Market Analysis

Market Analysis November 2022 - Tax exemption for small systems - (no) reason to wait?

Module prices have finally stabilized, and a slight downward trend has even started to set in. Whether this will continue depends mainly on how demand shapes up over the next few months. At the moment, the softening of prices reflects a gradual build-up of inventories, which should be drawn down again by the end of the year, if possible, even if it means further slashing prices. But for the other components of PV systems, the situation is quite different, and there is still no sign of a normalization in supply chains. Many component manufacturers are still facing huge order backlogs that still need to be cleared, so the chaos is likely to drag on into the first few months of the new year. Also, some of the major inverter and storage manufacturers are already announcing price increases again - for the third or fourth time in a row in less than 12 months.

One reason for the swelling inventories of PV panels at processing companies and suppliers is German policymakers' announcement of various adjustments to the German Renewable Energy Sources Act (EEG) and to federal tax law. One thing that has given pause to investors and project companies is major uncertainty about whether the government will skim off so-called "windfall profits" that could be realized due to high prices on the electricity market. As long as there is no definitive answer about whether this additional taxation is coming - possibly even retroactively - or the potential for a cap on returns, market players will be very wary. Some trust that regardless of what happens the returns will be acceptable, while others prefer to wait and push for more planning certainty and a clear rejection artificial market intervention.

Complicating the matter further is a pending transposition of an EU directive by Germany lawmakers. The European Commission has approved reducing VAT in the Member States to between 0 to 5 percent for certain products and services related to PV installations. Germany is aiming to implement the directive as early as January 1, 2023, as part of its amended annual tax act. Spearheading the push is the German finance minister, Christian Lindner, who wants to introduce a tax exemption for all PV installations up to 30 kilowatts peak on single-family homes and up to 100 kilowatts peak on multi-family homes that feed their PV power directly into private or public networks. And, because this power is not traded on the electricity exchange, there is no need to calculate profits. The new law would also bring the sales tax rate for parts and labor on PV systems installed on residential buildings down to 0 percent.

But once again these plans have created uncertainty among installers and a reluctance among consumers to buy. Some companies are already complaining of a slump in orders, at least until after the end of the year. Installations that have already been ordered will now be postponed into the new year at the request of customers, and projects that have already been started are being delayed. Moreover, retailers will still be obligated to pay tax on purchased components, which means they may have to seek financing to cover the cost of the tax until they receive a refund for the prepayment a month or two later. Financial imponderables loom, particularly in the first two months of the new year. But if we take a closer look at the timing of small-scale plant installation, these problems are quickly put in perspective.

Even today, small PV projects often take several months to complete, if only because of supply chain disruptions and limited resources among installation personnel and responsible authorities and network operators. Installers have to have a bit of a financial buffer, have good payment terms with the upstream supplier, or require certain advance payments from their customers. As long as the installer and customer have not agreed on firm performance milestones with invoicing after each phase, the date of completion of the entire system determines the tax rate. In the case of new PV installations commissioned before the end of the year, completion before January or February is probably unrealistic in the vast majority of cases anyway, so there is no reason for end customers to delay their orders.

Installers' books are also likely to be full of old orders where at least inverters and batteries still have to be installed or where the AC side has to be completed. Once suppliers gradually work out the kinks and gradually start shipping ordered goods, there should still be enough material and work available by the end of the year. Then, when the tax exemptions kick in next year, the installation of small-scale systems should be even more attractive for private homeowners and commercial businesses than it already is. For installers, this means getting a head start preparing for the rush and planning purchases carefully to avoid the kinds of bottlenecks and surprises we saw this year.

The supply situation is still good, especially for solar panels, and prices are stable. Other components should also become more readily available, as long as pandemics and wars don't throw another wrench in the works. So, if you are an installer and have not yet signed any contracts with your suppliers for 2023, it is high time you got in touch with their sales staff. We wholesalers have already submitted our forecasts to the manufacturers ahead of time based on our experience this year. Interested end customers who have already made a purchase decision but have not yet placed an order would do well to get the ball rolling. Installation capacities at professional installers are tight and will remain so, which means that those who hesitate are merely postponing the date when they can start using cheap self-generated solar power tax-free in the new year.

Overview of price points broken down by technology in November 2022 including changes over the previous month (as of 21 November 2022):

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