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Solar in Europe: highways and byways on the path to a sustainable future

The ever expanding palette of tools available to national authorities in their struggle to meet the energy needs of the future has grown to include fiscal incentives, quotas on production and the creation of feed-in tariffs on renewable energy sources. European Commission directives on the harmonization of renewable energy policy have taken on a greater urgency and as the measures implemented gain traction it would be wise to look back at the road already travelled and take the measure of the success or failure of decisions by focusing on the paths followed in Germany, Spain and France.

January 2011
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Executive Summary

Feed-in tariffs (FIT) are a mechanism by which governments can establish a minimum price to be paid by utilities to generators of electricity from renewable energy sources and are generally guaranteed over a period of 10-15 years. The subsidy provided to low-carbon energy producers increases their competitiveness and ensures the viability of the photovoltaic industry in the face of competition from cheaper sources of energy such as hydroelectric, natural gas or nuclear.

Feed-in Tariffs, the Gilded Path

Recent successes have clearly demonstrated the power of a coherent political strategy and with the proper guidance solar capacities have developed considerably. Germany remains the uncontested leader in this domain and has witnessed levels of photovoltaic output rise from 76 MW in 2000 to around 9800 MW as of 2009 according to the German environment minister. A similar trend was observed in Spain over the same period which witnessed a corresponding expansion from 12 MW to 3500 MW. In France and Italy the gains have been less impressive as the political will was somewhat lacking until recently but they have been making up for lost time ever since. In all of the countries the options are being multiplied through the introduction of various incentives which include tax credits to private individuals installing photovoltaic technologies in France to low interest loans for those wishing to construct projects in Spain and Germany.

In other countries policymakers have approached feed-in tariffs with a certain degree of trepidation and have favored the creation of alternative schemes. Poland, Romania, Sweden, Finland and Belgium have subscribed exclusively to a system of quotas. In Great Britain the government has taken a more idiosyncratic approach and combined its quota system with a market for Tradable Renewable Energy Certificates which serve as verification that a certain amount of electricity was produced from renewable sources. At the global level a more patchwork approach remains the rule as the political will for a more universal policy has been somewhat lacking.

The desire for more certainty in the market for sustainable energy compelled analysts at Deutsche Bank to take pools of data collected from a wide range of government mandated energy targets and pour over them with a fine tooth comb. The results of the study confirm that feed-in tariffs or alternatively titled cash back schemes provide one of the most efficient means to satisfy investors demands for transparency, longevity and certainty (TLC). The virtuous circle this approach would create is a central component of arguments made by supporters of the feed-in tariffs. As technology improves the cost of producing clean energy would decrease providing a greater return on investment thus making attractive ever more research and development into diversifying the options available to consumers. Increased efficiency would contribute to the long term health of solar energy and ensure its competitiveness when faced with what are currently cheaper sources of energy.

As in any emerging market, high levels of confidence created a certain sense of giddiness and recklessness. In countries where feed-in tariffs created the most attractive environment, primarily in Spain but also France and Germany investors in solar technologies were overcome by a their fervor for the new possibilities and created a green bubble which eventually burst and whose effects we are still feeling today. In Spain, according to data provided by the Photovoltaic Industry Association, infrastructure exploded from 2007 onward passing from a mere 160 MW installed in 2006 to 3400 MW in 2009. In France where overall capacity remains more modest there was still a multiplication of the installed base by a power of seven from the year 2007 to 2009. In Germany the growth has been more measured but is no less impressive with increases of close to 40% of capacity every year since 2002.

The source of this rapid growth can easily be traced back to the creation of favorable conditions for growth in each of the countries concerned. The combined effects of falling prices in the market for solar panels along with slew of government mandated financial incentives created an environment that was ripe for record returns on investment in the photovoltaic infrastructure. Profits of over 20% were not unheard of in projects which benefitted from the most favorable conditions.

The price of success

If the opportunities for financial gain had investors rubbing their hands with glee over the possibilities being presented by a green boom than the governments of the countries concerned were being struck down by a case of the cold sweats.. The runaway pace of development created pressure as growth largely outstripped the capacities of governments to provide adequate financial resources to ensure the proper implementation of the policies put into place.

The spiraling cummulative cost of German policies increased the government's financial burden from €1.9 billion in 2004 to €9.3 billion in 2010 according to a study conducted by the publicly funded research institute RWI and published by the country's largest newsweekly Der Spiegel. France has faced a similar crisis and policymakers were compelled to demand an emergency report which was published in Spring 2010 and predicted cost overruns of €3 billion per year. Unless changes are made then objectives that were initially planned for 2020 could be met as early as 2013.

Aside from the pressure on public purse strings the volume of collective grumblings has become louder as the danger of rising costs for consumers threatens to increase prices even further. The financial burden shouldered by the state for the development of green technologies is at least partially transferred to consumers through increases in the amount they are charged on their monthly utility bills.

