Grid Parity Reality Hits Home for Renewable Energy

This was not the way anyone expected we would get to grid parity prices but the convergence of falling global prices for PV panels and wind turbines from Chinese export growth and lower natural gas prices in the US from the growth in unconventional natural gas E&P is pulling the market into the grid parity orbit faster than many renewable energy firms can tolerate.

Why?

It’s global competition setting the prices for PV panels and wind turbines and both the EU and US must adapt or die.  In US markets many states are nearing their original renewable portfolio standard goals and must decide to go further like California or declare victory and let the markets work.  The super-committee at work on a solution for the US debt crisis has bigger problems than renewable subsidies to deal with so the looming prospect of the expiration of subsidies in the US is looking like a real threat.  In Europe higher cost Russian gas sets the benchmark but that is small comfort to EU renewable players because the debt crisis is cratering the feed-in-tariff (FiT) subsidies.  Even Germany’s decision to retire its nuclear fleet has not helped raise prices for renewable equipment.

Get thee to grid parity—fast!

The EU debt crisis is causing anxiety for politicians and bankers but it represents a day of reckoning for the feed-in-tariff (FiT) subsidies that have supported wind and solar expansion across Europe.  While Germany’s FiT passes the higher than market renewable energy subsidy directly through to customers, in Spain, Italy and elsewhere in Europe the FiT has been paid out of government revenues.  That practice is coming to a screeching halt as austerity sweeps Europe in an attempt to avoid sovereign debt default.

A recent news story by Reuters called it a ‘perfect storm’ for European renewables. As the financial crisis in Greece spreads to Italy, Spain, and other EU nations, austerity leads to cuts in feed-in-tariff supports, Chinese PV and wind turbine exports continue to flood the market with supply even while demand falls with the FiT cuts driving prices down further.

On November 11th the news, at first blush, did not look so bad with SMA Solar, Germany’s largest solar firm by sales reporting higher-than-expected quarterly results based on strong sales in the United States, Belgium and Italy and growing demand for maintenance services.  Gamesa, the large Spanish wind turbine maker, followed with an increase in outlook for 2012 sales due to expansion into new markets and left its 2013 outlook which cheered investors after Vestas said its long terms sales outlook was too uncertain to forecast accurately. Then Acciona reported nine month revenue above forecast because of higher prices for its output energy.

But the good news did not last as investors discounted increased sales as distorted by the speeding up of customer purchases because of expected cuts in FiT subsidies.  The resulting mental recalculation made the current numbers look worse than reported and the future numbers look horrible.

Then the other shoe dropped when word from Frankfurt November 14th was SolarWorld, Q-Cells and Nordex cut their outlook and reported very bad news. Germany’s wind turbine maker Nordex revised its 2011 sales outlook down to 920 million Euros from 1 billion Euros. Germany’s No.2 solar company by sales, SolarWorld followed suit cutting its 2011 revenue outlook below2010’s 1.3 billion Euros ($1.8 billion). SolarWorld CEO Frank Asbeck said PV module prices had fallen 40% in 2011 and he expected them to fall another 10% in 2012 eroding margins to single digits. SolarWorld’s share price fell 15% on the news. And worse, Q-cells CFO resigned after reporting wider losses than expected for the quarter because of falling prices for PV panels. Q-Cells share price fell 29%.

Like it or not the EU debt crisis is savaging renewable energy in Europe and this time lobbying politicians on feed in tariff supports is not sufficient to offset their fear of default and the demand for austerity.  That is why European firms are racing with their last euros to find other markets for their products and services.  This will not likely help EU PV panel and wind turbine manufacturers but they mostly have been swamped by China already.

Ironically, American markets are looking better and better to a debt shocked world.  The best evidence of that is the screaming of US manufacturers demanding the US government do something about China dumping PV panels in the US market.  That this is election season in the US puts President Obama between another rock and hard place in deciding which constituency to please and which to disappoint.  If the Administration ‘kicks the dumping issue can down the road’ as it did with the Keystone LX pipeline decision until after the election, China will win by default and the renewable energy lobby will be a lot smaller as a result of the carnage given the European experience.

There is another more fundamental lesson for America in this current reality!   The growth of domestic energy production from unconventional oil and natural gas is a compelling competitive advantage we dare not waste.  It will reduce our energy imports, improve our energy security, create well paying jobs, bring more low price natural gas to market to quicken the retrofitting of our power supply portfolio with less coal and more natural gas.  Along with falling prices for Chinese PV panels and turbines and the current renewable portfolio standards the best thing the government can do now if GET OUT OF THE WAY and let the market work to restore America’s global competitive advantage.  Now is the time to create the level playing field and phase out ALL energy subsidies across the board and let the least cost, best fit principle of market competition rationalize the market, restore equilibrium, and help pull us out of our economic ditch.