Market Analysis

Market Analysis April 2020 - The post-EEG era may come sooner than expected

For years, many players within the renewable energy sector have been thinking about what to do with installations in Germany once they drop out of the government feed-in-tariff scheme after the 20-year operating period has expired. Of course, the aim is to avoid a situation in which many plants that are well maintained and still in good working order are gradually disconnected from the grid. With a view to a rapid switch to 100% renewable power and reaching the government's self-imposed climate targets, these capacities must not be lost - and this is something the government also needs to hear.

In contrast to feeding all of a plant’s power into the grid, contemporary strategies are envisaged mainly as an upgrade for power plants that have already been amortized and will supply most of their energy at zero cost in the future. The switch to a high proportion of on-site consumption through the integration of energy storage in small private photovoltaic systems, direct supply and intelligent balancing of generation and consumption in industry, as well as solutions that convert generated power into other forms of energy - known as “power-to-X” applications - are just a few of the concepts being discussed, prepared and implemented.

With manageable investments, these facilities could then get a new lease on life and provide useful service for a few more years. Unfortunately, for many applications the legal framework is still lacking, the upshot being that many wind farms will be threatened with complete decommissioning and dismantling. However, most of these plants are not facing a deadline for a conclusive subsequent use concept before the end of 2021. In the coming years, more and more systems will be affected, in line with the installation volumes added in the years after 2001.

Of course, there are already projects, primarily in the PV sector, that manage completely without statutory feed-in tariffs, but these are mostly very large solar farms. Smaller installations still prefer to take advantage of the EEG, at least as a fallback solution. At present, however, we are sliding into a situation which makes the future of the PV and wind industries, and thus the success of the energy transition in the electricity sector, seem anything but certain. Of course, there is still talk about the existing 52 GW cap for photovoltaics in Germany, which was supposed to be eliminated as part of the climate package put together by the German government in 2019. Yet there is still no regulatory framework in sight for implementing this decision.

Draft bills have already been submitted to the German Parliament or the economic committee several times, but these have repeatedly postponed voting on it. Behind the scenes, there is still rumored to be haggling over the standoff distance regulations for onshore wind turbines - the abolition of the cap on photovoltaics has apparently become a bargaining chip. Of course, the fact that the Covid-19 crisis has brought many other important issues to the desk of Federal Minister of Economics Peter Altmaier has also contributed to the delay. Yet the reality that doing away with the cap, which was decided long ago, has still not been implemented can be considered grossly negligent. There is far more at stake here than numerous jobs in the renewable energy sector.

But what does this government failure mean for the German photovoltaic market and how are companies dealing with the current situation?

In very simplistic terms, there are two tendencies here. To sum up, however, it can be concluded that the solar cap is perceived as a bigger problem within the industry than Covid-19 and the economic lockdown. The effects of the coronavirus pandemic are generally limited to slightly more difficult working conditions and a shortage of labor for medium and large projects, which often involve foreign workers who are now lacking due to border closures. The supply situation for modules, inverters and storage systems, which are primarily manufactured in China, is also somewhat tense. In April and May, the temporary shutdown and suspension of production in the first quarter of the year started to bite, and that has kept module prices largely stable for the time being. By June at the latest, however, the situation will have returned to normal if - yes, if - there were no solar cap!

Despite the corona crisis, the order situation is very good, at least in the small to medium-sized systems segment. In this respect, many end customers still seem eager to make decisions and are showing willingness to buy. Accordingly, order books are full and the mood among installers and dealers is good. Worries over an end to the EEG are not very widespread in these circles, perhaps because for many small plants the economic aspect is no longer the primary concern. For most medium-sized commercial plants, on the other hand, savings achieved through covering on-site consumption are probably already more attractive than selling the electricity, with the result that an end to the solar incentive is not seen as very menacing in this case either.

The situation is quite different for installers of larger roof-mounted and ground-mounted systems, whose business model is largely based on the existence of a statutory feed-in tariff. This provides a long-term return, albeit very low, on which other sources of income - such as direct marketing - can be built. Without this state-guaranteed security, many projects are simply not financially viable. At the current pace of expansion, it has now become very likely that the 52-gigawatt cap will be reached by the beginning of the second half of the year. Many players in this sector therefore have serious concerns about the future, as urgently needed orders are simply no longer being placed by their customers due to this uncertainty. A pragmatic optimism along the lines of "it'll all work out" is increasingly giving way to bewilderment over the government's approach.

The great death spiral for companies in the solar industry has not yet returned but it will not be long in coming without immediate action. In Southern Europe the lockdown caused by the coronavirus has already brought the solar industry there to a standstill. In Germany it could be a combination of both the lockdown and the end of the EEG law, but mainly the latter. This time around it could take a very long time for the industry to reorient and sort itself out again in a post-EEG era. And at some point it really will be too late...

Overview of the price points by technology in March 2020 including the changes over the previous month (as of April 27, 2020):