Best of Both Worlds: What if German installation costs were combined with the best solar resources?
Germany is widely recognized as a world leader in solar energy deployment. The country installed a record 7.9 GW in 2011, with roughly 3 GW added in December alone . That represents roughly 28% of total worldwide installations of 28 GW — amazing for a country that represents just 3% of global electricity sales and slightly more than 1% of global population , .
What's even more amazing is that Germany has the insolation equivalent of Alaska. That is, it's not very sunny there. Just as impressive — the country pays a relatively low price for solar energy under its feed-in tariff (FIT) when compared to countries with far superior solar resources.
So, how does Germany do it? The country has effectively pushed down the price of its solar installations through stable purchasing and financing policies. The following describes those policies and projects the cost of solar energy — in the U.S. and international markets — if the installed cost achieved by Germany could be combined with more viable solar resources. The result could be more-economic solar power.
Germany's FIT is frequently recognized as the driving force behind the massive deployment. The country has aggressively reduced the FIT on a consistent basis, lowering the price paid to new solar installations. As of March 2012, the solar FIT in Germany ranges from 17.9 eurocents/kWh for ground mount installations to 24.4 eurocents/kWh for rooftop systems up to 30 kW, and excludes any tax credits U.S. developers may be familiar with. That's equivalent to $0.23/kWh – $0.31/kWh at current conversion rates. For comparison, Italy's FIT ranges from 17.1 eurocents/kWh for large ground-mount systems to 24.7 eurocents/kWh for roughly comparable systems.
Germany's current FITs are 15% below 2011 levels. Chancellor Angela Merkel has proposed additional cuts of 20-29% and limits to the percentage of energy FITs can be applied to . These proposals are under debate as of the publication date for this Market Insight.
Germany also directly supports the financing of solar installations. The federally owned KfW bank lends to individuals and community groups to facilitate renewable energy and energy efficiency investments . According to Paul Kuehn, Managing Director at Deutsche Eco USA, KfW's 2011 rate for refinancing senior debt for photovoltaic installations was roughly 4% . In 2010, KfW financed 40% of photovoltaic installations. The bank recently committed to lending €100bn ($140 billion) over the next five years. Interestingly, KfW was listed #1 among the world's 50 safest banks in 2010 by Global Finance magazine .
Germany also offers guaranteed access to the grid for solar installations. When combined, the FIT, lending policy, and grid access create a low-cost environment to develop renewable energy. The response has been significant market investment and a large industry of module and component manufacturers, installers, and related services.
Because the German and U.S. solar resource are so different, it's best to compare by converting the production-based FIT to a capacity-based $/watt value.
Using NREL's System Advisor Model (SAM) and solar data for Frankfurt, I calculated that installed costs to produce energy at $0.23/kWh, including "developer margin" or profit (assuming a weighted cost of capital of 8%, seven year straight-line depreciation, and 1-axis tracking). Low-cost funds available from Germany's KfW bank were excluded as that support structure isn't available in the U.S. The result: installed costs need to be $1.83/watt to replicate Germany's utility-scale FIT value.
That's pretty low — about half the value reported by GTM research in a recent report for U.S. installations . But U.S. installations are frequently recognized as expensive because of the need to bring in outside investors to take advantage of tax benefits, high developer margins due to the risk involved, and complexity in siting and interconnection. In contrast, developers accessing Germany's FIT require relatively low developer margin because the FIT payments and other policies are seen as quite stable.
But imagine Germany's low installed cost values in really sunny places. Table 2 compares capacity factors for a hypothetical 1-MW PV system and the relevant FIT payments, assuming Germany-like installed costs and no tax credits.
|Location||Capacity Factor (1 axis tracking)||Calculated Solar FIT|
|Los Angeles, CA||23%||$0.123|
|Sao Paulo, Brazil||17%||$0.173|
Of course, German FIT values may not be directly applicable to other locations without some nurturing of various industry participants. According to Toby Couture, Director of Energy Analysis of E3 Analytics and an author of several papers on international solar deployment, "FITs (for a host of reasons) have succeeded in creating more competitive and dynamic markets than supposedly "market-based" approaches such as RECs" . But Couture also comments that Germany's ability to install solar at a low cost is not about any single policy, but "the entire institutional/industrial/financial/regulatory framework, all of which are supported by policy stability and predictability."
Kuehn of Deutsche Eco concurred, arguing "[t]he key to Germany has been the relative consistency in their FIT policy and correspondingly large PV market… everyone on the supply chain accepts lower margins in comparison to the U.S., which leads to lower install costs."
Given the solar resources covering much of the U.S., sound policy and policy consistency could be a viable recipe for success.
: Wang, Ucila, "Germany's Solar Identity Crisis", January 10, 2012
: Roca, Marc, Bloomberg New Energy Finance, "Solar Capacity Rose 54% to 28 Gigawatts Last Year, BNEF Says", January 13, 2012
: See U.S. Energy Information Administration, accessed January 18, 2012
: U.S. Census Bureau, 2012 Statistical Abstract, accessed January 18, 2012
: Blau, John, "Germany Slashes FIT Subsidies in an Effort to Rein in Solar Power Installations", February 23, 2012, RenewableEnergyWorld.com
: Deutsche Bank Climate Change Advisors, "The German Feed-In Tariff for PV: Managing Volume Success with Price Response", May 23, 2011
: Germany's KfW Bank invests EUR100bn in renewable energy, Pennwell Publishing, accessed January 27, 2012
 Personal communication with Paul Kuehn, February 2, 2012
 Global Finance (2010), "Global Finance names the World's 50 Safest Banks 2010", September 2010
: Prior, Brett; Seshan, Chitra (2011) "Concentrating Photovoltaics 2011: Technology, Costs and Markets", Greentech Media
 Personal communication with Toby Couture, February 2, 2012