The emerging new energy world order: Which role for Europe?
Article of Prof. Dr. Rolf Wüstenhagen for ESPRIT St.Gallen
After 150 years of fossil fuels, the world is embarking on a path towards cleaner energy. More than 60 % of all investment in new power generation capacity in Europe between 2008 and 2010 went into renewable energies like wind, solar and biomass. Germany has seen a particularly strong growth, with more than 50’000 Megawatt of new power generation capacity now installed in wind and solar, and renewable energy accounting for 20 % of electricity consumption. Germany’s favorable policy framework, with so-called feed-in tariffs guaranteeing solar investors attractive returns for 20 years, has also resulted in 300’000 jobs being created, many of them in areas with previously high unemployment in the East of the country. Together with similar developments in countries like Denmark, Spain and Italy, the old continent seemed poised for an era of green growth. More recent headlines, however, appear to paint a gloomy picture – a number of pioneering solar firms have recently filed for bankruptcy, and popular investor magazines are publishing “death lists” of renewable energy companies. One of the reasons for the more cloudy outlook is rising competition from China: 38’000 Megawatt of wind turbines were newly installed worldwide, 50 % of which in China. In solar, Chinese manufacturers have become dominant players, exporting much of their production to Europe, notably Germany. Have German policymakers been digging the grave of their own industry by providing too generous incentives? Has the idea of ‘green growth’ just been a short-lived dream for Europe, followed by a hard landing of disillusionment?
Germany: Two decades of renewable energy growth
In the context of our executive education programme in Renewable Energy Management, we recently had an opportunity to gain some fresh insights about the possible answer to these questions. Two of the eight modules of that programme took us to Germany and Asia. In Germany, we witnessed Solon’s struggle for survival – one of the pioneering companies of the photovoltaics sector, growing from humble beginnings in Berlin’s Kreuzberg district to a proud manufacturing site featuring the latest in innovative building technologies in the German capital’s Adlershof high tech cluster. We also had several sessions involving policy makers from German government and parliament. The German parliament stood at the cradle of the country’s renewable energy boom, when, in late 1990, at the last session before Christmas, it voted with a surprise majority in favor of introducing the Feed-In Law. The law, initially promoted by a rare coalition of post-materialist supporters of wind energy and conservative farmers with a stake in small hydropower, initiated what in hindsight looks like a 20-year success story of growth, initially in wind. In 2000 and 2004, the then governing coalition of Greens and Social Democrats amended the law with the ambition to help solar energy follow a similar virtuous cycle of customer demand leading to mass production leading to lower cost, fuelling more demand etc. To reach that objective despite the initial obstacle of much higher power generation cost of solar, feed-in tariffs were raised from 8.5 to 59 cents per kilowatt hour, with provisions to reduce the support by a fixed percentage every year. An interesting feature of German renewable energy legislation – especially in the light of the recent Euro crisis – is that it was not directly tied to federal budgets. Instead, the additional cost of supporting renewable energy generators through the feed-in tariff was simply redistributed as a surcharge on electricity prices for all consumers (with exceptions for heavy industry). In 2012, feed-in tariffs for solar photovoltaics have come down to 13-24 ct/kWh – depending on the size of the installation – and are refinanced by a 3.6 ct/kWh surcharge on electricity prices. In total, German electricity consumers have made a net investment of 40 billion Euros over the last decade to support the growth of renewables, and reduced several hundred million tons of carbon dioxide emissions along the way. In line with international trade rules, the incentives were not limited to solar cells produced domestically, and hence American and Chinese competitors have taken increasing shares of the German solar market. By increasing the price of electricity, the feed-in tariff has effectively worked like an indirect internalization of external cost of conventional energies – the holy grail of environmental economics, which has traditionally been hard to implement in real politics in its pure form. Nevertheless, while a majority of the population is supportive of German renewable energy policy, some parts of the public and some industry circles remain skeptical. Consequently, we witnessed during our stay in Berlin the beginning of what turned out to be a month-long struggle between the Ministry of the Environment and the Ministry of Trade and Industry about a reform of the solar incentives. While both agreed that feed-in tariffs needed to be adjusted in the light of costs for solar panels that had declined by more than 50 % in two years, their inability to reach agreement on the specific terms led – for the first time in Germany’s 20 years of successful renewable energy history – to substantial uncertainty in the market. Combined with fierce competition from China, this made life for firms like Solon not easier.
Asia: Heavily investing in solar energy
Switching scenes: Eight weeks after our trip to Berlin, we taught the next module of our executive education programme, this time in Singapore. We visited another solar factory, REC’s super-modern, highly automized 700 Megawatt-facility, a S$2.5bn investment, supported with several hundred million dollars by Singapore’s powerful Economic Development Board. The picture that emerged here was different from Germany’s current doom and gloom. While management of REC as well as their South-East Asian government mentors obviously acknowledged the challenges arising from sharply declining market prices, the factory continued to run 24/7, and succeeded in squeezing further cost out by optimizing their manufacturing lines month after month. Given the significant investment, including government aid, the firm was able to build a highly integrated factory, with wafer, cell and module manufacturing side by side on the same premises – a rare view for Europeans who are used to a more fragmented solar industry, where a lot of shipping occurs between the different steps of the value chain.
Wanted: The enlightened long-term investor
What can be concluded from comparing these two insights in solar markets and policies gained within our executive education programme? First, I cannot help but think of Gartner’s famous hype cycle, which suggests that development of new technologies is not a linear process, but can be characterized by a cycle of initially inflated expectations, then a trough of disillusionment, before finally embarking on sustainable growth (“the slope of enlightenment” in Gartner Group’s original words). Gartner’s recommendation for the trough of disillusionment is “don’t get out because it’s ‘out’”, suggesting that long-term investors should look beyond the short-term volatility and sentiment. It seems that Asian investors, including governments, are currently featuring more similarities with the enlightened long-term investor à la Gartner than some of their European counterparts. For example, the Chinese government, according to the US Department of Energy, provided their solar firms with $30bn of investment subsidies in 2010 – which may be a sign that they are determined to weather the storm and further increase their share of the global solar market. Second, visiting the two factories confirmed my view that the missing piece for full cost competitiveness of solar energy is not some magic technological breakthrough, but rather a continuous improvement in a straightforward, capital-intensive industrial manufacturing process. Those players that are less capital constrained will be best positioned to continue playing an active role in the future low-cost game, while those who do not have equally good access to capital will be targets in the ongoing consolidation process, leading to a different-looking, but ultimately stronger industry.
Proximity to markets as Europe’s advantage
Coming back to my initial question above – is the period of “green growth” already over in Europe? Are we facing sunrise in the East, and sunset in the West, when it comes to the future of the solar industry? As a European, I am actually somewhat optimistic. I believe the fundamental transition of the energy industry provides room for growth for many firms and countries. While Asian countries have a number of advantages, such as lower labor cost and a cultural openness to government involvement, European countries have some strong points on their side, too. A high awareness for energy and environmental issues, a skilled and innovative labor force, and last but not least the fact that there are already existing markets for renewable energies and real customers with a widespread willingness to invest in, for example, solar panels, provide us with a potential competitive advantage. Does that mean that all jobs will remain local? Certainly not. But does that mean the old continent can continue to play an important role as the world strives for a cleaner energy future? Yes, I think so indeed.