Sun setting on European solar subsidies
The Australian
3/7/11 4:22 AM
The Australian
Sun setting on European solar subsidies
Peter Wilson, Europe correspondent From: The Australian March 05, 2011 12:00AM
TIM German works for Cornwall, the warmest and southernmost county in Britain, but his mood right now is anything but sunny.
In fact, Mr German, the manager of renewable energy for Cornwall council, is furious about what he sees as a cack- handed policy shift by the British government that has clouded the county's plans for grabbing a slice of Europe's solar energy boom.
"We've got dozens of companies lining up to invest here and create new jobs by developing clean energy and suddenly, bang - it could all be killed off," he said yesterday.
To Mr German's chagrin, Britain is joining other major European countries in rolling back the consumer-paid subsidies that have fostered the world's most dramatic growth in solar power installations.
Europe now accounts for about 80 per cent of world demand for solar power equipment, but governments from Germany to Portugal have started to remove their guarantees of long-term
artificially high rewards for anybody who puts solar panels on their roof or invests in an
industrial-scale solar energy farm.
Industry experts say those feed-in tariffs, which are usually guaranteed for 20-25 years, have
succeeded in their primary aim of kick-starting the solar energy industry by encouraging enough investment and economies of scale to bring down the prices of solar power equipment.
In some parts of Europe, such as southern Italy, solar power is already close to being able to compete on price with fossil-burning electricity for retail consumers, and broad areas of the continent should reach the same point by 2015.
The problem, according to Phil Dominy, a senior executive at the London office of financial
consultants Ernst & Young, is that the FITs "have been too successful for their own good".
"They have attracted much more investment than governments had expected, and suddenly governments have got nervous about imposing billions of euros in higher costs on consumers."
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Page 1 of 4Sun setting on European solar subsidies
The Australian 3/7/11 4:22 AM
The subsidies for the solar industry are paid by consumers in the form of higher electricity charges rather than higher deficits on national budgets, but this year no government is comfortable about
raising utility charges in a flagging economy.
"It makes sense for them to start reducing the tariffs, but some governments like the Spanish are
doing it in a very unfair way that is unsettling investors and causing a lot of upset for the industry,"
says Mr Dominy.
"A lot of people who have already invested are now going to lose money in Spain, so some are taking legal action against the government."
The problem for Cornwall council and Britain's fledgling solar industry is that David Cameron's coalition government has backtracked on its commitment to the FITs more quickly than any government in Europe.
British Environment Secretary Chris Huhne announced a rethink of the program last month, just 10 months after the scheme was introduced by Gordon Brown's Labour government to encourage householders and community groups to install solar panels.
The Conservative and Liberal Democrat parties that took power last May claimed credit for having prodded Labour into introducing the scheme and promised they would expand it, but Mr Huhne now says it has to be reviewed because of a flood of applications to set up large solar plants.
"Large-scale solar installations weren't anticipated under the scheme we inherited, and I'm concerned this could mean that money meant for people who want to produce their own green electricity could be directed towards large-scale commercial solar projects," Mr Huhne says.
Under the scheme, anybody who installs solar panels is guaranteed for 25 years to receive up to 41.3 pence (66c) for each kilowatt hour generated, even if they use it themselves rather than feeding it into
the power grid. If they do feed the electricity into the system, they get an extra 3p on top of that.
Those rates are more than 10 times the market price.
Investing in a household solar unit that cost about pound stg. 10,000 ($16,060) could generate a
tax-free return of perhaps 10 per cent, and many corporate investors and pension funds decided that they wanted a slice of the action.
Mr Huhne says the review will first look at excluding large solar projects or cutting their profits, and
will then consider how to handle the smaller household solar units.
Mr German says the government about-face is exasperating for companies that have ploughed money into preparing for the scheme, and for Cornwall, which has already given planning permission to eight solar energy parks and has 27 more applications on its books and dozens more waiting in the pipeline.
Cornwall has the best sunshine and lowest average incomes in Britain, and had been banking on the FITs to produce badly needed investment, jobs and cheap energy for the county.
"With the sort of returns you can earn under the feed-in tariffs, it's very hard to understand how the government didn't realise how much demand there would be," Mr German says.
"They only had to look at Germany and Spain, where exactly the same sort of thing happened years ago."
Germany has pioneered the scheme over the past decade, with spectacular results. Last year alone,
that nation installed 6.5 gigawatts of solar energy capacity, more than the total capacity of the next
two largest solar nations,
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Page 2 of 4mSun setting on European solar subsidies The Australian
3/7/11 4:22 AMmSpain and the US, put together.
