Germany’s cabinet has backed a proposed to levy a charge on the self-consumption of solar power in the country’s commercial and industrial sector, as it plans to reform its Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz) or EEG. Although the move is aimed at reducing the electricity bills of end customers and funding the country’s energy transition to renewables from a broader base, it could result in the scaling back of new solar installations in the country.
Background of the German Renewable Subsidy and Surcharge System
Germany’s electricity industry has been undergoing a transition of sorts over the past several years. The government has been pushing for the adoption of solar and other renewables in order to meet its objective of cutting down cutting carbon dioxide emissions by about 40% from 1990 levels by 2020.  Additionally, renewables are also expected fill up some of the void that will be created as the country phases out its fleet of nuclear power plants by 2022.
The EEG legislation was initially set up to encourage installations of renewables such as solar power by providing a subsidy, known as a feed-in-tariff, to compensate for the higher cost of electricity generated from renewable sources.  These subsidies are then funded through surcharges on the electricity bills of end consumers who buy power off the grid. The surcharges, which currently stand at roughly 6.24 euro cents per kilowatt-hour, have resulted in Germany having one of the highest electricity rates in Europe.  While some industrial customers have been exempt from paying these surcharges, many others have chosen to generate power themselves rather that consume from the grid given the burden of the additional surcharges, and this has resulted in close to a quarter of power consumption by companies in Germany coming from self-generation. 
Details Of The Plan
Under the reformed Renewable Energy Act, consumption of self-generated solar power would no longer be exempt from this tax. New commercial and industrial installations that exceed a peak capacity of 10 kW in capacity would have to pay roughly 70% of the renewable energy surcharge beginning from August, which would work out to roughly Euro 0.044 (about $0.06) per kilowatt-hour of self-generated energy consumed. While the outline of this plan has been approved by Chancellor Angela Merkel’s cabinet, many of its details are still to be worked out. The cabinet is expected to sign the draft in April after which it will be voted on by the German parliament. 
While some policies along these lines have been implemented or proposed in other parts of the world, we believe that the impact of the German taxes could be more pronounced. In the United States for instance, the state of Arizona approved a fixed monthly charge of about $0.70 per kilowatt of installed system capacity for rooftop solar systems, in order to compensate for their usage of the grid infrastructure for net metering.  However, in Germany’s case, the surcharge is proposed to be levied on a per unit of consumption basis rather than on an installed capacity basis, with the per unit rate also being relatively high.
Move Will Impact Solar Installations And Demand
While the German solar market is likely to have seen a decline in 2013, with installations expected to have fallen to roughly 4 gigawatts (GW) down from a peak of about 7.6 GW in 2012 owing to subsidy cuts , it still figures as one of the world’s 5 largest solar markets and remains an important market for high-end solar products. We believe that the plan to tax self-consumption could hurt new solar installations since it would increase the cost of solar generated electricity and lengthen the payback period of investments.
Additionally, the new regulations are expected to cover a bulk of the market for solar self-consumption, as the German Solar Energy Industry Association estimates that only about 17% of self consumers have capacities of below 10 kWp. Overall, we believe that large solar panel manufacturers such as First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR) and Yingli Green Energy (NYSE:YGE) could see an impact to their German businesses as the regulations come into effect.Notes: