ParisTech Review

The announcement came as the final blow for the German photovoltaic (PV) industry. In late February, the German government decided to advance by three months the scheduled reduction of guaranteed feed-in tariffs for PV electricity, originally set for July 2012. Furthermore, the reduction will be two orders of magnitude beyond what it was slated to be. After a series of successive cuts in 2010 and 2011, the price paid to owners of PV modules will be once more lowered – up to 30% less, depending on the type of installation.

This new measure is likely to come at a very dear cost for an already battered industry. In December, the German solar panel manufacturer Solon went out of business. Its counterpart, Sunways, threatened with a similar fate, had no choice but to join the portfolio of the Chinese firm LDK. In their wake, other companies are stumbling or losing their footing, like the Solar Hybrid installer or SMA Solar, a manufacturer of solar inverters (inverters convert direct current of 12 or 24 V into 230 V alternating current).

Flagships are at risk
Perhaps the most striking example is that of Q-Cells: once considered one of the champions of the national solar industry, in January this PV cells maker announced losses of 846 million euros for 2011, for a turnover of one billion euros. Its stock market shares collapsed, and the firm was forced to approach its bondholders to reschedule its debt. On April 2, the company, with a workforce of 2,000 people, announced it was filing for bankruptcy.

What caused such haemorrhage? Like their international competitors, the German makers of PV cells and panels are victims of a worldwide overproduction crisis, before anything. While the production capacity of PV modules reached 50 gigawatts per year, annual sales rose in late 2011 to only 21 GW, as analysts at Swiss bank Sarasin explained in their November 2011 report, “Solar Industry: just a few German companies will survive the market shakeout”. “Makers have built their production capacity according to forecasts that were too optimistic,” says Matthieu Glachant, director of the Centre for Industrial Economics at Mines ParisTech graduate school.

The result: solar panel prices have plummeted. According to the specialized agency Bloomberg New Energy Finance, they were halved in 2011. German manufacturers are not the only ones impacted: in the U.S., Solyndra LLC and Evergreen Solar have also bitten the dust, while First Solar is in serious trouble. The Chinese company Suntech also reported heavy losses. But while the crisis has hit all manufacturers in the industry alike, German producers have fallen from twice the height.

The abrupt end of the German “solar miracle”
For before the storm, there had been euphoria. Driven by a very proactive policy implemented since 2000 thanks to the law on renewable energies (in German, Erneuerbare-Energien-Gesetz, or EEG) introducing feed-in tariffs guaranteed for 20 years, the German solar market enjoyed a tremendous expansion, which accelerated in the late 2000s.

From 1105 megawatts (MW) in 2004, the installed production capacity for PV rose to over 24 000 MW today, according to statistics released by the Federal Ministry of the Environment, Nature Conservation and Nuclear Safety (PDF). Germany now produces about 4% of its electricity from solar energy.

A development that far exceeds that of the rest of developed countries that have joined the race later: Germany alone represents over 30% of world PV electricity production capacity, according to European Photovoltaic Industry Association figures.

The costs of incentives are exploding
But there are two sides to every coin. In Germany, things snowballed out of control. The years 2010 and 2011 have each seen the installation of 7,500 MW’s worth of solar panels, more than twice the government’s objectives. “Clearly there was initially a poor estimate of the impact of subsidies, specifically an underestimation of the cost of deploying the panels with subsidies,” says Matthieu Glachant. The direct consequence: the cost of subsidies for solar energy exploded. The weight of the specific contribution to the EEG – i.e. the costs of supporting renewable energy as a whole – in electricity prices paid by households in Germany rose from 5% in 2009 to 14 % in 2011, according to the German Institute for Economic Research (PDF).

To make things worse, the RWI (Rheinisch-Westfälisches Institut für Wirtschaftsforschung), a pro-industry research institute, added fuel to the fire by releasing its statistics. According to its calculations, the cumulative cost of supporting the PV industrial line (the difference between amounts paid under the feed-in tariff and the amount paid for the same amount of electricity at market prices) has surpassed 100 billion euros in 2011. Though this figure has been strongly challenged by pro-environment research institutes, like the Wuppertal Institute, it nevertheless hit the mark, due to significant media pickup in Germany and its subsequent use by opponents to solar energy.

The necessity of readjusting feed-in tariffs
At the political level, the cost of the “solar miracle” has suddenly become a subject of considerable tension between the Environment Minister, Norbert Röttgen of the CDU (Christian Democratic Party) and his liberal allies in the government coalition. Both sides have finally agreed and cuts in subsidies, coupled with automatic reductions whenever targets set by the government are exceeded, have been endorsed by Parliament on Thursday, March 29.

For Matthieu Glachant, the medicine was bitter but nevertheless necessary to allow a return to a reasonable pace of development. “Once an estimation error is committed, one can either choose to persist or to correct it, and in both cases it creates disorder”, he says. “They had to choose between two evils. Personally, I find that the decision to significantly revise down subsidies has been a very good decision, but of course the ideal course would have been to not make the mistake to begin with.”

