Solar subsidies

Coalition talks between Chancellor Angela Merkel's conservatives and the pro-business Free Democrats last month indicated that Germany's new government was considering hefty cuts to subsidies for renewable energy. Reductions of up to 30 percent were on the table. While they did not decide to drastically cut subsidies immediately, it is still unclear how the Renewable Energy Sources Act (EEG) will develop in the next few years.

The EEG was originally intended to boost green energy by guaranteeing anyone who installs solar panels on their rooftop a fixed price for each kilowatt hour fed into the public grid. The subsidies, paid by all electricity consumers, are reduced each year according to the number of new solar panels that were installed throughout the year.

A guaranteed return for the next 20 years

Solar panel owners who installed systems in 2009 are entitled to 43 cents per kilowatt hour they feed into the grid over the next 20 years. If they use the electricity themselves the subsidy scheme still pays them 25 cents per kilowatt hour.

Payments for panels installed next year, however, are expected to shrink by about nine percent. That is why many Germans are rushing to get solar panels installed before the end of 2009.

According to Markus Klein, CEO of the Engelskirchen-based installation company "regenerative generation", his workers would install panels all year round if it weren't for snow and ice.

"We are installing as soon as the weather allows us and then all year around until it's winter again," Klein says.

A necessary incentive?

Klein says the guaranteed return on investment is a necessary incentive for people to install solar panels because it's still difficult to use solar power as a stand-alone energy source. Electricity storage devices like batteries, which are supposed to provide energy to households throughout the night, still lose about 20 to 30 percent of the energy they are fed.

He explains that the solar panels generally pay for themselves over a period of 10 years.

An average four-person household with solar panels that produce 4,500 kilowatt hours in a year receives annual payments of about 2,000 euros. Given the average owners' initial outlay of 15,000 euros, that's a considerable return on their investment.

Some claim subsidies are too high

Critics claim the solar subsidies, which are funded by all energy consumers, are therefore too high.

"Do I need a return of 15 or 20 percent, or shouldn't three, four, or five percent suffice as an incentive? The purpose of the Renewable Energy Sources Act is not to finance extra incomes," says Holger Krawinkel, an energy expert with the Federation of German Consumer Organizations.

But Markus Klein argues that solar subsidies get cut each year anyway. The number of new solar panels installed in a year determines the cut in compensation for electricity fed into the grid.

According to the federal electricity network agency, Germany's solar energy capacity increased by 2,340 megawatts between October 2008 and September 2009.

The fact that the threshold value of 1,500 megawatts was breached means subsidies for 2010 will be cut by nine percent, giving newly installed panels a lower rate of return.

Price drops in solar panels

Recently introduced limitations on new solar installations in Spain and a general increase in the worldwide production of panels has seen the price of solar components fall drastically.

"If costs for solar plants drop by 30 percent, then it's not quite logical why the compensation shouldn't be proportionately reduced," Krawinkel says.

Markus Klein, on the other hand, says the total cost of installing a solar system hasn't decreased as much as the cost of the panels themselves if you account for other factors such as labor expenses.

Some detractors of the subsidies argue that as most of the panels are sourced from Asian countries, which produce at cheaper rates, German subsidies are only filling the pockets of Asian manufacturers.

Others like Klein point out that the subsidies are also beneficial to Germans working as installation mechanics and electricians. Moreover, German manufacturers produce other solar components such as inverters.

No revenue, no investment

CDU energy expert Joachim Pfeiffer claims that subsidies are only hyping demand that otherwise would not exist.

"Because of the purchase guarantee Germany is demanding modules that otherwise would not get sold anywhere else for those prices. This is why the whole world is largely producing for the German market," Pfeiffer says.

Markus Klein says if it wasn’t for the revenue, the comparatively high cost of solar energy would stop customers from investing in the green technology.

"Speaking at least to the point where we reach grid parity, we definitely need the subsidies. But beyond that time, people will not need it anymore, because it will be more interesting to have your own solar panels on your roof to produce your own power," he explains.

"It will be cheaper than buying it from the power company, and it will make you more independent, and our German costumers like the idea of being independent, especially from power suppliers abroad."

The solar industry is currently aiming to achieve grid parity - when the price of solar power drops to the same level as electricity obtained from conventional providers - between 2013 and 2015.

Reporter: Sarah Steffen

Editor: Sam Edmonds