Some Recent Changes in the German Solar Market
In all the hubbub about Germany’s new feed-in tariff (FIT) law, you may have missed an unusual announcement coming out of Germany. One of the “big four” utilities here, RWE, has committed 170€ million over three years for distributed solar, small wind, and CHP. With a goal of 1 GW solar for this year, they already have 200 MW in signed contracts. And this just a few months after RWE’s then-CEO stated that installing solar in Germany makes about as much sense as trying to grow pineapples in Alaska – not terribly promising. So what caused this turnaround, and what does it tell us about the changing German market?
RWE initiative driven by leadership
Along with economic calculations of FITs, behind-the-meter savings, and LCOE (levelized cost of electricity), one of the biggest drivers here is a change of CEO at RWE. With the departure of former CEO Jürgen Großmann, new CEO Peter Terium is actively pushing for the institutional culture shift needed to integrate more distributed generation (or just increasing corporate greenwashing, depending on whom you ask).
What RWE is doing
RWE’s new solar business model utilizes neither FITs nor behind the meter consumption. Rather, they are investing in utility-side distributed generation, bundling many commercial-scale (generally big box retail) installations to create virtual power plants. These are managed by RWE, along with all of the other power plants in their resource portfolio. This approach is better suited to utilities because regulations do not allow utilities to keep FIT-compensated generation in their resource portfolios. The commercial customers, meanwhile, get the good PR of rooftop solar without having to pay for the system themselves. For RWE there is also the advantage that the customers now have a long-term association with RWE. Given the deregulated market here – and the increasingly advantageous economics of on-site PV power consumption – loss of customers is a real concern.
Behind the meter projects in Germany
While RWE isn’t going behind the meter, several big project developers are going in that direction with their commercial customers, just as we are seeing with big box retailers like IKEA and Walmart in the US. For certain larger-scale applications like supermarkets where there is a good matchup of generation and consumption, we are already at lifecycle (“dynamic”) retail parity. Many of these large customers have the means to pay the upfront costs, so it makes sense to invest in solar and get a lower LCOE. They can consume a high percentage of their electricity onsite instantaneously (Germany does not allow for monthly “banking” as with American-style net metering), saving on utility bills, and feed excess generation into the grid, receiving below-retail-rate FITs for 20 years.
New policy requires hybrid business models
With the new FIT law, Germany is moving forcefully towards more behind-the-meter consumption. In fact, new commercial/industrial scale applications (10-1000 kW) will only be allowed to sell 90% of their electricity via the FIT. As of 2014, residential scale systems will also be limited, with an 80% maximum share of generation eligible for FITs. The rest can be
(1) instantaneously consumed on-site behind the meter,
(2) sold via PPA, other bilateral contracts, or on the spot market, or
(3) compensated at the average daytime price for electricity (3-5 cents and dropping due to high penetration of no-marginal-cost solar – peak here is on winter evenings, not summer afternoons).
Given the alternatives, those who can consume on-site will do so. This summer’s Intersolar Europe conference reflected this new reality, with all of the major manufacturers prominently displaying their new storage and smart home prototypes, and promising mass-market products for next year. We can also expect to see more third parties stepping in to serve PV installations without on-site load.
Broader utility shifts
Unlike US utilities under net metering, until recently German utilities did not have to contend with eroded revenues from PV. However, this is changing as (1) their customers begin to dramatically reduce grid electricity consumption, and (2) high penetration of no-marginal-cost renewables cuts into their ability to profitably operate peaker plants. In the future, we are likely to see much stronger efforts from utilities to protect their revenues, perhaps through some combination of (1) initiatives like RWE’s to invest in PV, (2) efforts similar to San Diego Gas & Electrics’s recent attempt to revise rate structures, and (3) capacity markets similar to PJM that compensate for available capacity, not just generation. In the meantime, RWE’s new distributed solar initiative is a heartening indication that the German utilities are ready to stop sitting on the sidelines and start making their own contributions to a renewable energy future.
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