Why Germany is the hot solar destination despite low sunlight?

8/4/2020

Germany lies in the mid-latitude region (51.1657° N, 10.4515° E) of the earth where sun light is low compared to that in tropical and sub-tropical regions.

Let’s look at the solar insolation of the country:

The average value is 3.01 kWh/m²/day

If I compare this value with the countries in tropical region and sub-tropical regions like Colombo (Sri-lanka) and New Delhi (India) then it is quite low.

We all know that sunlight plays a very important role in determining the feasibility of the solar power system.

When sunlight is good, fewer solar panels can produce enough current to run your electrical appliances.

Despite this, more and more Germans are replacing grid electricity with independent solar installations and the country has become a hot solar destination.

The main reasons are as follows:

(1) Grid electricity is very expensive

The constant reduction in the cost and improvement in the technology have made solar one of the cheapest power generation source.

Moreover, it is environment friendly.

Germany has one of the most expensive grid electricity rates.

Please look at the chart below:

Source: STROMVERGLEICH

It has grown from 21.65 Euro cents/ kwh (23 US cents) in 2008 to 29.16 Euro cents/ kwh (32 US cents) in 2017.

1 Euro cent = 1.08 US cent
Or
1 Euro = 1.08 USD

A growth of 35% in the last 9 years, making it an average annual growth rate of 3.85%.

Here are the reasons for this:

The tax component in the grid price is usually high in this country.
In the year 2017, the grid price was 29.16 Euro cents per unit of electricity consumed or kWh
The tax component was 16.038 Euro cents. It was 55% of the grid price in that year.
7.48 Euro cents (26% of 29.16 Euro cents/ kWh) went to the Grid.
5.63 Euro cents (19% of 29.16 Euro cents/ kWh) were given to the power generators

The tax components were:

Source: STROMVERGLEICH

There is a component called renewable energy surcharge is used for financing the renewable energy projects which is 6.88 cents or 23.6% of 29.16.

It is clear that German promotes renewable energy through surcharges on grid electricity.

It is clear that high tax on grid electricity and the government’s investment in the renewable projects have made people to consume less grid electricity and start generating own through solar PV installations.

(2) An Effective FIT policy mechanism

The FiT policy is very supportive and effective in promoting the solar installations in the country.

FiT is the fee paid to the renewable energy producers, in our case it is solar energy producers, for the period of 20 years, for each unit they produce and feed it into the grid.

In this way the FiT mechanism offers long term security to the renewable energy producers. Moreover, the remunerations are above the wholesale or the retail prices, further making solar energy investments lucrative.

(3) Solar installation is cheaper in Germany

The cost related to customer acquisition, installation, and profit/overhead cost are less. Moreover, the expenses related to permitting, interconnection and inspection procedure are lean in the country.

Here are the reasons for this:

The customer acquisition cost is less in Germany because of strong network between the solar installers, equipment manufacturers and the lead generating websites.
For installing new residential solar power system, local permits and inspection by government officials are not required
Most of the solar power installation labour is cheaper non-electrician man-power
There is no permit fee for solar power installations
The drop in prices of Lithium-ion batteries almost to half since 2013 gas accelerated the growth of solar installations. Now more and more home owners are buying battery based solar systems so they can get smooth supply even during night and in bad weather.
The incentive applications are processed online that is easy and quick
Due to competition, the profit margins are lower and cost of installation is less
German PV systems are exempt from sales tax and value added tax
Germans have large system size with median of 6.8 kW that further lowers the average price of the system. This further improves the financial feasibility of the system, offering higher rate of return.

Source: Researchgate

(4) The Declining cost of solar PV Installation

The unanimous acceptance of the country’s solar program has played an important role in bringing down the cost of solar PV installation from Euro 5/watt in 2006 to around Euro 1-2 per watt in 2014.

The cost of installation is declining since 2006. It has declined from Euro 5,000/kWp to Euro 1640/kWp in 2014, a good 13% CAGR decline in the cost of installation.

Conclusion

The above factors have accelerated the growth of solar power installations in the country despite its low solar radiations.

If I assume that grid rate of 29.16 Euro cents in 2017 will grow at the rate of 3.85% for another 25 years that is also the average life of the solar panels.

Then the per unit electricity price at the end of the 25th year would be 75 Euro cents per unit of grid electricity.

With time, the grid prices are likely to increase and solar power system cost is going to come down.

The price gap is going to widen year by year, further motivating Germans to replace the grid electricity with the solar power systems and become the independent energy producers.

In addition, the investment in solar energy projects through renewable energy levy will boost the growth of solar in the country.