Putting the Brakes on Development

In an effort to place some reins on runaway growth, governments have pursued policies of adjustment and control with varying degrees of success. Spain, where the negative effects of the bubble were felt most sharply was the first to launch a concerted effort to burst it. In dramatic steps taken in September 2008 the Spanish authorities made the decision to reduce the applicable tariffs by more than 25%. This was in response to government figures predicting that installed capacity by the end of 2008 would have exceeded targets set for 2010. Additional powers were granted to allow the government to regulate the rhythm of development through a series of measures granting them greater powers of control. France and Germany took similar steps in 2010 and not without difficulty in the case of the latter.

Paradoxically, at the moment when countries who were traditionally relied upon to champion the development of solar technology have begun to put the brakes on expansion long time laggard Great Britain has emerged as the latest convert to the solar cause. Feed-in tariffs were introduced through the Clean Energy Cash Back schemed in April of 2010 and served as a signal of rapidly changing priorities in a country that has traditionally shown a lukewarm response to the promotion green energy policies. With the country playing catch up it will take time to see if the current policy is enough to boost PV capacity to levels found in its continental neighbors. If the cost of implementation seems expensive it becomes less so when viewed through the prism of the proven benefits of such a system and its power to kick-start the development of the green technology sector. In Germany, close to 80,000 people owe their jobs to the industry and the revenue generated from electricity production alone reached close to €3 billion in 2009.

As the market matures government incentives should begin to play less of a role and for industry professionals the logic of this evolution is self-evident. “The phenomenon we are currently witnessing, where subventions are projected to diminish, is in fact serving to prime the pump and make room for the sector to blossom and fully realize its potential,” explains Bruno Jauffret, VP of Marketing at 8minutes33, a producer and operator located in the south of France and specializing in PV installations on large roof structures. “We have always taken the long view where the absence of significant government mandated incentives would serve as a positive sign for stability in the sector and its potential for sustained growth. It is proof that the current direction of development is in fact working.”

It should come as no surprise to learn that the young enterprise fully anticipated the recent French decision to lower FIT rates from January 2010 and remained optimistic about its prospects. The move was expected and, “considering the climate we are operating in entirely logical,” especially in light of rapidly falling prices for the primary materials for production. A further round of revisions downward in September however has forced the company to change tack and reevaluate its current position, a process made even less palatable by the upward trend for prices of solar panels observed in the latter part of this year. The combined impact has called into question the financial viability of around 25% of the organization’s current projects.

The market has undergone similar shockwaves in Spain where the Spanish Photovoltaic Industry Association (ASIF) sounded the alarm following the government decision to reduce FIT rates for the second time in a row as a response to concerns over the effects of the country’s economic malaise its pinching effect on government purse strings. Within this context policymakers have placed stability above all other concerns in the energy market which has led to a revision of FIT rates downward by up to 45% for ground mounted solar installations. Whereas previous cuts were more or less accepted by the industry the more recent round has driven a stake through the heart of numerous projects and has led the ASIF to denounce the measures as a massive step backward and a threat to the very existence of the photovoltaic industry in Spain. Professionals have denounced the lack of transparency surrounding recent decisions and insist on more as a necessary precondition for restoring the confidence of investors and producers in what remains an uncertain business climate.

A Lingering Patchwork Approach to Development

The ASIF has identified as its main criteria necessary to evaluate the success or failure of the current political approach to development of the solar energy sector as being whether it adequately provides the foundation from which to build long-term growth. The German experience has produced some leading lights such as Q-Cells, a global force in the production of solar panels and cells but the model has been difficult to replicate and not all countries have experienced the same levels of success.

Despite its place at the forefront of technological development France has struggled to produce world class industrial concerns capable of operating on any significant scale. The dissapointing fact remains that now and for the foreseeable future much of the solar panel technology used in Europe will more often than not be stamped ‘Made in China’. In France fully 90% of solar panels are Chinese in origin and current policies have been of principal benefit to producers based far from the European market in which the operate.

That Germany remains an exception to this rule is due in no small part to massive government intervention over the last ten years through measures designed to support the growth of locally based initiatives. A sophisticated framework for research and development has evolved and remains an important key to success as demonstrated by the contribution made by such poles of excellence as The Fraunhofer Institute for Solar Energy Systems. As a focal point of innovation and the creation of numerous spin-off businesses the institute provides far more than a mere framework for development and acts as an incubator for young enterprise. It backs up its policy of encouraging entrepreneurial spirit by providing up to 25% of the financial investment required to launch its numerous spin-offs and continues to support them through their early years of development. Eicke Weber, a former professor at the University of California, Berkeley and current director of the institute is happy to discuss at length the example of Concentrix Solar the most successful of the young companies launched during his tenure.

For Eicke Weber, the key factor in the success of the partnerships launched between Fraunhofer and industry is embedded in the very statutes under which the institute operates. “Fraunhofer has a very special model: its institutes are expected to earn their own money. We only have 8 % of basic funding in the budget of our institute,” he explains. “By contract with the ministry of science, we have to get at least 30 % of our resources from the private sector. So the institute is constantly looking for opportunities of contracts, and our work has to be well aligned with the interest of the industry.”

