Feeling the heat

By Fiona Harvey in London, Chris Bryant in Berlin and Kathrin Hille in Beijing
Published: June 2 2009 19:59

Two workers maintain solar panels on the roof of a German warehouse. China and the US are beginning to outstrip Europe in renewable energy, calling into question politicians’ promises that the sector will lead growth

Workers at the Q-Cells solar panel plant at Thalheim, in Germany’s “Solar Valley”, are slowly adjusting to their new shorter working week. Until recently, the plant struggled to meet the vast demand for panels stirred up by Germany’s generous subsidy system. Now the production lines are quieter and there are many empty bays in the car park.
“If you go into the technology or administration departments they’ll tell you it’s nice having an extra day off per week. The staff have been working flat out for years,” says Stefan Dietrich, the company spokesman. But other employees are less pleased. “Production workers don’t get such super-high wages and if their families have to go without €100 each month then that’s not so great. They know why it’s happening, though – they read the papers and watch the news. They know it’s about preserving their jobs.”
Across Solar Valley and beyond, the story is the same, despite the subsidies and the continuing rhetoric from Berlin about the threat from global warming. Workers are struggling with lower pay and are being hit not just by a global recession but by a crisis in an industry whose potential was once considered almost limitless.
Investment in renewable energy worldwide dropped by $13.3bn (£8bn, €9.3bn) in the first quarter of 2009, down 53 per cent compared with the same period in 2008. A decline in conventional energy prices and softening demand were behind the plunge, which followed five years of stellar growth. In the solar industry, oversupply also played a part – investments made in extra capacity in recent years have now come onstream, bringing down the price of components and cutting solar companies’ profit margins to the bone.
But the problems of Germany’s solar workers also reflect a broader trend in the renewable energy industry. Europe was once the manufacturing hub of renewable energy components. European governments poured billions into subsidies to encourage utilities and householders to take up the technology, and the renewables market was the biggest in the world.
That is changing. The US and China have begun to outstrip Europe in renewable energy, both generation and manufacturing. Last year, the US overtook Germany to become the country producing the most wind energy. China added more wind capacity than any country but the US. China also overtook Japan as the biggest manufacturer of photovoltaic components, silicon cells that convert sunlight to electricity and are the building blocks of solar panels.
This dramatic change has implications far beyond the woes of German solar power workers.
BELOW: CHINA, FROM ROOFTOPS TO RURAL SOLAR FARMS
Political leaders around the world – including US president Barack Obama, José Manuel Barroso, European Commission president, and Gordon Brown, UK prime minister – have hailed low-carbon technology as the industry of the future, promising millions of “green-collar jobs” that will help lift their economies out of the recession and into an era of solid growth.
Mr Obama marked Earth day this year with a visit to Newton, Iowa, where a former Maytag washing machine plant, shut last year with the loss of hundreds of jobs, has been taken over by a company making wind turbine towers. It was an example, he said, of “a new, clean-energy economy” that would “create millions of new jobs right here in America”.
BELOW: GERMANY, TARIFFS FUND A FEED TO THE GRID
The potential for growth in the global industry, analysts agree, is real. The world must move to tackle greenhouse gas emissions as a matter of urgency, and energy security is a key problem for governments that renewable sources of power can help to solve.
But will the growth in renewables benefit western economies in the way their politicians claim?
“The big question for the solar industry,” says Phil Schneider, principal at Deloitte Consulting, “is where manufacturing investment and job growth will happen.”
On a windswept plain close to the deserts of Inner Mongolia, Dalu Industrial Investment Group thinks it has the answer. A Chinese conglomerate that started as an engineering provider for utilities, it is betting heavily on solar power. It has secured a vast plot where it is building a plant to make photovoltaic components, but ultimately: “We want to build a manufacturing base there covering the entire value chain, including a large-scale solar farm,” says Yu Yajie, administrative executive director.
Dalu is not alone. There are now more than 100 solar power companies in China, with more springing up. Although the Chinese renewable energy market has suffered in the downturn, it is still well-placed to weather the storm.
Already China accounts for one-third of global solar component production. The Chinese industry has tripled in size in the past few years. Li Junfeng, deputy chairman of the China Renewable Energy Industry Association, believes the country will become the world’s biggest source of solar components next year. Almost all the production – about 98 per cent – is destined for markets abroad, although the domestic market is also growing under new incentive systems.
China’s push into renewables and its formidable manufacturing base has led to component prices tumbling. New Energy Finance, a consultancy, says the spot silicon price has fallen sharply, from $136 per kg in January 2009 to $73 per kg in early May. The price of finished photovoltaic cells is forecast to fall by more than 43 per cent this year.
This is particularly painful for manufacturers in other regions, who complain that they cannot hope to compete on price with lower quality Chinese components.
Nobuo Tanaka, executive director of the International Energy Agency, says it is “inevitable” that the manufacturing of renewable energy components – mainly solar modules and wind turbines – will move to China and, to a lesser extent, India. “The PV cells made there are not of as high a quality yet [as those made in Europe] but they will get there.”
This view is echoed by George Frampton, former chairman of the White House Council on Environmental Quality and a member of the Obama campaign’s transition team. He says: “There is a very strong momentum. And it’s not just because of the cost, it’s also that I’m not that optimistic that this market is going to boom in the US.”
He believes implementing a cap-and-trade system on carbon emissions will be essential to create and keep jobs in renewable energy in the US.
Andrew Dorchak, co-author of a recent University of Illinois report on low-carbon industry, warns that the US risks being left in the worst position of all. He believes it could end up losing out both to Europe, which holds much of the intellectual property behind wind turbine technology, and to China, which is grabbing a growing share of the lower-value end of “green manufacturing”, particularly cheap solar panels.
“Some green jobs will be created in America, but nowhere enough to offset those being lost in traditional manufacturing industries,” he says.
For western politicians, the uncomfortable truth is that the expansion of renewable energy in developed countries, aimed at reducing their carbon emissions, may result in a bonanza for poorer nations rather than a grand influx of jobs to their home countries.
This will not be the case across the board. Although solar panel components are relatively small and easily transported, some parts of a wind turbine – such as its long, elegant blades, which are difficult to ship long distances – must be manufactured in the same region where it will be installed. However, modern wind turbines are made up of more than 8,000 parts and many of the less delicate ones can be made anywhere and assembled close to the final destination.
Vestas, one of the world’s biggest wind turbine manufacturers, recently decided to close its manufacturing plant in the UK to invest instead in production facilities in the US and China. Meanwhile, Q-Cells of Germany is opening a production line in Malaysia and about one-third of rival SolarWorld’s 1,800 employees are based in the US.
In Germany’s subsidies regime, “jobs were always an important argument”, says Matthias Fawer, sustainability analyst at Bank Sarasin. “It’s only a question of time until politicians seize on this and say – wait, we’re paying for something that’s no longer creating jobs here.”
Indeed, says Joachim Pfeiffer, energy co-ordinator for chancellor Angela Merkel’s CDU party, “The whole world has to some extent been producing for the German market. We’re concerned that the German electricity consumer is subsidising foreign production.”
Additional reporting by Andrew Ward

