2012: A fundamental shift in Germany’s market drivers?

•  
  Feed-in-tariff development vs. retail electricity price development (source: EuPD Research).
•  
  LCOE vs. retail electricity price development (source: EuPD Research).

Blogger

Parag Bhamre

Parag Bhamre is an Associate Consultant at EuPD Research and works on strategic consulting projects for PV manufacturers. He is also in-charge for tracking forecasts and trends in the PV sector. His previous work experience involves working as an analyst for a major sales and marketing consultancy. He holds a Bachelor of Engineering (Computer Science) degree from Pune Institute of Computer Technology, Pune University, India and a Masters of Business Administration (MBA) degree from HHL – Leipzig Graduate School of Management, Germany.

Feed-in-tariffs (FiT) as incentive mechanisms are increasingly gaining popularity. China recently announced a new feed-in tariff scheme for PV to complement its rapidly expanding module manufacturing capacity. Other countries such as Germany and Italy, which have established FiT schemes, nevertheless are continuously adjusting the FiTs to encourage balanced growth in the market. But in the future, will designing FiTs be the sole important factor affecting the growth of photovoltaics in the developed PV markets?

PV installations in Germany have seen a rather slow start in the first half of 2011. The first five months of 2011 witnessed a total of 1.1GWp PV capacity installed compared to 1.7GWp during the corresponding period in 2010. Due to the slow start in 2011, the feed-in-tariff cut did not come into effect in July 2011 as had been anticipated.

PV system prices have dropped significantly, primarily on the back of steep reductions in module prices. With no FiT reduction coming into force and PV system prices dropping significantly, the analytics team at EuPD Research predicts that Q3 and Q4 2011 will see strong growth in installations driven by attractive internal rate of return.

With PV system prices hovering in the range of €2,600 to €3,000 per kWp in 2010, the levelized cost of electricity ((i.e. lifetime cost of generating one unit of electricity) for these systems was approximately in the range of 27.1-29.8 €-cents/kWh in Southern Germany.

On the other hand, the retail electricity prices in Germany have seen a sharp increase in the last few years. According to statistics published by Eurostat, the retail electricity prices (incl. of taxes) for domestic households consuming electricity in the range of 2,500kWh to 5,000kWh per year in Germany have increased from 21.48 €-cents in 1H 2008 to 24.38 €-cents in 2H 2010.

Due to the current drop in the PV system prices, the levelized cost of electricity of PV has further dropped to levels of 25-26 €-cents. Based on the assumption that retail electricity prices rise at a rate of 3% per annum, it is expected that the cost of generating one unit of PV electricity will equal the retail electricity price for domestic consumers by 2012 in Southern Germany - grid parity will have been achieved.

Another point which should be noted is that the feed-in-tariff for small PV systems (< 30kWp) in Germany currently receives 28.74 €-cents per kWh. With an FiT cut coming into effect in January 2012, depending on the percentage digression, it is possible that the FiT might fall below the current retail electricity price. For a domestic retail electricity consumer/PV electricity producer, this would mean that he will pay more for buying 1kWh of electricity from the utility than he receives for selling 1kWh of electricity to the utility (retail electricity price> FiT).

To date, investment in PV has been heavily dependent on PV system costs and the FiTs translating into what would be considered a good return on investment. EuPD Research expects that 2012 will be an inflection year when the dynamics of the markets start changing as electricity prices start influencing end-customer decisions.

Sample interviews conducted with end-customers of PV have seen these customers indicate their intentions and thought process in regard to PV. For instance, a residential PV system owner in Germany was quoted as saying, “I invested in PV because I didn’t want to pay so much for electricity every month and since the electricity prices are only increasing; by investing in PV I can save money in the long-term. It is also attractive to get money for the electricity produced. “

EuPD Research predicts that in the next few years, the perception of PV solely as a profit-making channel will change and the notion of PV as an instrument of reducing electricity bills will gain significance. There is an increasing need in the market for devising alternate marketing strategies to reach end-customers. Some companies have started thinking about these issues, although it remains to be seen which of them will be able to cash in on the opportunities arising and make the necessary modifications to their plans.

This guest blog is an excerpt from the recently published EuPD Research study ‘Dawning of a New Era – Photovoltaics at the Edge of Grid Parity’. In case of questions please contact Mr. Parag Bhamre directly: p.bhamre@eupd-research.com