The cost is E5.5 billion ($7.6bn) in higher electricity charges for German consumers, so
5.6 per cent of the nation's combined electricity bill or 0.2 per cent of its total economic turnover goes to subsidise solar producers.
The subsidies are highest in the Czech Republic, where 7.4 per cent of electricity payments go to subsidise solar power, meaning 0.37 per cent of GDP is devoted to producing a world-high 3.3 per cent of the nation's electricity.
One result of Germany's expensive investment in using the sun to reduce pollution and buy
a degree of energy independence is that the country is well-placed to reach its international climate change commitment of deriving 18 per cent of its energy from renewable sources by 2020.
Germany had achieved 8.9 per cent by the end of 2008, while Britain, which has promised
to reach 15 per cent, had only made it to 2.2 per cent.
Spain was the next country after Germany to have a boom in solar energy, and this year
Italy and the US are expected to soak up many of the new solar panels that will no longer
go to the Germans and Spanish.
According to Mr Dominy of Ernst & Young, solar power will on average reach price parity
with other forms of electricity in Europe by 2014, so FITs "will fade away" over the next
three to four years.
"The danger was always that if you set tariffs too low you wouldn't trigger the creation of
a market, and if you set them too high you would get boom and bust, in which case the
crucial thing is how you go about cutting the tariffs."
Germany and Italy have adopted the most sensible approach to FIT reductions by making gradual cuts that are tied to the industry's annual growth and its success in lowering the
price of solar panels, Mr Dominy says.
"That has been carefully planned and has avoided retrospective changes for people who
have made long-term investments," he says. "Spain stands out as an example of how not
to do it. They've made retroactive changes, not by reducing the actual tariff rates, but by imposing a cap on the number of hours' output you can claim for each year.
"Their argument is that solar module prices are coming down so tariffs should come down,
but that doesn't help you if you built your solar farm before the prices came down.
"I had one client recently who will now make a loss on their project in Spain for the next 25 years."
France suddenly suspended its scheme for three months in December, and will now impose
a limit on the solar installations it will subsidise each year, along with a tender system for establishing large-scale solar plants.
Those policy changes have upset many investors, but they will not derail the long-term viability of the industry, according to Europe's leading private analysts.
Jenny Chase, the chief solar industry analyst for Bloomberg New Energy Finance, says Europe's solar industry faces "a certain amount of adjustment" but there is still good growth
in the future.
"The reason the FITs have suddenly come down is that the cost of solar modules have come down more quickly than the tariffs were scheduled to come down . . . leading to a boom in investment," she says.
"They definitely made the incentives for investors too high because they had no idea there would be such huge falls in the prices of solar modules in 2008.
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Page 3 of 4 Sun setting on European solar subsidies
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3/7/11 4:22 AM
"The governments said 'Oops, we're committed to high tariffs for 20 years', and now they're locked into paying for that with higher electricity prices.
"It has certainly worked in terms of getting the industry to the point where the price of solar modules has really started to fall dramatically.
"In 2008, when Spain was sucking up a lot of modules, demand kept prices up, but Spain
hit a bump at the end of 2008 so prices crashed, but that meant prices only fell to where
they should have been anyway.
"The cost of actually producing modules has fallen so much that since the end of 2008
prices have fallen by more than 55 per cent."
Ms Chase says one result is that in some parts of southern Italy, where there are high retail electricity prices and plenty of sunlight, unsubsidised solar power will already be as cheap
as carbon-burning electricity if solar installation costs are the same as those in Germany.
"There is no real reason for those costs to be higher than Germany's - the problem is
that pricing in Italy has been value-based instead of cost-based," she says.
In other words, Italian installers and operators of solar panels have been charging high
prices simply because they can.
Ms Chase says Italy's "insanely high" feed-in tariffs mean its solar boom could hit a sudden downturn brought on by government action.
"But if Italy took away FITs tomorrow, I believe it would still have a viable solar industry,
and some other parts of Europe are not far behind," she says.
"There are parts of Europe where bad sunlight and cheap electricity mean solar power is
a long way from achieving grid parity (price parity with fossil fuels), but by 2015 there will
be parity across a lot of Europe."
According to Ms Chase, the fact that retail electricity prices are much higher than commercial prices means it will be household solar power units that first reach price parity as module prices keep coming down "to the point where solar power simply won't need subsidies".
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Copyright 2011 News Limited. All times AEDT (GMT +11).
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