German Solar Industry Could Soon Collapse

Because of its generous incentives program, Germany, a country that gets about as much sun as the darkest parts of the United States, has become the largest market for solar power in the world. That in turn has helped create a thriving solar manufacturing industry in the country. Because of its success, the German system has been imitated around the world in places such as Spain and China. At renewable energy conferences, industry experts plead for a similar system in the United States.

But even as it's hailed as an example, Germany's federal government has started to cut back on the program, and plans to cut it even more by April. If that happens, it could devastate the German solar industry, and send shockwaves through the industry around the world. It could also reveal what could be the inherent weaknesses of the approach--it doesn't address the fact that it's cheaper to manufacture solar panels in China.

Germany's system is something called a feed-in tariff. If you install solar panels in Germany, utilities are required to buy the power they generate at a fixed price. The price is high enough that anyone who installs such a system will, provided solar panels work, make a decent amount of money on the investment--around a 6 to 9 percent annual return, although the amount depends on the cost of the solar panels. The utilities then pass the cost of this program along to consumers, raising electricity bills by a couple of cents per kilowatt hour. Many experts praise this system because it seems more fair than a general tax or federal subsidies (which amount to a general tax, since the government pays for the subsidies). In the feed-in tariff system, consumers who use more electricity have to pay more to subsidize renewable energy, rather than everyone paying the same amount. By raising electricity prices, it could also provide incentives for people to reduce their electricity consumption and so reduce greenhouse gas emissions.

From the beginning, the system was designed to gradually require utilities to pay lower and lower prices for renewable electricity--the goal is to encourage solar and other renewable energy companies to find ways to lower the cost of their products. In theory, eventually solar panels would be cheap enough that they could compete with conventional electricity without government help. But now the government wants to cut it much faster than was planned, and that has solar companies very worried.

According to one study, by Landesbank Baden-Wurttemberg, a bank based in Stuttgart, Germany, the cutbacks would cause almost all German solar manufacturers to go out of business. That's because the lower rates will drive customers to select lower-priced solar panels made in China. According to one such manufacturer, Schott Solar, "this decision will benefit low-wage Chinese manufacturers and endanger tens of thousands of jobs in Germany, more than 1,000 at Schott alone."

According to Schott, customers have been willing to pay a premium for their solar panels, expecting them to be of higher quality and to last longer than Chinese solar panels. But with a lower feed in tariff, their solar panels won't look like a good investment. And there's just no way they can compete with the Chinese on price alone.

Germany's domestic solar manufacturing is beginning to look like a house of cards, but things look even worse for the incipient solar industry in the United States. The Recovery Act and other legislation is geared toward increasing the solar market in the U.S., in an attempt to increase the size of the solar industry here. If established solar companies in Germany can't compete with China, how will new solar companies in the U.S. fare--especially if they plan to manufacture here? In one recent example, a U.S. solar company, Evergreen Solar, announced that it would have to give up on assembling solar panels at a U.S. factory in favor of manufacturing in China.

One thing seems clear, fostering a solar market in the U.S. or Germany is not enough in itself to create and maintain solar manufacturing jobs in these countries. To compete, companies in these countries will need to find ways to make cheaper solar panels. And they'll probably need strong government incentives to build factories in their home countries.