CHINA: FROM ROOFTOPS TO RURAL SOLAR FARMS
Solar power companies in China have had reason to rejoice. In March, the government thrilled the industry with a pledge to subsidise roof panels, writes Kathrin Hille.
The announcement, made by the finance and housing ministries, sent shares of several solar companies soaring. But that enthusiasm has since waned, amid evidence that the component makers are not immune to the global recession.
The Sino-US Suntech, the world’s largest photovoltaic module maker – which in January shed 4,000 people, or 30 per cent of its workforce – revealed last month that 30 per cent of sales in the first quarter had gone to an affiliate. The announcement gave rise to fears of swelling inventories. Suntech added that selling prices had been sliding and would continue to do so.
Also of concern to the sector is that Beijing did not make it clear whether the subsidies were a one-off or a permanent programme. Some industry reports have since said that Beijing’s budget for this is capped at Rmb2.5bn ($366m, €257m, £222m), limiting installations under the programme to 180MW. In addition, the announcement failed to explain whether and how projects under the subsidy programme would be linked to the electricity grid.
Amid this caution, ReneSola became the first to announce a project under the subsidy plan, investing Rmb160m in a 5MW rooftop scheme in south-eastern Zhejiang province. The group based in Jiashan, west of Shanghai, expects to gain additional subsidies from the provincial government; approval from central authorities is pending.
Suntech said meanwhile it had agreed with provincial authorities in Jiangsu, just north of Shanghai, to build a 1.5MW rooftop project there. Jiangsu is one of several provinces in China’s densely populated and power-hungry coastal belt that have incentive policies of their own.
Beyond the rooftop market, China’s vast, dry and sunny hinterland holds potential for another segment: solar farms generating power on a much larger scale. Two such plants were recently completed, in Shanghai and Inner Mongolia, and the government is planning for more. China Longyuan Electric Power Group is, for instance, to build China’s largest solar farm in Qinghai province in the far north-west, which would have a capacity of 200MW on completion, scheduled for 2011.
Wang Zhongying, deputy head of the government-backed Energy Research Institute, predicts that a sharp drop in component prices will help China build up to 20GW in solar power generation capacity by 2020 – more than 10 times the current target of 1.8GW for that year.
That would still leave solar power trailing behind wind energy, where installations have been driven by preferential tariffs. Installed wind-power capacity is set to grow eightfold to 100GW until 2020, according to the National Energy Administration.
A lack of clear rules has led to a large amount of idle capacity, however, as the state grid often refuses to link up wind power generation sites – typically in remote locations – to its network.

