Market Analysis July 2022 - Germany’s revised EEG: New life for PV, or dead on arrival?

It has been a few weeks now since Germany passed the long-awaited "Easter Package", the latest iteration of the Renewable Energy Sources Act (Erneuerbare Energien Gesetz, or EEG) which includes far-reaching changes intended to accelerate renewables in Germany. On the whole, the praise outweighs the criticism because the act contains numerous improvements and makes life easier for future investors and operators - in theory, at least.

One of the aims of the package is to expand solar power in Germany from the currently installed 60 gigawatts to 215 gigawatts by 2030. This would require an average of 22 gigawatts of newly installed capacity per year. To achieve this, feed-in tariffs will see a further rise. Monthly degression will be put on hold until the start of 2024 and replaced by semiannual degression from then on. On 1 July 2022, the EEG levy, an electricity tax, will finally be abolished. The resulting drop in the price of electricity would then be passed on to consumers. In future, the feed-in tariff will be financed through the federal budget. The new law puts an end to the mandatory cap on effective active power feed-in of 70 percent of installed PV capacity, at least for systems up to 25 kilowatts-peak.

In addition to improvements in feed-in tariffs, bureaucratic hurdles will also be gradually eliminated. To this end, the Buildings Energy Act (Gebäudeenergiegesetz, or GEG) and some passages in the Energy Industry Act (Energiewirtschaftsgesetz, or EnWG) will be amended and the tendering mechanism will be modified. Last but not least, tax law will also be streamlined, especially for small to medium-sized plants. Cover-to-cover, the new act is nearly 600 pages long. All of the details of the law can be found in the relevant publications.

The key question for us, of course, is: What does the act mean for the future development of the PV industry?

Once the initial enthusiasm for the adopted measures has subsided, anyone familiar with the current market situation will immediately ask: How is the rapid expansion of renewables supposed to succeed at all? We are already struggling with a growing shortage of skilled workers and poor availability of critical components. Installing 22 gigawatts of new PV capacity per year represents a quadrupling of the installation figures of 2021. The target does not even take into account European and global demand levels. Unfortunately, we are now highly dependent on China for the supply of materials along almost the entire supply chain, from solar cells and modules to inverters, power-management and battery units. But China also has its own rapidly growing market, which may exceed 100 gigawatts this year.

The PV market in the USA is also growing continuously, and solar installations there command much higher prices than here. It is no secret that scarce goods always go where they can be sold most profitably. Europe ranks relatively far behind, thanks to low prices relative to other countries and high shipping costs that have to be added to products that come mainly from Asia. The fear is that the rapid switch to renewables, especially to PV-based generation systems, could fail due to lack of access to the necessary components. Many politicians are probably not even aware of this yet, but a rapid strengthening of the European solar industry without external or government help is almost impossible.

For the energy transition project and the complete switch to renewables to succeed by 2035, 2040 or whenever, and not to be doomed from the outset, supporting measures in labor-market and industrial policy are urgently needed in addition to changes in the EEG, the GEG or the EnWG. Access to foreign skilled workers, and even more so to venture capital, must be made much easier. The fact that the European Parliament has approved greenwashing of investments in nuclear power and gas-fired power plants and waved through the new taxonomy sends completely the wrong signal. This is how money from pension funds and other investment capital keeps flowing into fossil-nuclear power generation and why it is lacking for the rapid development of an energy economy that is independent of Russia and China.

But who knows how much time we have left to build up our own production capacity for polysilicon, silicon ingots and wafers or solar glass. In these areas, Europe is a desert - up to 95 percent of the materials for cell and module production now come from Asia. Just imagine the following horror scenario: China's head of government Xi Jingping buys into Russian propaganda and feels encouraged by Putin's supposed successes in Ukraine and the suppression of the protests in Hong Kong to tackle its pet project; namely, the conquest and annexation of Taiwan. Should this happen, it will be a new acid test for European sanctions policy and for the solar industry. Without products from China, we would have zero chance of implementing the energy transition in the foreseeable future.

At the moment, things are still going relatively well for many players in the solar industry, with demand outstripping supply. Installation capacities and material availability are more or less in balance. Over the past few weeks, prices for solar panels even seemed to have stabilized, as many projects have stalled due to delays in the delivery of other components. The delays seem to be behind us now, however, and prices are picking up again. Rising polysilicon prices and the return of the weak Euro are partly responsible for this. The Dollar is now at parity with the Euro, which makes imported components hugely more expensive. In the past, this could not always be passed on to the buyers, which is causing headaches for many manufacturers. Now, completely different standards are being applied to new supply contracts.

Some PV panel manufacturers are already calculating their future prices for Europe based on the assumption of a Dollar that is worth more than a Euro. No one can predict whether the unfavorable exchange rate trend will reverse or worsen. Others do not want to commit at all and are building all kinds of sliding price clauses into their contracts, thus creating flexibility in the offer prices. But this makes it very difficult to negotiate contracts for large-volume purchases, as it is rarely possible to build the same flexibility into plans for photovoltaic projects and use them as a basis for financing negotiations. This means that large safety reserves have to be planned, which quickly makes the projects appear uneconomical. Thus, at the moment, all signs point toward a legal framework that is more D.O.A. than life-giving - quick, a defibrillator for the policy makers!

Overview of price points broken down by technology in July 2022 including changes over the previous month (as of 19 July 2022):

Overview of price points broken down by technology in July 2022 including changes over the previous month