German politicians are the trainers of the solar industry

Feed-in tariff schedule for coming years will design the roadmap to grid parity in the world

What will happen with the global market demand for solar PV in 2011? Will we see another magnificent year like 2010, with a record growth of 80% compared to 2009? Or will the global market shrink or grow just modestly, due to a collapsing German market as a result of politicians trying to break the world’s leading market? In this case it could lead to an industry facing oversupply, price erosion and an industry consolidation, with German companies facing financial problems or even bankruptcy. This scenario would mean that a lot of the invested money and the jobs created over the last decade will get lost.

Unrealistic but phenomenal growth in 2012?
What is the problem? The German market grew almost 90% compared to 2009, leading to more than 7000 MW of new installations in 2010. Germany now accounts for over 55% of the global market volume. The average yearly growth rate since the year 2000 is around 67%. It is hard to imagine what this would mean if it continues at the same rate. It would mean that in 2012 more than 20,000 MW and in 2015 more than 90,000 MW of solar power would be installed... It would also mean that Germany would generate more than 25% of its total electricity consumption through solar PV in 2015. Great and phenomenal figures! But with the current Feed-in tariff system, the total cost related to this growth path would be phenomenal as well. And since all electricity users will have to pay for this through a surcharge on their electricity consumption, the price for a kWh from the grid would grow quite high too. This scenario however also means, that grid parity would be reached sooner, and most likely before the year 2015....

“Go-and-stop” scenario is killing
This gives the German government a dilemma. Stopping growth abruptly will not only hurt the global industry, but many German manufacturers and companies as well. But how then can future growth be controlled?
A market cap, like a maximum acceptable volume eligible for the FiT? Lessons learnt from the past are that “caps are killing”.  A ‘go and stop’ scenario will lead to a run on the ‘last FiT subsidies’ resulting in an ‘empty bucket’ halfway through the year. What should the companies do the second half of the year? Quickly lay-off employees and hire them again just before next years’ round? It will make the industrial manufacturers hesitant to invest in new machines and equipment for production expansion, hurting Germany in the back as leading high-tech solar equipment supplier.

Controlled steps
It seems better to control the growth by bringing down the feed-in tariffs gradually, but predictably, in pre-announced and pre-controlled steps per quarter, avoiding end-of year rallies. This will give the industry a clear focus and marks for necessary cost reductions. This would not only effect German companies, but as the leading market, it would force the entire global industry to cut cost gradually, since most manufacturers in the world still rely heavily on sales in this market.

Politicians defining the global roadmap
German politicians have the unique opportunity to define the global roadmap towards grid parity in Germany and other countries in the world. The pace can be structured, the goal of grid parity reached within less than 3 years. A continuation of the market growth means larger volumes of modules and inverters are needed and volume is the way to reduce cost of production for modules, inverters and systems. That means grid-parity can be reached sooner and feed-in tariffs can be reduced sooner as well. More manufacturing volume also means the need for more, smarter and more efficient high-tech equipment and machines. Not by coincidence an area where Germany holds one of the best positions on the global market.

Germany: the trainer pushing its athletes
The solar industry is training for the big game when grid parity is reached and subsidies are no longer needed. It looks like a sports team training to get ready for the highest level of competition. In our world: competing with fossil fuel. The athlete trainer of this industry is Germany and all it has to do is push its athletes a little harder each time to be more powerful and efficient, until they are ready for the big game. Now, let’s hope that the German politicians are a bit sports minded and understand the chances for a Gold medal....

Why will the global market show further growth in 2011 and 2012…?

The year 2010 promises to become another revenue record year for the global solar PV industry. The newly installed solar PV power in 2010 could reach the all time high of around 14,000 Megawatt worldwide. This will be a market growth of around 100% compared to 2009. Will the industry continue this boom in 2011 and onwards?

