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German Solar Dreams - So Long Or Goodbye ?

Politics / Renewable Energy Dec 17, 2011 - 07:33 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleIS IT SO LONG - OR GOODBYE ?
Solon SE, in 1998, was Germany’s first listed solar photovoltaic producer. In Frankfurt trading on 15 December it stock price fell 46 percent to around 50 euro cents. The Berlin-based company had filed for insolvency after failing to reach an “arrangement” with banks and investors, its brief statement said. This was the first publicly traded German solar cell-making company to file for insolvency. Analysts noted the company had failed to cut costs fast enough and was unlikely to repay a 275-million-euro loan from Deutsche Bank and a group of seven German banks, due by 31 December.

The reasons for this sudden collapse are in fact endemic in the solar PV industry - even in China the industry has large, even massive surplus capacity relative to reasonable or possible market growth trends and absorbtion capacity. In Germany, as of May 2011, more than 18 000 megawatts (18 GW) of solar power had been installed, with over 85% of the cells home-produced. In year 2010 alone, the German solar PV industry produced and installed 7.4 GW in nearly one-quarter million individual systems. In 2010, solar PV stations supplied about 12  billion kilowatt-hours of electricity, around 2% of national consumption, but hopes that the growth curve can keep going, to as high as 25% of total consumption well before 2040, which German solar companies and their finance industry backers claim they can do, is now looking very unlikely.

The industry, drunk on subsidies simply grew too fast. US and especially European producers are the hardest hit. Workers in Germany's once booming solar energy industry now face a shakeout of epic proportions driven by ever falling prices for solar panels over the past year. Falling panel prices are a lot more the result of commercial and economic factors, including company bankruptcies than technology or industrial progress driving down unit costs. Solar electricity was always expensive and will stay expensive - tech progress only makes it relatively less expensive.

Cuts in subsidies for solar electricity, the "feed-in tariff" issue, weaker demand for panels, tighter supply of loans and credits from crisis-hit banks, and fierce competition from cheaper Asian rivals facing the same challenges are eating into what was once the world's biggest producer of solar cells, taking the shine off an industry that was "born in Germany". Long-term employees in this young industry can only count about 7 years experience in what seemed a gold rush industry, but in Solon's case the downside is especially tough: one desperate last move of Solon SE was to fire one-third of its remaining employees in one day.

Early hopes in Germany that the Merkel coalition's decision to phase out nuclear energy would restore growth has done little to reignite the sector. The most likely near-term filler of Germany's power gap will be coal and gas, rather than solar and wind energy, simply due to building costs and the reliability of supply. Other negative factors, especially the need for a German Super Grid to transport intermittently-produced wind and solar electricity - which would take as long as 15 years to build, given the immense financing - only add to the negative outlook.

The emerging and deepening German solar energy rout affects all the industry's producers and their subcontracted support industries. In Solon's case these include the Vogt Group, a support firm supplying planning and logistics services for solar plants. Vogt had 160 employees in the high times of the solar boom, around 2005-2007, but shriveled as the young industry rapidly peaked out. Down to one-half its high times workforce, further lay-offs are now very likely as panel price declines and weaker demand dampen growth. The likelihood of austerity programmes even in Germany, and the certainty of slower economic growth in Europe contribute to a negative outlook for high-price solar.

Average solar energy falling on the edge of the Earth's atmosphere is around 1.36 kW (Mercury about 6 - 14 kW; Venus about 2.5 - 2.6 kW) per square metre, but things like the tilt of the Earth, thickness of the atmosphere, clouds and other factors affect how much gets to ground level through the year. One handy average in middle latitudes is about 345 Watts per square metre throughout the year on a 24-hour average basis. Over tens of millions of square kilometres this adds up.

The real problem is collecting it, like the few grams or milligrams of lithium or gold in every ton of seawater, converting it to electricity, and transporting this with as little loss as possible to where it can be sold and used. One idea is to go where the sun shines strongly and both clouds and people are rare - the deserts - and then somehow send the power back to where the people are.

The German-initiated and European backed version of this idea is a 400-billion-euro Dream Project called Desertec, to produce the electricity in the Maghreb countries and perhaps in the Mashraq near east, and send it back to Europe mainly using undersea cables. Supposedly, it will be fine to depend on Arab exporters of electricity while fearing dependence on Arab oil and using oil import dependence as a main driver - along with the fear of global warming - of the EU's massive climate-energy programme to radically shift to green energy. Times change.

Why the Desertec idea has been floated with some determination and some energy sector corporate, investor and governmental seed cash features the heavy clouds hanging over solar electricity and the growing rout of green energy in Europe - and even worldwide. Major projects, especially big projects are the hope, but their likelihood of happening is nearly zero.