Competition from emerging countries singled out
Industrialists themselves accuse the government of jeopardizing an industry that employs between 45,000 and 100,000 people in the country depending on estimations. They point to competitors which they believe benefit from the feed-in tariff policy without paying the price.

In their crosshairs: the manufacturers of emerging countries, particularly China. In recent years, the latter have deployed production capacities of PV equipment far superior to those of Europe, with lower production costs. “Germany has a production capacity of 3 gigawatts per year. China alone has a production capacity of 30 GW per year”, says Professor Eicke Weber, director of the Fraunhofer Institute for Solar Energy. However, he adds, “in this market, only modules with the lowest prices can be competitive, and the German industry has a hard time being competitive.”

Several cells and panels manufacturers in Germany, including Q-Cells, are even considering filing a complaint with European authorities for dumping. At issue: the favorable investment support policies that Chinese manufacturers are benefiting from, especially to bring their production facilities up to date.

In Eicke Weber’s analysis, this is a key element of their competitiveness. “The Chinese government has provided investors with huge credit lines with very low interest rates. The German industry could not keep up with that.” And this, even as the production tools in question are often made… in Germany. “For the manufacture of machinery, Germany is the clear leader. German machines manufacturers provide half of the equipment in the world. But we do not have the same investment capabilities. It is a question of size and age of production lines.”

The researcher proceeds to point out that the aging of the production system is not a problem solely involving manufacturers. The world of research could suffer as well: “We are very afraid that if manufacturing capacity goes away, keeping research here won’t be valued as much”, says Dr. Weber.

Innovate to overcome the crisis
A strong argument, given that if there is a point that everyone agrees on, it’s this: innovation stands as the best chance for German companies to survive the crisis. “Solar panels are becoming a commodity, and [their production] migrates to low cost countries, emerging countries for the most part. It is hard to compete on low-cost products. The only way to escape this price competition is to specialize in one way or another on a premium product, or a niche,” states Matthias Fawer, Chief of Sustainable Investment at Sarasin and co-author of that bank’s report on the subject.

Matthew Glachant, who visited China in 2010 to study the development of the Chinese PV industry (read the Cerna report: Innovation and technology transfer on an international scale: the case of the Chinese PV industry, available in French), goes further. According to him, the production of classic PV panels and cells, made from silicon, has no real reason to stay in Europe. “In my opinion, one of Q-Cells’ major problems is bad specialization”, he says. “When you look at the profit distribution, where are the margins? On the upstream (production and processing of silicon), on production facilities and downstream, on the installation of panels. The manufacture of cells and panels based on the mature technology of crystalline silicon, which is predominantly the one Q-Cells operates, will eventually be carried out by Chinese companies, unless production is relocated in China. To be competitive, we must inject money into research, we must invest in future generations of technology.”

For the time being, industry experts agree that in terms of innovation, the edge still goes to Germany, who has been spearheading the sector for years. But they all also remind that things can change all too quickly.

If manufacturers in Germany and Europe want to remain competitive, they must be able to find a role as precursors in their field. “In a way it can be said that German companies became a little lazy in their prime, when they were leaders in their markets,” says Matthias Fawer of Bank Sarasin. “They thought they were the best, they failed to see their Chinese competitors closing in so fast. They were caught by surprise by the rapidity with which Chinese companies have increased their production and lowered their prices, and so on.”

Offer-based incentives under fire
But for some, politics also have a role to play. “Let’s be very clear. Germany’s energy policy has created a market for photovoltaics – not an industry”, stresses Professor Eicke Weber. “There never was any direct support to the industry, only market incentives provided by the feed-in tariffs. To say “now that the market is created, we should not leave it to the Chinese”, is another step altogether.”

A step that, according to him, Germany should take. “I think we should create an even playing field, [by supporting investment like our competitors do]. We have taken the first step, now we must take the second, to profit from the market we created.”

This point is not without its detractors. For Matthieu Glachant, a policy that supports the offer is necessary, but should focus on research efforts. “There was an error in reasoning which was to think that subsidizing the demand for renewable energy would create a national industry. But obviously if such a goal is to be pursued in an open economy, it is vital to have an offer policy, to subsidize R & D.” For him, supporting investment in the productive apparatus is difficult to justify, especially vis-à-vis other industries that are facing the same difficulties.

In addition, the rules of the European Union hardly allow any distortions in competition. Despite the current situation, experts keep an optimistic outlook: with its powerful research facilities, the German PV industry still has many cards to play. “Right now, there is not much innovation or research in progress because there is no money left to invest”, concedes Matthias Fawer of Bank Sarasin. But once the gap between supply and demand is readjusted, “I’m certain there will be a renewed confidence, a new cycle of innovation.”

Like many industry observers, Matthias Fawer wants to emphasize the positives that the crisis must not overshadow. Owing to the dramatic fall in production costs, solar energy has become competitive compared to other sources of power generation – much faster than anyone ever expected. “And I think that’s what counts ultimately,” ponders Fawer. “How many gigawatts of solar power, of wind power, are produced and at what cost. As for the industry, the ones who survive will be stronger than ever.

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