Planned cuts to Germany’s generous subsidies could test whether solar power is cheap enough to compete.
Reuters recently reported that Germany is considering big cuts to the huge subsidy program that turned the overcast country into the world’s biggest user of photovoltaic cells and a major player in solar technology and production. With prices for solar panels already dropping sharply and thus becoming more attractive to consumers, it could be a test for whether alternative energy can shine without government aid. Analysts at RBC Capital markets say that if the cuts occur, prices will fall even faster and companies across the industry will feel the pain.
Since solar power’s future largely depends on its cost versus conventional energy sources, the industry faces a challenge now. The cheaper solar becomes, the closer it is to reaching “grid parity,” the point at which installing a watt’s worth of photovoltaic power costs as little as getting electricity from the local power company, which burns coal or oil or atomic nuclei. Subsidies essentially accelerate the race to grid parity. But making money off a commodity product (most photovoltaic cells are identical, for all intents and purposes) while prices are plummeting is not easy. The boom years have left the industry with more manufacturing capacity than it can absorb. Cuts to government incentive programs just exacerbate the overhang.
Germany’s program encourages the installation of photovoltaic panels by forcing utilities to buy back excess solar power at obscenely high prices. The cost is absorbed by utility customers across the country. The reported cuts to the program would total 17% in early April on top of a 10% reduction that went into effect at the start of the year. The government may also cap subsidies for 2010 and future years, which could have a huge effect because “Germany has been the demand sink for the industry,” says Stuart Bush of RBC.