For much of the last decade, Germany has been a driving force in the global solar industry. Despite the relatively high prices of solar panels, the country’s market for solar products has remained buoyant due attractive state subsidies. The country now accounts for almost a third of global installed photovoltaic capacity, adding about 7.5 GW capacity last year alone. The world’s biggest solar firms such as Yingli Green Energy (NYSE:YGE) and First Solar (NASDAQ:FSLR) are quite dependent on the German market. Yingli’s German business accounts for around 17% of its Trefis price.
While Germany’s solar sector currently faces a crucial test as the government begins to cutback on subsidies, an opportunity has emerged to fill the vacuum that is created by the phase-out of the country’s nuclear plants.
Subsidy Cutbacks A Challenge
Due to substantial generation costs, solar power has received the highest feed-in-tariffs (FIT) from the German government. However, persistent demands from conventional energy producers and the industrial sector forced the government to reduce FITs by up to 29% earlier this year while FITs for large scale plants of above 10 MW were abolished altogether. The government will cap the subsidies at 52GW and, once total installations cross this number, the price guarantees via FITs will stop.  The subsidy cuts will force manufacturers to focus on further cost reductions – reducing panel manufacturing costs and the balance of system costs while increasing the efficiency of solar panels.
Nuclear Phase Out Creates Space For Growth
Increasing safety concerns, following the Fukushima nuclear disaster in Japan last year, prompted the German government to begin phasing out its nuclear reactors. The country shut down 8 nuclear plants last year and plans to close the 9 remaining plants by 2022. The share of nuclear in the country’s generation mix has declined from 23% last year to 17% this year while renewable energy sources have shot up from 20% to 25%. The government has set a target for renewable resources to contribute 40% of total electricity generation by 2020.
Wind and hydro power currently have the largest shares of Germany’s renewable energy market, while solar accounts for about 3% of the generation mix.  However, given that panel prices declined by about 50% over the last year, solar power experienced the fastest growth among renewable sources of energy.
Weak Transmission System Could Prove To Be An Opportunity
Germany has been facing problems with its inadequate power transmission lines. Much of the power generation takes place in the north while a large portion of demand comes from southern cities such as Munich and Stuttgart. Most of the nuclear power plants that are going to be decommissioned are also located in the south of the country. Given that southern Germany is relatively rich in solar resources and has strong energy demand, solar power could play an important role in capacity growth in the region. 
Seasonality Of Solar Power A Drawback
The seasonal volatility of power generation is the main obstacle that solar energy faces to its wholehearted adoption in Germany. With generally overcast weather in the country, solar power is at a marked disadvantage especially during winter months. If solar power plays a greater role in the country’s power generation mix, the country could be forced to import power from neighboring countries like Poland during the winter.Notes:
- Germany Makes Last Minute Changes To Feed In Cuts, Sustainable Business [↩]
- German Solar Power Output Up By 60 percent in 2011, Reuters [↩]
- Germany To Raise Electricity Charge To Fund Renewables, AFP [↩]