GERMANY: TARIFFS FUND A FEED TO THE GRID
The gleaming dark-blue panels that bedeck scores of buildings in the picture-postcard city of Freiburg, in south-west Germany, might lead the casual observer to assume the solar industry is in rude health, writes Chris Bryant.
The region’s residents are among the many beneficiaries of lavish government subsidies that made Germany the largest solar market in the world, in spite of a lack of sun.
But for the country’s panel-makers, the recession is accelerating a consolidation process that could see many companies disappear as the mass production of solar cells makes cost a decisive factor.
“We’re at the start of huge structural changes in the industry,” says Johannes Segner, chief operating officer of Solibro, which supplies thin-film solar modules. “There are over 300 firms producing solar modules worldwide ... This kind of fragmentation cannot last.”
Germany’s photovoltaic industry employs 48,000 people and generated revenues of €7bn ($10bn, £6bn) last year, according to BSW-Solar, the industry association. But with margins plummeting, European groups are looking to expand production overseas.
“Companies must be nearer to fast-growing markets in Asia, southern Europe and north America, and costs will play an increasingly important role,” says Matthias Fawer, sustainability analyst at Bank Sarasin.
Since 2000, the federal government has forced utilities to pay consumers with solar panels an artificially high rate for the electricity they feed into the grid. Renewable energy makes up 14.8 per cent of German electricity but solar power represents only 1 percentage point of that. Even so, a recent study put the inflation-adjusted cost of renewable feed-in tariffs at €34.7bn, assuming a phase-out in 2010.
However, the government has so far ignored calls to slash subsidies to the bone, opting last year for a cut of just 8-9 per cent instead.
Some solar analysts still see a bright future, forecasting a return to solid sales growth in 2010. Others cast doubt on predictions that Germany’s entire solar industrial base is about to disappear.
“The growth dynamics will certainly be greater in other countries,” says Stefan Dietrich at Q-Cells, the world’s largest solar cell manufacturer. “But in the long term Germany has an advantage because the research and development skills are here. Many of the [research] institutes are still expanding and new products are coming out of the labs.”
Copyright The Financial Times Limited 2009