Sunday, April 8, 2012

System Prices vs. FiT Rates in Germany and Italy

This simple graph compares photoelectric system prices in Italy and Germany and the FiT rates in each country. The prices reflect system sizes of < 100 kWp in the case of Germany and 3 kW systems in Italy. Considering the disparity in system sizes this isn't an apples to apples comparison but it comes close enough for my purposes. Better data would undoubtedly show a stronger convergence in prices than this graph. Note also that photoelectric systems are tax free in Germany while the Italians impose a 10 percent tax.

When I look at this graph the thing that pops out at me is how much higher the FiT rates are in Italy compared to Germany. The rates are especially high considering how much more sun Italy gets than Germany - 1200 kWh/kWp compared to 900 kWh/kWp. Logically, we would expect the Italian FiT to be about 25% less than the German FiT. The Italian FiT is already slated to step down to 25 cent/kWh in the second half of 2012 but I expect them to revise this plan. A more aggressive plan would have them instituting the 25 cent/kWh FiT in July but then also implementing 1 cent per month degressions for the remainder of the year such that they enter 2013 with a sub-20 cent/kWh FiT. An aggressive FiT reduction scenario would take FiT rates down below retail pricing in Italy. Once you get FiT rates below retail pricing you have more flexibility when it comes to cutting the FiT even more.

FiT parity leads to Net-FiTs

FiT parity is the cross-over point between FiT rates and retail electricity prices. When FiT rates are higher than retail electricity prices the end-user wants to backfeed all production into the grid to get the FiT rate. Once FiT rates fall below retail the end-user prefers self-consumption over backfeeding. FiT parity in Italy will lead policy makers to change the FiT structures from their current form to a Net-FiT form. In a Net-FiT structure the end-user only gets the FiT rate for the portion of production that is backfed into the grid. Germany adopted a Net-FiT structure on April 1st as part of their much contested incentive overhaul. If Italy implements an aggressive FiT degression plan we can expect them to adopt a Net-FiT structure at the beginning of 2013.

Net-FiTs ain't that Bad

The retail price for electricity in Germany is 26 to 28 cents/kWh. The FiT in Germany for systems under 10 kW is now 19.5 cents/kWh. The 6.5 to 8.5 cents/kWh spread between retail electricity and the FiT rate acts as a sort of shock absorber. Let's assume the average photoelectric system owner is self-consuming 30% of their production. In this scenario the effective value of their production is 70% based on the FiT and 30% based on retail electricity prices - .7*19.5 + .3*27 = 21.75 cents/kWh. Here's  a sketch of how the FiT and effective value play out going forward. Note: Retail electricity price is assumed to stay constant at 27 cent/kWh. 


These numbers show us that the FiT can be chopped in half but the effective value only changes by 30%. I'm prone to think things will actually turn out better than this because better system planning (appropriate sizing) and a new generation of smart appliances (water heaters, dishwashers, dryers, refrigerators) are going to help raise self-consumption rates. Here's how the effective value plays out if we assume a self-consumption rate of 50%.


These significantly higher values tell us the self-consumption lever will play a steadily increasing roll in the profitability of photoelectric systems. 

The shape of things to come?

Germany just had a huge quarter that was precipitated by their FiT restructuring. The restructuring is actually staggered over the year depending on system size so we can expect Q2 to also be strong. I suspect the Italians to start talking about rejiggering their FiT. This will lead to a boiling frog scenario as people rush to install ahead of this FiT cut. I expect this will happen in Q2 or Q3. Q3 and Q4 will see rapid expansion in Japan to make up for slowing demand in Europe. And then there's China... The forecasts call for 4 to 5 GW. I expect well see more like 10 GW.

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