Germany: 55% of the global PV market
Germany will take up around 55% of the global PV market volume in terms of newly installed solar power in 2010. The Feed-in Tariff will decrease 13% per 2011, as regulated by law. As stated in a previous blog post, to my opinion, this will not impact next years’ market growth. The industry can and will adjust their pricing in order to keep this major market alive and kicking. Even in 2011 a strong German market growth can be expected again, as customers will be encouraged to quickly install a PV system, before the FiT will be cut-back a more serious 22% in 2012. That is, if the German government will not decide to implement a ‘cap’ on the market volume eligible for the FiT. As Spain demonstrated, ‘caps are killing’ for a market and in the case of Germany, depending on the cap figure, it could have a serious impact for the global solar industry.

Scenario 1: Germany introduces a market cap
Let’s visualize a scenario where the German government will introduce a market cap in order to control the costs for the electricity rate payers paying the FiT premium. A cap that’s lower than the current market volume will force the industry to sell its extending product volumes elsewhere. There are no markets able to consume several GigaWatts, simply because the business infrastructure is not yet ready for it. As a leading and well developed market, Germany was ready to cover up for the losses in Spain in 2009. The companies, the sales people and the engineers were available to do the job.

But, which market can backup for Germany if a cap will reduce demand in Germany in 2012? Which market could easily take over a few GigaWatt extra from Germany? Can Japan take a few more GW and grow 200% in one year without importing modules? Can Italy grow with a few more GW in one year? It seems at least more logic than for instance the world’s number 3 market California taking a few GW extra. California is yet far away from the 1 GW mark and the financing issues and administrative and procedural hurdles make it unlikely to take up a few GW in just one year. If all these markets can’t, where will all the modules go? And if no market can consume the GW’s, what will happen? A price fight competition is a likely scenario, making casualties among manufacturers, including several German companies. Not only downstream, but also upstream. A cap on the German market effectively means a cap on the global market. And that will lead to a natural stop on production capacity expansion. Thus leading to a fall back for the leading German equipment manufacturers. They will lose high qualified jobs too. Can a German government afford to lose jobs in its globally admired and growing solar industry and current economic environment? This seems unlikely and let’s hope the government is smart enough to stay away from a market cap…

Scenario 2: FiT reduction will lead to further market boom
It is my belief however that, without a cap, but with further cut-backs on the FiT up to 22% in 2012, as regulated by law, the German market and global market will continue to grow rapidly. There is a good chance that the industry can bear this 22%. First of all, there is still room for reduction of PV system costs. Modules can be produced cheaper by technology improvements, and further upscale of mass production and acceptance of a lower profit margin. Some manufacturers of crystalline modules stated that they are already close to $1 per Watt production cost. Add to that cheaper inverters and other BOS components, where cost reductions based on mass production have not yet really taken off, and turnkey PV system cost should be close to $2,50 per watt very soon. And with the Euro improving against the dollar as currently is the trend, it should be feasible.

Back-up market for Germany
In other words, there will be room to keep the German market going. And, once module and system prices are this low, other markets like Italy, with higher FiT’s will become even more attractive and thus very thirsty for modules and systems too. Not to forget about the many new and emerging markets, like the UK, India, China, etc. Bringing down the PV system prices to match the German requirements will also open up new markets. All in all this could lead to an even greater hunger for modules and systems on the global market. Manufacturers will sell as much as possible in the most profitable markets and sell anything else in Germany. In this scenario, the global market could grow along with the industry, which is still expanding its capacity rapidly and with new entrants looking for a piece of the pie. This scenario could lead to continued strong growth of the global PV market and industry until at least 2012.

44 more GW in Germany by 2014?
This scenario will give other markets the possibility to grow and build up their business infrastructure. By the end of 2012 these markets, like the US, Italy, India and other Asian and European markets will then become ready to consume multi GW’s per year. That will hopefully make the world market able to survive a fall back scenario in Germany. And that seems inevitable in the end. Even a ‘modest’ 30% annual market growth scenario in Germany would mean an additional 44 GW of installed PV power by 2014. There are enough question marks if Germany, its grid and energy infrastructure can accept this huge amount of solar energy production capacity.

