Solar Subsidies and Why They're So Important

Lately, an Italian solar market that can't decide whether it's coming or going has held solar stocks hostage. For investors who have been following solar for a long time, the story is nothing new. We've gone through it in Germany, Spain, and now Italy. But what are the feed-in tariffs, or FITs, we keep talking about and how do they affect solar stocks? Let's take a deeper look into the subsidies keeping the industry afloat.

What is a feed-in tariff?
A FIT is nothing more than a set price solar power generators are paid for the electricity they generate. Normally a utility has to buy the power generated, and the price is pre-determined for a set of time (such as 20 years in Germany). But the way countries handle FITs can determine whether they're stable sources of demand or passing fads.

Germany
The solar boom really began when Germany decided to start the solar feed-in tariff parade. A FIT was present as far back as 1990, but in 2000 the Energy Supply Industry Act took the country's solar path to a new level. And companies like First Solar (NYSE: FSLR  ) and Suntech Power (NYSE: STP  ) took advantage by building a big footprint in the market. I'll show below just how important steady demand from Germany has become.

Spain
The risks of solar subsidies can be seen with what happened to Spain in 2008-2009. An oh-so-generous FIT was put in place in 2008, resulting in 2.5 GW of installation, only to be bounced a year later because it was "too successful." So in 2009, the country put a cap of 500 MW for FIT solar power. This put a crimp on companies like LDK Solar (NYSE: LDK  ) and JA Solar (Nasdaq: JASO  ) , which were expanding rapidly as demand markets grew.

Italy
The one country throwing solar stocks for a loop right now is Italy because of an adjustment in FIT that is taking longer than expected. Like Spain, Italy set their feed-in tariff rate too high, and a flood of development came to the market. In 2010, capacity additions jumped 62% to 1.85 GW.

But it appears the country's rooftop FIT is still in order, and SunPower (Nasdaq: SPWRA  ) is hoping to take advantage. In smaller installations on valuable land, SunPower's higher efficiency makes more sense than First Solar's panels, for example. Manufacturers have been cautious with statements about Italy this year, but it isn't as if demand will dry up all together.

Here's a roundup of where feed-in tariffs currently stand in Europe:

Country

Estimated 2010 Installation

Rooftop Feed-In Tariff

Ground-Mounted Feed-In Tariff

Germany 7.25 GW $0.43/kWh $0.32/kWh
Italy 1.85 GW $0.65/kWh $0.46/kWh
Spain 100 MW* $0.43/kWh $0.19/kWh
France 719 MW $0.68/kWh $0.18/kWh

*Estimated.

The next frontier
Canada and the U.S. are considered two emerging markets in solar. In Canada, a generous FIT program was put in place in 2009 that has sparked projects by SunPower among others. But problems with the program and the possibility it could end under a conservative government have held the country back from a larger presence.

The U.S. has been held back by its own complex regulatory systems and lack of defined rules for the industry. Right now, most plants are built with a power purchase agreement, or PPA, that acts like a FIT for an individual project. The problem is that these are negotiated for each individual project, and there's few rules encouraging utilities to participate in them. This makes regulatory and other indirect costs high in the U.S.

California has taken the biggest step with its renewable energy standard set at 33% of power by 2020. That has encouraged Edison International (NYSE: EIX  ) and Pacific Gas & Electric (NYSE: PCG  ) to get aggressive signing deals with solar developers. Slowly we're becoming more productive, but the U.S. won't dominate solar demand for a few years until we get some of our issues sorted out.

Ironically, some of the places that have pushed solar to the next level are some of the weakest solar markets in the world. Germany gets even less sun than Minnesota, and vast tracts of desert around the world have gone undeveloped. This is slowly changing, but intense sun sources make solar even more cost-effective, and when combined with lower costs, should make solar more attractive in places like India, Africa and the western U.S.

Feed-in tariffs and their significance
As you can see above, Germany and Italy dominated the 16 GW of solar that was installed in 2010, hence the market freak-out when they appear to be cutting FITs. Solar stocks are a volatile ride, but as costs fall and demand sources diversify the industry is slowly taking steps in the right direction. Will you be able to hang on for the ride?

Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 17, 2011, at 3:19 PM, Eysteinh wrote:

    Good article.

  • Report this Comment On May 18, 2011, at 5:56 AM, Panchabuta wrote:

    The National Solar Mission in India was launched in India with a target of 20,000 MW grid solar power by 2022. The first phase will be of three years (upto March, 2013) targets to set up 1,100 MW grid connected solar plants including 100 MW of roof-top and small solar plants till 2012-13. Based on the overwhelming response from developers on request for proposals India launched a competitve reverse bidding market discovery mechanism on the published FiT and developers selected based on the highest discount offered.

    This is come under a lot of criticism and seems like projects might not happen due to over agressive bids and low tariffs in India.

    Given the global context of what is happening in Spain and Italy, the Indian decision might not be that bad after all. We have analyzed this in detail in our numerous essays on Solar in India

  • Report this Comment On May 18, 2011, at 10:16 AM, TMFFlushDraw wrote:

    @Panchabuta

    Yeah India and China are two potentially huge sources of demand. I just didn't have enough room to include everything in this article.

    FSLR was pretty upbeat on India and a reverse FIT bid makes a lot of sense if its done right. I think that's what we should do here.

    Travis Hoium

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