Sun block

IFR Germany Report 2012
11 min read

When the German government shut down much of its nuclear capacity after last year’s Japanese earthquake and tsunami, many predicted a boom for renewables in general and solar power in particular. It hasn’t worked out that way.

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“We fear that the cuts are too deep and are being made too fast.” Nowadays, that is a familiar cri de coeur in Europe. In this instance, however, it comes not from opposition politicians protesting against austerity, but from David Wedepohl, spokesperson for the German Solar Industry Association (BSW-Solar).

BSW-Solar represents an industry that is appalled by the German government’s recent decision to cut its support for the country’s solar industry by up to 32%. According to BSW, the consequences of the cuts will be that “the operation of solar power systems will for the most part become unprofitable, a wave of bankruptcies will become inevitable, and 100,000 jobs will be threatened”.

Public opinion, BSW-Solar says, is squarely behind the industry. As proof, it points to the 11,000 people who turned out at the Brandenburg Gate on a cold day in early March to protest against what the rally’s organisers called “the solar phase-out”.

That may be an exaggeration, and as demonstrations go, a turnout of 11,000 hardly amounts to what BSW-Solar described as a “mass rally”.

Brutal falls

But job losses in the solar industry in Germany are clearly gathering momentum, with Q-Cells perhaps the most notable of the recent bankruptcies in the country’s photovoltaics (PV) sector.

Floated in 2005 in an IPO that was 35 times covered, evoking memories of the fateful Neuer Markt boom, Q-Cells saw its share price peak at just over €81.05 in December 2007. The value of the shares are now worth little more than small change, and Q-Cells is by no means the only German solar company whose shareholders (many of them retail) have endured an Icarus-style descent in the value of their holdings.

There have been equally calamitous falls for other one-time stock market favourites such as Solon and Solar Millennium, both of which have sought protection from their creditors in recent months.

Even for the industry survivors, share price falls have been brutal. SMA Solar Technology, which says it had its second best year in 2011, despite of a fall in operating profit from €516m to €240m, has seen its share price plunge from close to €100 at the end of 2010 to a little over €30 in recent trading.

Companies such as Q-Cells, however, were in deep trouble long before the subsidy cuts, with surplus capacity in the industry driving module prices lower throughout 2011.

According to pvXchange, a business-to-business exchange that monitors module price trends, “by the end of 2011, a price level was reached that nobody in the industry thought was even remotely possible at the beginning of last year. Driven by the price reductions of Chinese producers, the other manufacturers had to follow suit, pushing down the price index in all categories by 32.5% to 45%”.

This is one reason why institutional investors have been suspicious of the sector for a while. “I think photovoltaics will continue to play an important role in Germany’s energy mix,” said Joerg Sperling, a partner at the Munich office of WHEB Partners, a cleantech private equity fund which is an investor in pvXchange.

“But I always had my doubts about the sustainability of cell manufacturing in Germany. I see the industry developing in the same way as the semiconductor sector, where the cost of capital is a key driver of competitiveness. Asian manufacturers have a clear advantage in that respect, which is why we have steered clear of German PV cell manufacturing companies.”

’Complex puzzle’

At issue for investors in public as well as private equity is not the capacity of the sun to shine lustily enough to turn the world’s lights on. Even allowing for wet weekends in Oberstdorf (apparently the wettest city in Germany), the sun generates 1,080,000,000 terawatt hours of power, or 60,000 times the world’s total energy requirements, according to the website of the bankrupt Solar Millennium.

The issue is how competitively this dazzling amount of power can be harnessed. With storage and transmission the headaches for all renewable sources, Siemens hit the nail on the head in a recent report in which it said Germany’s energy policy was a “complex puzzle”.

“If about half of Germany’s energy is to come from renewables by 2030 [and some 80% by 2050], then they’ll have to be competitive without subsidies,” the report stated.

It won’t be easy weaning German solar companies off subsidies that have amounted to more than €100bn over the past decade or so. That is an awful lot of money for an energy source that still accounts for “less than one-tenth of 1% of the power generation in Germany”, according to Solar Millennium.

