Germany and the High Price of FITness

This interesting article in The Economist on Germany's renewable energy laws talks about how successful Germany's feed-in tariff scheme has been in catapulting Germany's solar industry, and how it has the ironic effect of increasing the price of solar and channeling investments away from possibly more effective renewable energy technologies, causing some backlash amongst politicians who seek to scale back on some of the cross-subsidies afforded to solar.

The feed-in tariff essentially works like this: utilities are required to purchase power form renewable energy sources at a fixed higher-than-market rate that decreases gradually in fixed amounts over a 20 year period. Such fixed rates provides certainty to investors to calculate their returns. The utilities are permitted to pass on the extra costs of purchasing renewable power to its customers by "smearing" such extra costs across the the price of all electricity generated--renewable or not. Because of the relatively small percentage of renewable power compared to overall electricity generation (some 6.7% in Germany for 2006), such a cross-subsidy added a mere 3 euros per month, to the typical German household power bill.

But as the article points out, the feed-in tariff has been so successful that it has had unintended effects:

Cheerleaders for solar had hoped that the increased demand for panels would help manufacturers reduce unit costs, and thus make solar more competitive in the long run. Instead, the rush into solar has led to a shortage of the high-grade silicon used to make the cells, which has soared in price from $25 per kilogram in 2003 to around $400 today. Indeed, such is the demand for solar panels in Germany that it has kept prices high globally. This is wonderful for manufacturers, but makes it more expensive to install solar capacity in sunnier parts of the world, where it would generate more electricity...A euro in cross-subsidies spent on wind power, rather than solar, produces more generating capacity and a larger reduction in carbon emissions.

In my view, we have to keep the longer term view of the silicon shortage in perspective. New capacity for polysilicon will come online within the next two years, and that, hopefully will ease the bottleneck. My next post will delve a little more into the silicon situation.