Germany cuts back on solar subsidies: now what?

The past few years have seen a dramatic scaling up of the solar industry from what was once a niche market to a globally emergent industry that may transform our entire energy structure.  While some may ascribe the growth of the solar industry to market forces reacting to demands of a carbon-conscious consumer base, the reality is that this shift towards renewable energy has been massively subsidized by governments, particularly in Europe and in the United States.

In a move that will cause shockwaves across the global solar power market, the German government has been scaling back subsidies for solar, including a 30% reduction in the feed-in tariff rate – the amount of money consumers get for feeding power into the grid from rooftop systems.  They are also reducing subsidies for the purchase of solar panels.

This is bad news for the solar industry in Germany.  Der Spiegel, the most influential newsmagazine in Germany, described the industry as “on the ropes”.  They cite a string of German solar company bankruptcies as evidence that the industry’s economic model relies on subsidies and cannot be fiscally self-sufficient.

And indeed, these bankruptcies have had ramifications on the other side of the pond.  California solar developer Solar Millenium is a subsidiary of a German company of the same name.  When the German company went bankrupt in later 2011, it “ceased providing any funding whatsoever” to its California operations, which also declared bankruptcy last month.  As detailed here last week, this turmoil in the financial sector of the solar industry led to the withdrawal of the IPO of BrightSource, perhaps the highest-profile utility-scale solar developer in America.

Spain provides an example as to what can happen when subsidies for an insolvent solar industry dry up.  When the euro crisis was in full swing in 2009 and the Spanish government needed to drastically cut spending, they reduced feed-in tariff subsidies to utilities significantly, causing the wholesale collapse of the Spanish solar industry.

America’s model of subsidy is quite different from that of Spain or Germany.  Instead of subsidizing the purchase of renewable energy, we subsidize its production.  The Department of Energy (DOE) has subsidized the construction of utility-scale solar, wind, and geothermal energy plants to the tune of about $17.5 billion through their loan guarantee program.  Several billion more from the DOE go into research and development through programs like the SunShot Initiative.

Still, there may be parallels to Europe that affect the viability of the U.S. solar industry going forward.  Are the companies receiving loan guarantees able to stand up on their own?  The now-infamous example of Solyndra shows how these programs can go awry, carrying away millions in taxpayer subsidy with them.

One answer could be addressing not just the supply side of the energy equation, but also the demand side.  Setting up tax codes to favor renewable energy would be a way to force the market to reorient toward those forms of energy which we consider desirable as a society.  Forcing utilities to purchase renewables, through mechanisms such as Renewable Portfolio Standards (highlighted on this blog a few months ago), achieves the effect of influencing demand without putting billions of dollars of government funding on the line.  Ultimately, measures such as these will help create a more stable solar industry, one that can stand on its own when government feel the need to tighten their fiscal belts.