Spain's green energy programme, including massive subsidies for solar PV but also large subsidy payments for wind electricity and grants for windfarm development, have been dashed with the country's slump into deep recession. Its "green dream", before government budget deficit trimming started in 2008, then accelerated to slashing in 2010 and intensified again in 2011, was costing the nation more than 12.5 billion euro a year. Costs for its "solar family power plant" programme, might have spiralled as high as 180 billion euro for the 2007-2017 period if the programme, covering about 400 000 "family plants" when the plug was pulled in 2010, had continued floating ever higher on a magic carpet of feed-in tariffs, cheap loans and grants. Particularly in solar energy, green energy job losses have grown rapidly to an estimated 15 000 through 2008-2009.

The jobs dream used to pump more subsidies using the shiny high-tech oil-saving image of green energy equipment has been a particularly cruel failure.  Dr. Gabriel Calzada Álvarez of the King Juan Carlos University in Madrid  found that each green energy job in solar energy, created in Spain, cost taxpayers about 570 000 euro. The smaller subsidies paid to the equally high-tech wind power sector produced much fewer jobs, with a cost-per-job rate of about 850 000 euro. Even worse, his 2009 study found that for every four jobs created by Spain's expensive green technology program, nine jobs were lost because the electricity generated was so expensive that each "green" megawatt installed in the power grid destroyed five jobs elsewhere in the economy by taxes levied to fund the green energy, resulting in sharply higher business costs.

In Spain, the choice available became brutal: the government had to continually slash subsidies not only because the energy supplies failed to materialize in any easily-utilisable way, but because Spain was going broke and could no longer afford this folly. Not only in Spain’s case, but more intensely because of the depth of financial and economic crisis, the luridly high minimum electricity prices needed for, or rather thrown at renewable-generated electricity, often 5 - 8 times the price of coal-fired or gas-fired plants, wasted a vast amount of capital that could have been otherwise allocated. This public money was thrown at the industry by political deciders who "let the markets decide" when to bankrupt the banks they then bail out with public money, but do not apply that logic to meddling with the energy system.

Arbitrary, state-established price systems inherent in hastily cobbled “green energy” schemes, operated by governments who preach "neoliberal free market" doctrine, resulted in an overextended, subsidy dependent new industry hanging by an ever weaker thread. Doomed to dramatic adjustments any time the real world gets a hold, always the first to collapse when recession hits, the inevitable results are massive unemployment, loss of capital, abandonment of industrial plant, waste of raw materials, loss of know-how and the loss of credibility for the notion of Energy Transition.

Subsidies, especially so-called feed-in tariffs are the most important single subject fixing the survival of the green energy dream. Again we have to ask why governments which preach "free markets", and refuse to regulate the dysfunctional, even criminal financial sector can believe they are obliged to hand out huge subsidies for the electricity produced by solar PV and windpower, biogas, geothermal, wavepower or other New Tech sources and systems. The claim that jobs will be created and sustained, always an important argument, is totally dependent on the level of subsidies that are paid.

Exactly like the famous quip by Keynes to Franklin Delano Roosevelt, during the Great Depression on how FDR could create jobs - bury bottles with banknotes in them and invite the jobless to start companies for digging them up - would be as effective as paying green energy producers to generate electricity by giving them 40 US cents a kWh. A handy way of understanding what this means is taking the barrel price equivalent: on a thermal basis this is equivalent to oil at about $650 per barrel. Why solar energy mushroomed is very easy to understand.

As recently as midyear 2010, Germany had the world's largest solar electric power market and had created 150 000 jobs. By 2012, the number could be well below 120 000 even under optimistic scenarios. In Spain, job numbers in the green energy sector have plummetted since the high times before 2008-2009, and the same fate awaits the green energy industry in all other European states, the USA and probably China and India.

Solon was the worst casualty in the worst year so far for the European solar industry's short history. Equally bad things, for exactly the same reasons are threatened for wind energy. The bloodletting is particularly bitter for a stack of reasons including the confused mental state of deciders, wedded to their "let the markets decide" mantra but driven by political pork barrel pressures into locating high cost production sites in high unemployment regions with low level infrastructures and then "letting markets play". The Spanish and German solar industries show this trait, like Denmark's wind energy boom and the almost overnight boom-and-bust wind energy "bubble" in the UK through 2010-2011. Industry jobs are or were located in high jobless rate disadvantaged areas, where young, educated people will exit fast when things go bad.

