Tuesday, October 30, 2012

Photoelectrics Blow Corridor - Next Stop Propagandaville

The Bundesnetzagentur is set to release installation statistics for September in a few days. The September spike in conversion area installations should push the installs for the month well over 1 GW. This September surprise will re-ignite the political gabfurno that's been burning since the EEG surcharge was revised up. Lots of nothing is expected to come of the bickering. We can maybe hope for some choice insults here and there.

On the administrative side of things remember that the November, December and January degressions will be based on July, August & September installations multiplied by 4. Here's how it works.

July = 543.2 MW
August = 329.4 MW
September > 1 GW
Sum x 4 > 7500 MW

From the graphic we can see that a  7500 MW installation pace results in a 2.8% degression rate for November through January.

Here's where things gets interesting. From October forward the industry will have to rely primarily on installations in the sub-MW bracket for the bulk of the market. This new condition is two blessings and one curse. First blessing is that mathematically speaking this sub-MW market segment is less reliant on the FiT for profitability because this segment has the benefit of self-consumption displacing retail electricity. Second blessing (depending on who you talk to) is that the large EPCs who have been working on multi-MW projects are mostly out of the picture which means the remaining players (smaller installers) have a more focused agenda as far as incentive policy goes. The curse is that the market is likely to shrink from the current 8 GW/year rate down to a 2500 to 3500 MW per year pace.

The lower installation rate is actually what the FiT architects would like to see but the maggot-ass opposition will use this contraction as a propaganda cudgel. They'll say, look at this frivolous industry. Take away their billion dollar training wheels and they crash. This negative spin can have a real effect on people considering purchasing a photoelectric system - it sure has in the U.K. despite their tremendously generous FiT structure.

The best way to counter the negative advertising is to get high quality information out into the marketplace. Problem is I don't see solar advocates doing that at the moment. Everybody is mostly spinning their old talking points. Very few are talking about market integration.

As I see it, the mathematics shows that the FiT can be phased out in short order. I don't think we need to shock the system with an over-night FiT reduction but I think it's about time Germany laid out a quick and simple transition policy. I figure a penny a month FiT reduction is doable. That's three times faster than the 2.8% monthly reduction that we'll see in November through January. If Germany implemented an aggressive transistion ramp they could have the FiT down to 10 cents/kWh by this time next year. At that point the incentive program is placing minimal load on ratepayers which gives the FiT architects breathing room to more carefully tweak things from then on. The program effectively moves out of the political arena and into the unemotional hands of the engineers, operators, installers and so on. There's still work to do in building the market but the political hysteria is striped out of the equation. I figure this transition will give the market a tremendous amount of confidence.

It's not about FiTs... It's about sustainability...

The goal isn't to keep FiTs alive. The goal is to build a market that keeps itself alive - call it sustainability. Anybody remember where the FiT was three short years ago today? Check out the graph. Things sure have come a long way. Another 8 cents/kWh ain't gonna stop this train. Given today’s average installed costs a 10 cents/kWh FiT gives an internal rate of return over 8%. It won't be hard to continue selling 8% IRR inventments. The logic is that plain and simple. Solar advocates have the economic argument but they don't seem to know it. Do the math.


If average installed costs can get down to 1500 Euro/kWp the 8% IRR threshold can be met with a FiT at 5 cent/kWh. This isn't magic - it's all possible because your production costs are 10 cent/kWh and 30% of your production (at least) is offsetting retail electricity that currently costs 26.2 cent/kWh and climbing.

The New Normal

Someday not too far from now people won't look at solar as an investment with IRR thresholds and payback periods. People will look at solar as an appliance that makes 10 cent/kWh electricity. Simple as that.

Update: My September guess missed on the high side by 22 MW and this means the degression step will only be 2.5%. We'll see about the other stuff.

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