The problems of the German alternative energy business
The alternative energy industry is growing as increasing numbers of people recognize the value of finding sources of energy other than fossil fuels. However, current alternative energy sources are generally expensive and unreliable compared to traditional energy sources.
Consumers want cheap, reliable energy. So the alternative energy industry has required subsidies to make it an attractive area for investment and development, and some countries have provided more incentives than others. Investment in alternative energy in the United States is in its infancy compared to Germany, which has promoted alternative energy for decades and is a leader in both wind and solar energy production.
Germany’s alternative energy system
Germany regulates its alternative energy business using feed-in tariffs. By law, utilities must buy power generated by alternative energy sources at a fixed price, which is high enough to encourage investment in the systems. The utilities feed the power generated into their grids and pass along the costs to consumers in the form of slightly higher electricity bills. In this way, those who use more energy pay more of the costs, which is seen as a fair trade-off.
Each alternative energy source has its own tariff structure, which includes built-in price reductions over time. In theory, competition will eventually reduce the costs associated with installing the systems and production costs for alternative energy and conventional energy would be comparable, making further subsidies unnecessary.
Germany’s position as a leader in alternative energy suggests the system is working. In 2009, Germany had more than 21,000 wind turbines, which generated about 7% of the country’s electricity. Solar energy provides about 1% of the country’s energy. Despite this small percentage, Germany is the world’s largest market for solar power, and it’s still growing.
The government recently increased its target number of new solar system installations, and its plan is for 20% of the country’s energy to be supplied by renewable sources by 2020. Unfortunately, recent proposals may bankrupt German manufacturers of solar power systems.
Difficulties in Germany’s alternative energy business
Despite Germany’s success with alternative energy production, the industry still needs subsidies. However, the German government wants to follow the lead of other European countries, which have been drastically reducing their obligatory feed-in tariffs. German officials want to implement reductions in solar tariffs well beyond those already scheduled.
The impetus for this move is partly the poor economy, but officials also feel that a drop in the cost of solar panels warrants lower tariffs. However, low-cost panels are supplied mostly by Chinese manufacturers, not German ones. So far, people have been willing to pay more for what they see as a higher-quality product, but if their investment is threatened by lower tariffs, they will likely switch to the lower cost product, regardless of quality.
According to the German Solar Industry Association, European manufacturers will not be able to survive if this happens. Germany is already the biggest purchaser of solar panels in the world, and given the government’s ambitious alternative energy plans, it will likely remain so. However, if solar tariffs drop too far too fast, the country’s solar panel manufacturers may not benefit from any increased demand and may instead face bankruptcy.
Further aggravating the situation are the government’s 2009 proposal to extend the life of the country’s nuclear reactors and the June 2010 resolution to tax the nuclear energy industry. Energy companies are waiting for clarification on these issues, saying that the proposed tax will reduce the amount they can invest in renewable energies. Coupled with reduced solar tariffs, these developments further erode the incentive to invest in solar energy.
It remains to be seen how Germany will reconcile its ambitious alternative energy plans with the economic difficulties facing the country and its solar panel manufacturers.
