in tariff annual installations would be about 10 MW, rather than the 750 MW they currently manage. This exposes PV to considerable political risk.

Second, for most of the manufacturing processes the labour element of the costs is only between 5%-10%. This offers some protection against competitive threats from low-labour cost markets. Related to this, as most projects require decades to earn proper returns, the quality of the product and the stability of any company offering guarantees are very important.

Once installed, PV systems should have very low on-going costs with no fuel requirement and, hopefully, low operation and maintenance costs. They should also be more predictable than some other renewables, with the solar resource being much less variable than, for instance, wind. (Note too that a drop in solar resource has a linear impact on the solar output, while a drop in wind speed of 10% can result in a power loss of 20%). While initially the modules offer some form of security (they could be removed and resold in the event of financial failure) this is only the case for the first few years of a project’s life after which the modules will probably have been superseded by more recent versions and thus have very limited value.

Other characteristics also shape the way financiers look at PV. One key risk factor is that this is still a relatively new industry – will modules perform as predicted for as long as necessary to earn the returns needed to justify the finance? What if a new building shaded an installation in a few years time? How secure are the power purchase contracts? Many PV projects are by their nature small, and the transaction costs of arranging finance can be prohibitive; pooling projects is one answer, but they may have such varied characteristics that this can be difficult.

Despite these concerns, however, the PV industry is currently an extremely attractive market for investors. It is expanding very rapidly which keeps individual companies growing, but also makes mergers and acquisitions much more likely within the field. It is a proven high-technology product, with a robust demand and relatively secure returns and profitability. It is also an industry with high capital demands.

In addition to sums from both private investors and larger financial institutions, PV in Europe can also call upon other sources of potentially significant funding. First, the European Union has provided money for research, development and demonstration under the various Framework programmes it has run. Recent significant initiatives include the launch of the PV Platform and the Intelligent Energy Europe programme. Currently being formulated is the next key initiative, the Strategic Energy Technology Plan which should also provide significant support to PV.

The European Investment Bank (EIB) has also invested significant sums in energy projects. Its mandate is to use the funds at its disposal to support European policy goals. Within its annual lending of around €50 billion per year, around €4 billion (8%) goes to the energy sector, and of this, between €600-800 million goes to renewable energy. EIB lending for PV focuses on areas that will lead to cost reduction (as this is a key policy goal). They have also set up a fund with some €2 billion to support low and sub-investment grade proposals, particularly in RD&D, innovation and research infrastructures.


The PV industry has been growing very fast, and looks set to continue to do so (whichever growth forecast one chooses to believe). The new feed-in tariffs will only add to current levels of demand, and the PV companies are investing to meet this. It will require significant finances to maintain these growth rates – however, there does appear to be a buoyant capital sector with both sufficient appetite and resources to support the industry. Ultimately, they will continue to do so as long as it appears profitable – and the spectacular growth in Germany has already provided some early investors with extremely handsome returns. People entering the market now are still confident of repeating this success.

Edward Milford is Publisher Emeritus of Renewable Energy World
e-mail: rew@pennwell.com

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