Germany is doubling its efforts to be a renewable-energy power over the next 50 years, and it's expanding beyond just solar power. After the country put the kibosh on exploding solar installations by cutting feed-in tariffs (FIT), it has increased the FIT for biomass, geothermal, and offshore wind while simplifying solar rates. The wet blanket currently covering the German nuclear industry meant the country needed to find a way to push renewable-energy installations to meet national renewable-energy goals before plants began closing.

Renewable energy beyond solar
The rates for biomass, geothermal, and offshore wind will be increased significantly in 2012 to encourage development of these sources.

Source

Previous FIT Rate

2012 FIT Rate
Biomass 0.11 Euro/kWh 0.14 Euro/kWh
Geothermal 0.16 Euro/kWh 0.25 Euro/kWh
Offshore wind 0.13 Euro/kWh 0.15 Euro/kWh

General Electric (NYSE: GE), Siemens (NYSE: SI), and Vestas Wind Systems will be the major beneficiaries of a growing offshore wind market that is just starting to take off worldwide.

Unlike in the United States, where rates are negotiated in power-purchase agreements, Germany has adopted an across-the-board payment system for renewable-energy projects. That gives developers more certainty than going through the convoluted process in the United States.

A list compiled by offshorewind.net has 48 offshore wind projects in some level of development throughout the United States, but turbines have yet to provide power. There are a variety of reasons for the delays, but this finding just highlights how our regulatory scheme in the United States has hampered renewable-energy development.

As easy as a FIT is to understand, it has caused a lot of issues in the solar industry, where costs were falling faster than the FIT could keep up.

A government system that makes sense?
For solar, in what appears to be a very logical system (U.S. legislators, please take note), Germany has provided a target amount of solar power to be installed each year set at 3,500 MW. If that target is exceeded, the FIT is reduced more than a base of about 9%, and if installations fall short the feed-in tariff is cut less than planned. Oh, the beauty of a system that is easy to understand and predictable.

MW/Year

Base FIT Reduction

Additional Reduction

Total FIT Reduction
1,500 -9% -7.5% -1.5%
2,000 -9% -5% -4%
2,500 -9% -2.5% -6.5%
3,500 -9% 0% -9%
4,500 -9% 3% -12%
5,500 -9% 6% -15%
6,500 -9% 12% -21%
7,500 -9% 15% -24%

Since companies such as LDK Solar (NYSE: LDK), JA Solar (Nasdaq: JASO), and Trina Solar (NYSE: TSL) rely heavily on the German market for demand, a predictable FIT system will help companies plan production and installations.

To demonstrate how the installation target will work, Germany scrapped a planned FIT cut because solar installations totaled only 700 MW from March to May this year, 175 MW less than was needed for a cut.

The schedule illustrated in the table acknowledges that solar costs are falling faster than legislators could keep up and is designed to adjust based on how attractive FIT rates are. If we could only get a similar system set up in other countries or states where we run into similar problems, maybe renewable energy could find a consistent place in our utility generation without perpetuating the myth that it's vastly more expensive than other electricity generation.

A shakeout is still coming
Versus 2010, the 3,500 MW level is still a reduction in solar installations, so until other market pick up, we're still in for a shakeout of the industry. Lower costs and higher efficiency manufacturers will continue to squeeze the competition, and overall margins will be lower. First Solar (Nasdaq: FSLR) leads the way in cost per watt while SunPower (Nasdaq: SPWRA) leads the efficiency battle, and in this Fool’s opinion, those two companies are the best way to invest in solar. Chinese manufacturers are left to battle out the middle, a place I would like to stay away from.