Government subsidies can be highly attractive to companies and their investors, but governments’ interests will not always continue to coincide with the interests of companies. This appears to be so in the case of the German Government’s plans to cut the tariffs paid for electricity generated via solar, which will hamper the growth prospects of solar companies.

Changes to the feed-in tariff in Germany, a deliberate attempt by the Government to rein back on investment in new capacity, will hit investment in solar, and therefore demand for solar cells and modules. Since Germany makes up two-fifths of the world solar market, it is an important country for most solar companies. Furthermore, there are around 100,000 people employed in the sector in Germany.

The German Environment Ministry is proposing 15% reductions in feed-in tariffs for both roof-mounted and ground-based solar systems from 1 April 2010. Analysts were predicting a reduction; however, the expected range was between 5%-10%, so the proposed figure is much higher than anticipated - even by the pessimists!

The German Government wants to see 3GW of solar capacity being installed each year. If installations exceed this figure, there could be a further reduction in the feed-in tariff. However, if the price cut proves too severe and installations fall below 2.5GW, the tariff will be increased by 2.5%. 

These proposals still have to be discussed by the German cabinet. With the final Government bill scheduled to be passed in March, after it has been voted on in the Bundestag, there is still time for solar companies to lobby the Government for a change to the proposals. 

Silicon wafer prices remain weak, but the change in tariff is likely to hit the selling prices of cells and modules, with a probable decline in operating margins. European solar manufacturers will find it difficult to compete with lower cost Chinese producers.

The proposed changes have already hit the share prices of AIM companies in the sector. ReneSola shares fell 8% during the week the planned changes were revealed, while shares in Romag Holdings, whose subsidiary PowerGlaz supplies modules to solar farms, fell by a similar amount. In the case of Romag, this part of the business is a relatively small section of the group. 

Silicon wafer supplier ReneSola generated around 6% of its 2008 wafer revenues from Germany. The company’s exposure to the German market has increased since then, following the acquisition of a solar module supplier. Since ReneSola is a lower cost supplier of wafers, it will not be as affected by downward price pressure as some of its rivals. Even so, Panmure Gordon has cut its 2010 earnings per share forecast by 15% to 20.6 cents. 

By contrast shares in Jetion Solar Holdings, which published a positive trading statement at the beginning of 2010, have held up well. Jetion believes that the impact on its business will be minimal, with China remaining the core market for its solar cells and modules. 

Jetion is expanding in Europe, a major factor behind the strong fourth quarter performance and better than expected 2009 profit. Westhouse forecasts a pre-tax profit of $17 million in 2009. That equates to a net profit of $14 million, compared with a market estimate of $11.7 million prior to the trading statement. The positive momentum is expected to continue into this year. 

Jetion says it will look to other European markets, such as Italy, Greece and the Czech Republic, to offset any effect from the changes in Germany.

  

A few small AIM companies are becoming involved with solar parks, although these are not based in Germany. Ultima Networks, for example, has acquired land in Puglia, Southern Italy: planning permission has been gained for 3MW of capacity and grid connection has been agreed.

Another company, Minoan, which is developing a leisure resort in Crete, is initially acquiring two solar energy projects in Greece and plans to add more in the same area. Although it will cost €800,000 to get these first two ventures up and running, they will have 20-year index-linked electricity supply agreements at favourable tariffs. More solar project acquisitions are planned by the company. 

However, Germany is an important market, so all solar suppliers are likely to be affected. Although these tariff changes will not stop them from growing, it will slow down the pace of growth unless other markets can take up the slack. Italy and Greece are expanding markets, but they may not be able to make up for the expected shortfall in demand in Germany.