Bloated German solar sector costly for power market

* Subsidy causes solar installation boom in 2010/11
* Solar power capacity could grow by 7 GW this year
* Extreme power price swings possible

FRANKFURT/LONDON - A rush to pump money into subsidised German solar power has bloated the sector and threatens to distort the electricity market.
Cuts to subsidies did not prevent record capacity additions last year and the boom will continue as investors will seek to take last-minute advantage of generous, but fading support.

In 2010, an investment boom ahead of subsidy cuts, brought some 8 gigawatt (GW) of photovoltaic power capacity to an existing total of nearly 10 GW, giving Germany the world's biggest solar capacity worldwide.

"It is evident that the costs will rise yet again in 2011 to reach critical levels as more capacity is built, and that will result in problems," said Andreas Loeschel, an environmental and resources economist at the Mannheim-based ZEW institute.

"Further reform of the system is necessary."

He echoed widespread concern -- photovoltaics contributed only two percent to German power supply in 2010 as many days do not produce enough sunlight to generate much electricity.

At the same time, solar absorbed 40 percent of subsidies paid under the 10-year old renewable feed-in (EEG) law. Mannheim.

A study commissioned by the solar lobby group BSW said that some 6 GW of new capacity could be added 2011, and between 3 to 5 GW in the years to come. Among some main players in the BSW are Q-Cells and Phoenix Solar.

But Germany's four cross-country transmission grid operators said they even saw over 7 GW of new installations in 2011 and 4 GW in 2012.

MARKET IMPACT

This year, EEG payment for solar, which amounted to 3.3 billion euros ($4.34 billion) in 2010, could easily more than double to 6.8 billion, industry data shows.

Subsidies aside, there is more impact to come in the wholesale power market, where prices are already volatile because of Germany's large wind capacity of over 26 GW.

Like solar, wind generation varies greatly depending on weather conditions. Power prices have dropped to negative values already at times of extreme wind supply and low demand, such as night hours between Sundays and Mondays.

This effectively means that fossil power generators get paid to switch off their power plants in order to free grid capacity for a flood of wind power.

"If Germany adds 5 GW of solar this year, we may end up with over 50 GW of volatile wind and solar capacity that can't be controlled according to demand," a utility trader said.

At maximum production, this would add up to nearly as much as France's fleet of 58 nuclear reactors can generate.

"This will cause extreme price changes and make it very difficult to optimise power plant parks and stabilise the system," the trader added.

Traders say problems could especially arise during so-called shoulder hours between night and day (5-8 a.m. and p.m.).

In trading, these are the hours when low demand and price off-peak hours switch to the more expensive peak demand hours.

"On a sunny day, this could mean that the equivalent of a dozen or so nuclear power plants switch on and off when the sunlight comes or goes at just the same moment when peak price hours switch to or from off-peak hours," the trader said.

"I am not aware of anyone in the market who has found an answer to such a complex scenario in terms of pricing or grid stability."

But more solar power capacity also has benefits.

During prolonged heat periods, operators of German and French nuclear plants that rely on cooling water are sometimes forced to close the reactors due to environmental regulations.

During last year's hot summer, the 10 GW of solar capacity were able to compensate nuclear output losses.

GOVERNMENT TO RESPOND

In the face of these regulatory and market problems, the government is due to look for more reform.

Solar support rates had been falling by about 8 to 10 percent per year before an extra cut of 16 percent was made last July. A further 13 percent cut was agreed for this year.

Without steeper curbs, renewables lobbies might clash with each other, and with thermal power producers. The latter already see their profits squeezed through stagnant power revenues that are colliding with strong coal and gas prices.

A group of 10 prominent academics under the German institute for economic research (DIW), who had spoken out pro-green power in the past, fired on the government to make more solar cuts.

"It was never the intention of the EEG that the most expensive source of power grew the fastest," the group said in an open letter last month.

It wants a cap on new capacity additions at 3.5 GW a year.

Renewable industry associations signal they are open to change but their proposals are conservative and reject any caps or additional cuts in 2011.