Tuesday, December 13, 2011

Germany, Jobs and PV Electricity - Some Lessons for the USA

From http://www.solarworld.de/en/solar-power/projects-and-campaigns/for-farmers/
The money quote:
"Every single ray of sunshine provides a secure income, thanks to a SolarWorld solar power system and state incentives guaranteed under the German Renewable Energy Law. Moreover, income is assured for 20 years, irrespective of economic trends. Earnings from roof systems are comparable with those from conventional financial investment opportunities, but are more solid. Solar technology also makes an important contribution to preserving the natural environment."
Germany recently had its one millionth PV system hooked up to the grid, and the vast majority of these have been installed in the last decade. This was made possible via their Feed-In Tariff (FIT) system, which is designed to stimulate manufacturing jobs/industries by removing a lot of the valueless added financial risk associated with fluctuating grid spot market prices (and whose exact value at any given time in the future is unknowable). Due to the way that the FIT system works, almost all PV systems in that country are hooked up to the grid. In effect, the grid and associated pumped hydroelectric energy storage units (Alps, Norway, Sweden, France, southern Germany) become the battery, buffering variable supply and variable load. Recently, PV output contributed over 12 GW to the German grid, or roughly 15% of the power needed for the country, for a short while.

Most Americans are quite ignorant of why FITs work so remarkably well, and most German's who are knowledgeable about energy pricing look at what passes for our pricing systems with a mix of horror (how could a country with so many armed and dangerous nuclear weapons be SO stupid?) and wonder (at how we hobble ourselves and our awesome renewable energy potential, but to our disadvantage/their benefit), since the dysfunctional US system certainly allows their companies and exports to be in an advantageous position. Germany has both a pretty pathetic solar PV AND wind energy resource, especially compared to the USA. We have over 30 times our present electricity consumption in commercially viable wind locations, and we also have a lot of really sunny regions. And all we in the USA really need is a bit over twice current consumption to replace all pollution sourced electricity, allow for the extra needed electrical energy storage (pumped hydro) to go all renewable and replace most of our natural gas consumption (that used for residential and commercial heat and hydrogen manufacture). Unlike Germany, we have deserts, where at least 325 all sunny days per year is a reasonable expectation; Germany has more cluody/rainy/snowy days than we have in Buffalo - and ours is a 52% "sun obstructed" climate...

A good overview of Germany's PV efforts can be seen here: http://en.wikipedia.org/wiki/Solar_power_in_Germany. According to this article (http://thebreakthrough.org/blog/2011/03/doing_the_math_comparing_germa.shtml), over $US 86 billion had been spent/invested as of the end of 2010 to install 17.3 GW of PV capacity. Since the average output is 9.5% of the peak rating (-> 1.64 GW average output), this works out to an average cost of $US 52 billion per delivered GW, or about 60 cents/kw-hr, and that's just to generate it; there are hefty transmission costs, fees and VAT taxes on electricity sold, too, so that the full delivered cost is not cheap.... However, because of the way the FIT system operates, this small fraction of Germany's overall electricity is "blended in" to other generated sources, so the average German residential customer is only out a few Euro's a month. These days, the fully installed cost has been reduced by about 30% or so, but PV will never be cheap until the capital investment has been paid off.

In 2011, a bit more than 5 GW of PV will get installed, pushing the total up to near 23 GW, and pushing the total investment to over $US 100 billion. Almost all of these systems have been made in Germany, employing vast numbers in the chemical industry (making the semiconductors, dopants, encapsulants, cell wiring, etc), specialty glass, chemical/factory equipment needed to make PV and PV component factories, electronics (the dc output needs to get converted into ac via inverters), and then there is the fastener, framing, structural support and electrical equipment biz. Close to 200,000 people directly employed in a country of 85 million... and also a sizable export business, too. FITs are ideal for stimulating high skilled capital intensive manufacturing and all of the support systems/supply chains. In Germany, the FIT system was seen as a way to replace the employment that would be lost from the automobile sector in the late 1990's; nowadays, more steel is consumed by wind turbine manufacture than by the car industry. And that is really cool...

Most American's can't really get over the fact that the PV sourced electricity made (now about 2.5% of Germany's average electrical consumption) is so expensive. And this is completely unsubsidized - there are no tax deductions or tax credits (which almost invariably work out best for those who have a lot of money and are supposed to pay the highest tax rates) to help lower the needed price to make the investment worthwhile and at the same time be able to sell PV electricity at something like 5 c/kw-hr. The full cost of PV is paid by German consumers of electricity - the ratepayers. And since cheap prices only promote gluttony while more expensive prices promote a more efficient use of electricity - well, that's good, too, right?

The secret of why this works is the FIT system (here is how these work in a bit more detail: http://www.allianceforrenewableenergy.org/join-are.html), which has two major facets and a nifty wrinkle that is based on the way that a technology tends to develop over time. In the FIT system, all contracted Green energy (wind turbines, geothermal, biomass, biogas - which makes about 800 MW of electricity in Germany - small hydro, tidal, run of river and PV) must be sold at contracted prices when it is made and no "economic curtailment" is allowed (more on that in a bit). Then comes the FIT contract (generally a fixed price for 20 years), which is tailored to the actual cost of production for a given technology and scale of that technology. For example, onshore wind, which is less expensive that offshore wind, gets a lower price than offshore wind. The price is based on the average cost of production for that technology/scale and a socially determined reasonable return (profit). So, if you place wind turbines in a place with a really poor wind resource, you would go broke, but if you place them is a decent spot, you could make money. Unlike US mega-banking (or more properly, bankstering), failure is not rewarded. This stable price insures predictable cashflow as long as the project is decently installed and maintained. Then there is the "digression rate" (nifty wrinkle), where every year, the FIT contract prices for that technology/scale are dropped from the last year's value to match the increase in performance/drop in the manufacturing/installation costs, until those no longer drop. This forces competition between manufacturers, developers and bankers (who finance these to an amazing extent). The combination of stable pricing and digression is the main reason why Germany and countries who use the FIT system are the world leaders in wind, biogas, biomass and PV technologies, and in the employment of people making and installing them.

