Black Hole Sun: Germany Spends €100 Billion in Solar Subsidies

Step aside Solyndra. Germany is the true leader when it comes to solar boondoggles. Over the past decade, Germany has spent over €100 billion subsidizing solar energy. In 2011 alone, these subsidies topped €8 billion ($10.2 billion). Yet solar is still a niche industry in Germany, generating only 3 percent of its electricity. That's about the size of two nuclear power plants.

The main source for these subsidies have been feed-in tariffs (FiT). One blogger vividly described FiT:

Imagine if the government forced supermarkets to buy bread from plain white bread bakeries, ordered them to pay these bakeries a fixed price that's 5 times higher than normal for 20 years, and forced them to buy up all the white bread these bakeries could produce, whether needed or not…that's exactly what Germany is doing with electricity.

First used in the early 1990's, FiT became a lavish subsidy after the German Renewable Energy Act (EEG) was enacted in 2000. Basically, FiT mandate utilities to buy renewable energy at a higher cost, with the tariff benefiting the owner of the renewable energy project. As a sweetener, these tariffs are locked in for 20-year contracts. Because of this, the German think tank RWI estimates that the contracts for solar installations just in 2011 will top €18 billion over the next two decades.

Technically, utilities are supposed to bear the higher costs, not the ratepayer. But as RWI elaborates:

While utilities are legally obliged to accept and remunerate the feed-in of green electricity, it is ultimately the industrial and private consumers who have to bear the cost through increased electricity prices.

Unsurprisingly, Germany has the second-highest electricity prices in Europe. (Denmark, another heavy green energy subsidizer, is first.) Currently, this green energy surcharge is 3.59 cents per kilowatt hour of electricity. Each year, this surcharge adds up to €200 more in electric bills. 

To justify these higher rates, proponents claim that FiT for solar are essential to thwart global warming and incentivize clean energy innovation. But even by the logic of reducing carbon emissions, heavily subsidizing solar is a poor choice:

To avoid a ton of CO2 emissions, one can spend €5 on insulating the roof of an old building, invest €20 in a new gas-fired power plant or sink about €500 into a new solar energy system.

Meanwhile, using renewable energy avoided 120 million tons of carbon in 2010. But solar energy represents just 7.6 percent of these avoided emissions, even though solar took more than half of all renewable energy subsidies.

In addition, the spurring innovation argument falls flat. German solar manufacturers only re-invest 2-3 percent of their revenues in research and development. By comparison, German car manufacturers spend 6 percent and Silicon Valley invests more than 15 percent on R&D. Besides, if energy innovation requires government intervention, then why not directly subsidize energy R&D?

However, the feed-in tariff has been very successful in installing new capacity. Currently, Germany has 25GW of solar capacity—half of all solar capacity on the entire planet. In fact, Germany installed more capacity last December than the United States did in all of 2011.

But capacity isn't the same as actually generating energy. Der Spiegel explains:

Solar lobbyists like to dazzle the public with impressive figures on the capability of solar energy. For example, they say that all installed systems together could generate a nominal output of more than 20 gigawatts, or twice as much energy as is currently being produced by the remaining German nuclear power plants.

But this is pure theory. The solar energy systems can only operate at this peak capacity when optimally exposed to the sun's rays (1,000 watts per square meter), at an optimum angle (48.2 degrees) and at the ideal solar module temperature (25 degrees Celsius, or 77 degrees Fahrenheit)—in other words, under conditions that hardly ever exist outside a laboratory.

Unsurprisingly, Germany rarely has peak conditions for solar power. While FiT might work in places that are actually sunny (e.g. Gainesville, Florida), Germany averages only 1,528 hours of sunshine a year, or one-third of all daylight hours. That's actually less sun than Seattle gets. One utility CEO even compared subsidizing German solar to "growing pineapples in Alaska."

Thankfully, fiscal sanity is starting to catch up with FiT. In Germany, a proposed new reform would slash FiT rates each year by 24 percent, and ultimately end the program by 2017.

Reason on subsidizing renewable energy. Ronald Bailey on feed-in tariffs.