The net result is the total opposite of the false promises spun by green energy charlatans dredging government subsidies and playing it on the pinwheels of the global financial casino. In Germany, by federal government decision the solar industry was located in former communist East German Lander.
Before German reunification, these were reputed for their stability when the region used to be the hub of former East Germany's heavily polluting chemicals and metals industries. Since then, those who flee from permanent unemployment in these Lander have to jump from job to job.

German solar company Q-Cells is one example. In the mid-decade early peak of the solar industry Q-Cells was at one time the world's largest maker of solar PV cells. In mid-November 2011 the company said it would firstly lay off 250 employees, and, if unable to repay a convertible bond due in February 2012 will have to double the job losses. As with Solon, Q-Cells and other worried German cell producers, hopes that the German nuclear exit decision will produce big new orders are already fading, resulting in last-ditch fantasies like the Desertec project.

We have to turn back to Germany's decade-long flirt with neoliberal globalization uncomfortably linked with heavily bureaucratic European federalism to understand why things are so bad for the cozy government-subsidized green energy boom, that is presently collapsing. Legislation introduced in the 1999-2001 period by the centre-left coalition of Social Democrats and Greens led by then-Chancellor Gerhard Schroeder offered massive incentives to make Germany into the world's largest producer, and market for solar panels. This sparked thousands of start-ups, some of which became global leaders but in every case it was subsidies that kept them above water.

True to their neoliberal slogan pack, govdernment deciders handed out huge subsidies for energy production rather than panel manufacturing, slowing development effort - and above all benefitting cheaper Asian rivals, who rapidly elbowed their way into the subsidy dependent market, and drove down panel prices. Companies in China, Taiwan and Japan have now dislodged their German and US peers as the world's biggest suppliers of solar cells.

This has caused a major geographic rift in the now-fragile green energy industry. The U.S. International Trade Commission earlier this month approved an investigation into charges of unfair Chinese trade practices in the solar energy sector, further ratcheting tensions with Beijing over trade. The same moves could start in the wind energy sector, with Danish, Spanish, German and US mill makers accusing China and India of dumping. The Chinese and Indian countercharge is that they are subsidizing green energy plans and programmes in the Old Rich countries - the same which preach that China and India must adopt low emission climate policies and shift faster to green energy.

The Chinese-driven solar crisis has led to a wave of bankruptcies in the United States, notably of panel maker Solyndra LLC, showing that European solar players are not the only ones suffering from the industry glut. European windmill makers in Denmark and Spain, the former world-leaders, face the same new struggle against Asian competition in markets that for onshore windfarms are oversupplied, stagnant or declining as subsidies are cut and austerity bites. The only hope for wind energy resides in the move to offshore windfarms - at capacity costs per-kiloWatt as high as the European EPR reactor if not higher. Stepwise jumps in electricity prices are threatened in Europe by the convergence of the anti-nuclear political movement, the ageing reactor fleet needing very high cost dismantling - and the choice of high priced green energy. More expensive electricity may itself and alone trim expected growth for national power demand, already threatened by austerity and economic recession.

To be sure, uncompetitive Old World producers of green energy equipment claim that not only the large direct financial support given by Asian countries to their own green industries, but also unrealistic and undervalued national currencies are unfair. What is certain is that national trade surpluses in green energy equipment and services of the US, Japan and European countries have quickly melted - unlike the Himalayan glaciers the UN IPCC invites us to believe in ! Given the rising unattractiveness of the industry and global-level overcapacity, government largesse in the shape of more and larger subsidies are yet more unlikely.

The prospect is that solar and wind energy producers will have to take massive writedowns for at least the next 12 months, especially at expensive European and US plants, for example SolarWorld which has shut down production at one of its U.S.-based solar plants to save costs. Industry analysts focusing the shakeout in the German solar sector say it is unlikely to kill it off altogether but will force uncompetitive companies out of the market and drive an across-the-board move to lower industry costs more rapidly. There is clear overcapacity across the whole solar value chain, and probably soon in the wind energy sector, making it certain that many US and European companies will go out of business over the next year. Government deciders who first used subsidies to artificially promote growth in the industry, then pulled the plug on it can be congratulated on a fine piece of anarchy with the least possible benefits to everybody, except parasitic financial players.

To be sure, in the long run price declines will be healthy for an industry that so intensely relies on government subsidies but wants to become cost-competitive with fossil fuels. In the short-term however, investor funds, environment associations and the workers lured into the green energy sector by its heavily-promoted promises will suffer loss, disillusion, and leave empty handed. The industry grew too fast, had unrealistic expectations, was driven by massive subsidies, and will be handicapped by the loss of know-how, one of its key resources, whenever it starts growing again.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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