The maximum beer consumption
So, let’s hope the German government understands the dilemma and will give its industry and market at least another 2 years of reduced FiT, but without any cap. That will give the rest of the world the possibility to get ready for GW consumption, for the modules Germany can’t take anymore. That will not only help the global PV industry, but of course its own German solar businesses as well. They will then be able to expand their activities to these new markets in the coming years. It is a little like the Germans taking beer. They can consume a lot and maybe even the most per capita in the world, but there is a physical limit too…

The German PV market in 2011

What will happen in the German PV market in 2011? It presently looks like this year will show record figures for newly installed PV power, like last year. Customers want to make use of the current feed-in tariff, before this incentive will be reduced at the beginning of 2011. Since the government announced additional reductions of the tariffs in 2009, sales rocketed. It looks like the further feed-in tariffs are cut back, the faster the market is growing...With another reduction following on January first 2011, this is likely to boost sales till the end of this year. So, what will happen next year? Will the government be surprised when they see record numbers at the end of this year and decide that another feed-in tariff reduction will be necessary in 2011? Will they get scared that the public, their voters, will no longer accept the premium they pay on their energy bill to subsidize the feed-in tariffs?

Consolidation
One could conclude that the subsidies are still too generous. They could think that a further feed-in tariff reduction will cool down the spectacular growth....But, will that happen? Well, the global solar industry can certainly not survive without the German market, which takes more than half of the world market. So, in order to survive and keep their market share, the industry will have to reduce module and system prices. This will reduce their margins and profit. But, it is better to lose part of your profit than being forced out of business. This is what we call the 'consolidation'; survival of the fittest. Only the companies able to bring down cost and accept lower margins will stay in business.

Further feed-in tariff reductions will cause the market to grow faster
So, let's imagine, the German government will further reduce the feed-in tariffs in 2011, in order to 'cool-down' the market growth. My feeling is that this measure will be counterproductive. The faster it will reduce the tariffs, the more urgency the customers will feel to 'buy their own solar system', before this incentive gets reduced even further...And the industry will consolidate even faster. Cost and prices will need to be adjusted. This means acceptance of lower margins, or grow faster in order to reduce cost of production. This could help to hold and expand their market share in the fast growing German market.

Can the growth be cooled down?
Does the German government have any other solution to cool down a fast market growth? Frankly, I do not know how. Introducing a market cap for its feed-in tariffs will lead to a run on this incentive as well, and will force companies out of business, because there are no sales after, say 'May, since the cap has been reached'.

Too big to fail
Germany has chosen for renewables and the people and customers like it so much, there is simply no way back. Does it matter? No, Germany will lead the way in photovoltaics in the future. It has simply grown too big. It can't be ignored anymore. Not by the government, not willing to stop this job-machine, not by its population, which embraced solar PV and not by the global PV industry, because the market is simply too big to lose. Yes, it will cost the German energy user money and slightly raise their energy bill for many years. But energy bills will be raised anyway, due to increasing cost of conventional energy sources like coal (carbon taxes) and oil (scarcity). In the long term, these same customers and voters only benefit from more solar and renewables. For example with more predictable and stable energy prices. Germany will build up a large and still growing share of clean and sustainable energy supply. And, let's be honest, who would not prefer such a country to live in and leave that for your children?

Germany and solar pv is like Google
Germany sets the trend in renewables and is market leader. As technology innovators, Germans will always be able to make money on solar. German industries, investors and entrepreneurs can be found everywhere around the world. They have the knowledge, experience, industrial and innovative power, people and money to maintain world leaders. I think, that the German market will keep on growing. In 2011 and onwards. And fast as well. At this speed, it might even become the first market reaching grid-parity, when the cost of solar power equals the retail cost of conventional electricity. This will speed up the market even more and create more business opportunities around the world. Germany, and its solar industry infrastructure, could become a Google in solar pv. Too big and important to fail. Leading the way with forward thinking. And Google is still not doing too bad...