Despite the German government’s plan to reduce incentives for new solar installations, some market segments in the country will remain attractive for photovoltaics (PV) in 2012, with the return on investment (ROI) remaining sufficient to attract financial support for residential systems and even some large-scale systems, according to the IHS iSuppli Photovoltaics service at information and analysis provider IHS.
The residential segment could still deliver respectable ROI if costs do not exceed a specific threshold, even in the face of reduced feed-in tariffs (FIT) that once had subsidized the solar industry in Germany, home to the world’s largest PV market. Earlier in February, the country’s ministries for the environment and the economy had jointly published a proposal to cut FITs and simplify the overall tariff system. And while the proposal still must pass the German parliament and the upper house, it is likely to be accepted.
The FIT reductions mean that the success of the German PV market in 2012 will hinge on its capability to generate attractive ROI based on free-market dynamics, rather than on government incentives. To justify investments, those who install solar systems must pay their own way to a much larger degree than before, either through their own consumption of electricity, or from power sales to others. And although such actions are likely to lower the ROI on solar installations in Germany, returns still are expected to remain attractive enough to attract financial support.
Throwing a FIT
The new proposals call for tariffs to be reduced and application categories to be simplified into three starting March 9. The new tariffs exclude any bonus for self-consumption of electricity generated by solar installations.
Tariffs by system size are:
• Systems up to 10 kilowatts (KW)—a segment that consists of residential roofs but not farm houses—will have a FIT of €19.5 cents per kilowatt hour (kWh)
• Systems up to 1,000 KW—an area consisting of larger roofs—will have a FIT of €16.5 cents per kWh
• Systems up to 10 megawatts—including both large rooftops and ground installations, will have a FIT of €13.5 cents per kWh
Under the new plan, large systems above 10 MW will not receive any FIT starting March 9. Moreover, tariffs will decrease monthly by €0.15 cents per kWh starting May 1, 2012, replacing the annual FIT cut that typically occurs in January.
A so-called market integration model will be introduced, under which only 85 percent of the annually produced electricity for systems up to 10 kW—and 90 percent for all other systems—will receive the FIT. This clause affects mainly the institutional investments of PV power plants, and is driving PV power plants toward local consumption or Power Purchase Agreements with buyers.
For 2012 and 2013, the government has confirmed a target range of 2.5 to 3.5 gigawatts of annual installations, with the target to be reduced by 400 megawatts annually from 2014 on. Summarizes the FIT system proposed by the German Ministry of Environment.
ROI on the Decline but still Viable for Residential Segment
After the change in the FIT, IHS iSuppli calculates that residential systems in Germany still can generate an ROI of 10 percent on equity capital (20 percent) if system prices are at €1,850/kW, even with the omission of the self-consumption bonus. With pricing already having fallen to this level in the market, the residential segment will continue to offer attractive investment conditions—the FIT reductions notwithstanding.
However, for large rooftop systems up to 1,000 kW, attaining a worthwhile ROI will depend on how much of the generated electricity can be consumed locally or sold via Power Purchase Agreements. In the case of a supermarket or manufacturing site consuming about 30 percent of the PV electricity it generates, solar systems can yield a 10 percent ROI if the system price doesn’t exceed €1,400/kW. Such a scenario, however, approaches the limits of what is possible today.
On the other hand, system prices have to drop in order to keep ROI rates stable if the PV power is not consumed locally and if it is subsidized entirely by the FIT. For large rooftops, system prices must be at €1,250/kW to attain the key threshold of 10 percent return on equity capital.
For their part, ground installations seeking to yield positive ROI should cost €1,050/kW, a low level not yet foreseen in 2012. Just the same, if PV electricity can be sold via Power Purchase Agreements at rates of €10 cents/kWh, and prices are linked to average electricity price inflation of 4 percent per year, the investment can justify a cost of €1250/kW. An inflation adjustment of PPAs can make this business model beneficial soon compared to the fixed FIT.
Investment Case
A major question for the future growth of the German PV market is the level of investor interest amid declining ROI. Do installations really require a 10 percent ROI to attract investors’ attention?
During 2008 and 2009, PV investments in Germany reached ROI rates of 7 and 8 percent. Assuming an ROI rate of 7 percent instead of 10 percent, PV systems for large roofs can cost €1,500/kW, which is feasible today.
Will investors accept these lower rates? The answer is yes, although not with the same vigor seen in the past. Yet PV investment in Germany is expected to attract financial support even when ROI declines to 7 percent.
To be sure, the traditional PV business case of producing and feeding electricity to the grid will have to be modified and reoriented toward local consumption and Power Purchasing Agreements, given that the new FITs will most affect engineering, procurement and construction (EPC) companies in Germany. To facilitate the investment case, the EPCs must take care of local consumption or PPAs. Undoubtedly, it will be more costly to develop large PV projects, so the system hardware—i.e., modules and inverters— must cost less.
Only the lowest system prices will be accepted, and it will be incumbent upon European suppliers to reach competitive low prices. At €0.75/W, modules made in the European Union are 20 percent more expensive than the €0.65/W modules offered by first- and second-tier Chinese suppliers.
Government Targets Create Market Uncertainty
Compounding the problem, the German government’s confirmed target of 2.5 to 3.5 gigawatts for new annual installations is bad news for PV. To strengthen its position and squeeze the market into that target range, the German Ministry of Environment intends to assume sole power to change FIT tariffs without consultation and agreement of the parliament and upper house. Under this clause, the ministry would be able to change tariffs on very short notice to any desired rate, which is bound to create uncertainty for all investors.
Already, both the tariff cuts and the potential volatility of tariffs are severely affecting large roofs and ground installations, two of the three PV market segments in Germany.
How will the PV industry get out of the dilemma?
It will be up to EPC companies to transition from incentives to free-market dynamics, including Power Purchase Agreements and local consumption. Once the supply chain—and in particular, the EPCs— has modified services, large installations then can pick up again. The German PV market is not nearly so saturated in terms of space and rooftops, with only 10 percent of suitable rooftops equipped with a PV system, according to current rough estimates, which provides additional room to grow.
Learn More > German Solar Market Will Remain Attractive for Residential Investments Despite Cuts in Government Incentives