Despite its notable successes Fraunhofer has not been spared the overall climate of belt tightening that has spread following the economic crisis. A reduction in the level of resources industrial concerns were willing to commit to the institute has forced it to fight harder to sustain even basic levels of funding. Eicke Weber views the current dynamic in a positive light as it provides an additional spur to innovate for the individuals in the teams operating within the initiative whose numbers have grown from less than 500 when Weber arrived at the institute in 2006 to 1000 today. “I often say the money from the industry is the most difficult to earn because companies always have a choice: they can spend the money within their own research units or give it to us. For this, we must really offer something they don’t have, add real value”.

Similar strategic partnerships have spread throughout Europe but have developed following a somewhat patchwork approach. Whereas Germany is willing to level the playing field and create a wide range of possibilities for collaboration between researchers and private enterprise the tendency in France has been to create exclusive relationships between leading centers of research and the largest industrial conglomerates. The terrain is constantly evolving however and remains open to new models of development. Daniel Lincot, director of the Institute of Research and Development on Photovoltaic Energy (IRDEP), a partnership between the French state-owned power utility (EDF), the French National Center of Scientific Research (CNRS), and the engineering school Chimie-ParisTech has stated, “As the sector has grown to take on a more definable shape, bringing into our fold both industrial powerhouses as well as more specialized boutique operations, we have witnessed the emergence of a new dynamic as created by synergies between the various actors.” The center has already created the conditions necessary for the emergence of start-ups such as Nexcis which is gearing up for the creation of a large capacity photovoltaic module production unit and Daniel Lincot has affirmed that it is only the beginning. Following the pattern laid down by contemporaries in Germany he already has some firm ideas about the complexion the sector will take as it continues to evolve. “At the moment we are studying methods which could be considered as belonging to traditional construction techniques were it not for the photovoltaic twist that we provide. The game changing technology would make it possible to cover large surfaces with thin film solar technology and get the most out of even lower efficiency cells. It’s a sector that could launch a whole new model and it arises from our insistence on fixed objectives and constant focus on creating practical applications from our research.”

Another example of the efficiencies created through carefully thought out partnerships is underway at the engineering school Ecole Polytechnique, a member of ParisTech, where a joint team was created along with Total to conduct research into thin film technologies for photovolataic solar applications. According to Bernard Drevillon, the director of the Laboratory of Physics of Interfaces and Thin Layers (LPICM), “The clout of having a major industrial conglomerate as a partner in our research has allowed us to push back the limits of what is possible.” With its vast resources the initiative has become a model for others to follow and has received high praise from a task force charged by the French ministry of finance to explore the potential for growth in the photovoltaic industry.

Contained within the team’s findings are recommendations for the continued expansion of European research and development capabilities as a way of leveling the playing field to better meet the challenge posed by East Asian competition. Indeed, trying to go toe to toe with the likes of China by boosting industrial capacity is a losing game and it is only through the creation of game changing ideas that European interests can remain competitive. Daniel Lincot of IRDEP has a more nuanced view of the subject and states, “research is the cornerstone of future development but we must guard against sacrificing a coherent industrial strategy as it is only through a combination of the two that European companies can retain their edge. To separate the two and say that research must always take precedence would be like halting the production of automobiles to allow scientists to patiently labor over the creation of a perfect catalytic converter.”

Treading Lightly Toward Greater Harmonization

Within this context recent declarations made by the European Commission on designs for an eventual harmonization of policies throughout Europe in matters of renewable energy have elicited vocal reactions. One of the loudest voices has been the European Photovoltaic Industry Association (EPIA). They body was keen to remind decision makers of “the importance of preserving the whole palette of policy options at a national level as the transition is made to increased reliance on renewable source of energy and specifically photovoltaic electricity, if competitiveness is to be retained in the short to medium future.

The huge disparities that exist between the regimes operating across the EU suggest that the road to the future will lined with numerous highways and byways giving rise to increasing complexity. The composition of energy production in individual countries will have a direct impact on the enthusiasm of policymakers for solar. The existence, or indeed absence, of the political will necessary to promote renewable energy sources will depend largely on the costs when compared to other readily available technologies such as nuclear. The maturity of the sector in each country will also play a decisive role as where it is already developed there exists the potential for export led growth. Additional concerns have been raised by professionals in the countries farthest along the road who fear that developments will translate into ever lower feed-in tariffs that will gut the mechanism of its power to transform the market for renewable energy. Eicke Weber of Fraunhofer has been a committed observer of the heated arguments that surround the debate in Germany and explains, “The main question is: ‘do you want the renewable energy market to flourish or not?’ The only chance that this works is the Feed In Tariff.” For Weber, the harmonization efforts currently underway present certain risks that could be mitigated through a well thought out policy. “There are countries in Europe, like the UK, which are opposed to Feed In Tariffs. So the big danger is that harmonization might be achieved but at the expense of a truly effective system. But of course if this could lead to a European Feed In Tariff, which would be determined locally, it would be wonderful.”