On balance, cold-eyed industry observers said that some of Germany’s solar companies had remarkably little to show for the largesse that had been showered upon them.

“Worldwide, the solar sector has considerable excess capacity, so the firms’ problems aren’t surprising,” said Dr Norbert Irsch, chief economist at KfW in Frankfurt.

“In such an environment, brand image and technological competence are crucial. However, few German companies invested enough in research. If you look at their R&D expenditure to sales ratios, they are substantially lower than in the auto industry, for example. This is one reason why they lost their competitive edge relative to some of the Chinese and US companies.”

This is also why the German government has decided that for the solar sector, enough is enough, and that the provision of blank cheques to the industry will have to stop. Over and above the drain to the public purse caused by subsidies on renewable energy, there are the chunky transportation costs to consider.

This, said industry analysts, remains a notable Achilles’ heel for the broader renewables sector.

“One reason why the German industry was up in arms when the government announced it was shutting down its nuclear plants after the Fukushima disaster is the cost of transmitting electricity from A to B,” said Chris Moore, senior utilities analyst at Hammer Partners in London. “This is especially true for offshore wind, which is developed off the north coast when much of German industry is located in the south. But more generally, the development of renewables in Germany is circumscribed by the inadequacy of transmission capacity.”

Flawed logic?

For its part, the industry association says it accepts the necessity for some subsidy cuts. But it argues that the case against the economics of solar power is flawed.

“The feed-in tariff leads to a minimal increase in electricity prices,” said Wedepohl. “A 70% increase in the volume of solar power between now and 2016 would add no more than between 1.7% and 1.9% to electricity prices. As to the power grid, small improvements in the system could help us to generate 70GW of solar power by 2010 at a cost of about 11 cents a month for the average household.”

It is data such as this which explain why the solar industry in Germany believes it is tantalisingly close to standing on its own two feet.

“The problem is that there is no certainty in the legal regime regarding the sale by companies of surplus capacity. Until we have more clarity in the legal system, banks will remain reluctant to lend and investors will remain reluctant to invest across the whole renewables sector”

“It is true that solar power was expensive, but following the investments of the last decade, we are only a small step away from being competitive with conventional forms of electricity generation,” said Wedepohl.

It is not just the cuts themselves that have upset the industry. The Association also says that continual changes to government policy have done little to build confidence either within the industry or among investors. “This government has changed the law on feed-in tariffs four times in the last two and half years,” said Wedepohl. “How can you develop a business plan under those circumstances?”

Annerose Tashiro has some sympathy with an industry that is the subject of continually moving goalposts. She is head of cross-border restructuring and insolvencies at the German law firm, Schultze & Braun, and has worked on the restructuring of a number of beleaguered solar companies.

“Industrial solar module power investments are generally about 80% backed by bank financing,” she said. “The problem is that there is no certainty in the legal regime regarding the sale by companies of surplus capacity. Until we have more clarity in the legal system, banks will remain reluctant to lend and investors will remain reluctant to invest across the whole renewables sector.”

Little wonder, against that backdrop, that the most compelling blueprint for survival appears to be for Germany’s most innovative companies to de-emphasise the domestic market and to look elsewhere instead. This is clearly the strategy at SMA Solar.

“We will drive our international presence further, opening two new foreign companies in South Africa and Chile in 2012,” said a company spokesperson. “In 2011, we already achieved close to 54% of our sales abroad and we are aiming of increasing the share of foreign sales to 8% this year.”

Tellingly, it’s not just Germany’s finest that see the brightest prospects elsewhere. As recently as 2010, the NYSE-listed China’s Yingli Green Energy, one of the world’s largest PV manufacturers, generated 59% of its revenues in Germany. In 2011, that share fell to 47%. China’s share, by contrast, climbed to 22%, versus just 6% the previous year.

Sun block
Construction workers fix solar panels for solar power plant near Olching.