German solar market to remain strong, despite incentive reductions

Q Cells solar farm in Germany

JAN 20, 2011

Last year, the German government, reacting to reductions in module prices and the country’s hot solar market, reduced the feed-in tariff by a total of 16 percent—on top of a planned 9 percent reduction.

The subsidy in Germany declines by a consistent rate every year, explained said Jesse Pichel, managing director and senior equity research analyst of clean technology at Jefferies International, Ltd, a securities and investment-banking firm.

He said that in 2010, due to the popularity of the feed-in tariff, the government decided to reduce the program an additional 13 percent in July and 3 percent in October.

That’s “in addition to the 9 percent reduction that happens every year,” he said.

The incentive-cut had the desired effect, Pichel said.

“Demand fell off significantly after the feed-in cut,” he said, adding that even with the cut, it was a huge year for the German solar market, which accounted for about half the world’s solar installations in 2011.

The solar industry was worried that Germany could make another such move in 2011 or even place restrictive caps on the tariff. Such a move could stymie what had been the world’s largest solar market, making solar stocks a riskier investment in 2011 and beyond.

That’s not likely to happen, Pichel said.

Draft feed-in tariff legislation in Germany would allow for cuts to the tariff to be made based on how much solar is installed in the country in 2011, but included no potential for restrictive caps on the incentive.

“Based on our contacts in Germany, we believe the subsidy reductions are modest. They’ll be based on a 9 to 12 percent reduction,” Pichel said. “Because solar demand fell off so much in Germany, [legislators] realized there’s no reason to cap it [i.e., the feed-in tariff].”

He anticipated that cuts to the feed-in tariff in 2011 could reach 12 percent if Germany installs 6 gigawatts of photovoltaics in 2011. If Germany installs 7.5 gigawatts of photovoltaics in 2011, the feed-in tariff could be reduced by a full 12 percent. Pichel said the potential legislation is good news for investors.

Germany will account for about a third of all solar installations in 2011.

“Now, you have stronger growth in the U.S., Canada, China and Italy,” he said.

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