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Why Policy Changes in Germany and Italy Are Good for the Future of Renewable Energy

For the past two months, solar industry analysts have been glued to an Italian soap opera as the government repeatedly flip-flopped on its Feed-In Tariff (FiT) policy, a controversial tool that European governments have used to promote the rapid adoption of renewable energy through direct incentives. Conflicting reports made it very difficult to determine what was happening in Italy. The details are still not entirely clear, but the outcome will involve new limits and has significantly disrupted the solar market and prices. The response to such extreme uncertainty has been that Italian solar module orders and project construction have ground to a complete halt. The only solace for manufacturers watching this unfold was the comfort that came from knowing Germany, the country that pioneered the use of the FiT and in the process became the world’s leading solar market, was on solid ground.

Late last month, however, German Chancellor Angela Merkel provided the next plot twist in the unfolding drama. After a week that involved discussions with the chiefs of Germany’s four major electricity companies, on May 13 she made some surprising remarks that may mean Germany’s FiT is up for adjustment next. This is how Bloomberg reported it:

‘Germany’s subsidies for solar power may be too high, Chancellor Angela Merkel said. While solar receives half of the German government’s aid for alternative energy, it accounts for only 2 percent of the 17 percent of electricity generated from renewable sources, Merkel told a conference of her Christian Democratic Union party in Berlin today. “We do have to think about whether we can keep this up,” she said.’’

A major change to German and Italian FiTs could radically reshape global demand for solar modules and hasten the transition to competitive markets. Despite the challenges this presents for manufacturers, I would argue this is exactly what the renewable energy market needs if it wants to truly become mainstream.

There’s a good reason this news is getting so much attention. Germany and Italy together made up 64% of global solar demand last year.

There’s a direct connection between the price Europe sets for its incentives and the price of solar modules worldwide. Over the past couple of years, reductions in European FiTs have resulted in a steep reduction in the price of solar modules. An interesting result is that as module prices have dropped, demand has begun to emerge in non-European parts of the world (e.g. the US). Demand is emerging because module prices have reached a point where electricity generated by a solar PV plant is become very competitive with other mainstream renewables (e.g. wind), the first step in the path to price parity.

This dynamic represents the first step in the evolution of the global market towards competitively driven demand for renewables versus fossil fuels – in other words, a more sustainable world. Utilities who need to procure renewables for regulatory compliance are snapping up solar at a rapid pace. The next evolutionary milestone will come several years from now as solar becomes competitive in ALL markets with conventional electricity generation.

While analysts may wring their hands about near term disruptions in European solar markets and the impact on individual solar stocks, I think hidden in this crisis are the seeds of a promising future. The solar industry, and the renewable energy industry as a whole, need to make the transition from dependence on FiTs to a new future that relies more on competitive markets. FiT disruptions may be painful in the short run, but the best thing for emergence of a mature renewable energy industry is continued rapid price declines and the transition to truly competitive power markets.