In Germany, renewables are a very safe investment (see "the money quote"), and actual competent banking is a big reason for this. In general, individuals, small companies, partnerships and cooperatives get 95% of the project cost as a bank loan, and for bankers, this is pretty easy money. Since they know the price for the product, and a reasonable estimate of the annual energy production is also a given (required for loan), it is really easy to determine if the owner will be able to pay back the loan. Contrast that with the U.S. for wind projects, where at least 60% of the project is equity and less than 40% is debt. In a place like NY, the full price that will be obtained for the electricity is unknowable, as is the likelihood that the investor(s) will be able to use the tax credits/deduction incentives, or whether enough of the project output will get shaved off by economic curtailment to send the financials into the red zone. All that uncertainty ups the financial risk of the project, which means loans that come in at higher interest rates and shorter terms than in FIT countries. It makes the USA less competitive, so much so that our superior wind and solar resources are rendered meaningless.

One advantage of the FITs is that they actually force the prices of pollution based electricity DOWN, and in some instances, polluters actually have to pay up to 5 c/kw-hr for someone to take their generated electricity (this price lowering tendency is called the Merit Order Effect, alias MOE). The increase in renewable electricity production at relatively constant consumption rates results in less consumption of coal and natural gas (mostly imported into Germany), and with less demand comes lower prices. Which is good, right? And the "no curtailment" aspect prevents utilities from cutting off renewable generators whenever a large surge (sunny and/or windy day) of green electricity depresses the spot market price (even into negative territory) and ruins the profits of the owners of coal burners and nukes. Oh well...

So, FITs are designed to stimulate employment in value added manufacturing, which is where advanced industrial societies (like the US and Germany) create most of their real wealth (mining and agriculture also result in real wealth production). And, for good measure, some electricity gets made with no pollution, no possibility of a nuclear "oops event", and no fuel consumption. Also, when that electricity gets made there is the added benefit that is puts some downward pressure on fossil fuel prices that are going up as a result of depletion as well as increased demand for energy worldwide. Net new employment in the renewable energy business in Germany is roughly 350,000 in the last decade, equivalent to about 1.4 million in the U.S. Not bad... After all, would you trade real unemployment north of 16% (U6 value) for employment, but at slightly higher electricity prices, or maybe even the same prices once the MOE is factored in?

But a funny thing happened, along with all these other societally beneficial things, and this is especially noticeable in the PV biz in Germany. In 2010 there were 250,000 new PV installations, 7.4 GW of capacity and an the average size was 29 kw (though most of the installed systems would be smaller than the average, since there were some larger installations). Most of these are small scale investments, probably averaging about $US 100,000 each. But, for 5% down (or $US 5000), individuals, families, partnerships and groups of friends can also become owners of income generating energy production systems. That 29 kw average unit would make about 24 MW-hrs/yr of electricity, and at $US 450/MW-hr (45 c/kw-hr), that's about $10,800/yr, or roughly about $500/yr in profit based on that $5,000 investment. Try getting that from a bank. Of course, most of the revenue from the sales of electricity go to pay back the loan, but, it sure beats 0.5% from a bank account in a bank that probably did something really stupid like invest in Spanish government bonds or Irish real estate values. Plus, people tend to like investing in something that makes the world a better place, gets them a bit of money, does not lose money and helps put their fellow citizens to work who would otherwise be unemployed. And while similar things are done with wind turbines, in 2010 an average new turbine installed was 3 MW in size and it probably cost $US 8 million. And 5% of $US 8 million is still $US 400,000, so that's a pretty hefty threshold to market entry, and not available to everybody. But 5 grand? Sign me up... Oh wait, this is the US, where such opportunities do not exist. Instead, real estate or an often kleptocartic stock market (see http://www.zerohedge.com/news/goldman-punkd-clients-yet-again) awaits its next small investor suckers... excuse me, potential investors alarmed a the net loss of money that happens when you leave your money in the bank.

Besides, what else are they doing with their roof, the south side of a barn, that parking lot for their business, or maybe the back yard that otherwise needs more mowing? And when the bank loan gets paid off, they will have a nice income supplement of, for this project, about $US 5000/yr.

It is now the strong desire of middle and working class Germans to actually have something to invest in that is driving the German PV biz. They don't trust their stock market much these days, either. And the ones who bought into European Sovereign Bonds...they can't be pleased with that choice at all. Otherwise, they have dead end options like more bars and restaurants, or real estate (you can never lose there, right?). And they are more than willing to pay more for their electricity in order to employ their neighbors, as well as provide a decent low risk way to invest some of their savings in something that actually makes Germany a better place. Naturally, all that export income from the sale of PV's and PV factory components also is nice, too.

Of course, the government and most German's realize that most of their electricity will be made by non-PV routes, even when coal usage fades to nothing, the Russian gas fields get drained or that gas gets too pricey, and tall of their remaining nukes get shut down. Odds are, onshore and offshore wind will supply most of Germany's electricity. Besides, maybe soon some Made in Germany PV systems will get installed in North African deserts, and then the HVDC power systems (also made in Germany) will transmit it across the Mediterranean via underwater lines (also made in Germany) into Europe. Geez, more jobs....


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