Photo:coda, Creative Commons, Flickr
The German photovoltaic industry knew bad news was on the way, and it could have been worse. Last week, Germany’s Environment Ministry recommended a shift in subsidies from solar energy installations to offshore wind farms. The solar sector breathed a collective sigh of relief because the subsidy could have easily been significantly cut or completely eliminated. Nevertheless outraged, the German Solar Industry Association issued a statement complaining that its members were in “a sensitive phase of development and [face] harsh competition with Asia.”
With Germany's impressive track record of renewable energy legislation, we have to wonder if the future will cause fickle investors to flock to wind now that solar subsidies have been cut in Germany. On the surface, this might look like a victory for wind power, but if you do a bit of digging, a different picture emerges.
Germans get 13% of their energy from renewable sources, but little of this energy comes from offshore wind farms, and the technology has been struggling to get out of the starting blocks. "The development of the offshore wind industry has gone forward more slowly than expected," said Michael Schroeren, a spokesman for Germany’s environment ministry. "And the cost of these new technologies is also higher than was expected." By shifting subsidies from solar to wind, the German government is essentially signaling to the market that wind isn't doing that great, and that the technology needs all the help it can get.
German utility firm E.On recently cited a study from the Deutsche-Energie Agentur. The report was sponsored by the German government and all sides of the industry. Among bombshells contained inside, the study suggests that while wind power capacity will reach 48 GW by 2020 in Germany, the source is so intermittent and unreliable that it is equivalent to only 2 GW of stable fossil fuel capacity.
But we'll miss out on the big picture if we start to think in terms of "wind vs. solar." Wind and solar might be competing technologies for now, but I believe they will far more likely be complimentary technologies in the future. The sun doesn't shine for 24 hours a day and wind isn't always going to blow. Wind power also faces a mismatch of supply and demand, which can be solved by a "solar-wind hybrid" system.
High pressure weather systems lead to cold winters and hot summers which, unfortunately, coincide with low wind levels. This meteorological reality means that wind makes its maximum contribution when demand is lowest and its minimum contribution when demand is highest. But high pressure weather systems are associated with plenty of sunshine, and this means solar panels can potentially cover any wind-related shortfall from such a system. On the other hand, a low pressure system is associated with high winds and cloudy conditions, and in that case, a wind system can cover any solar-related shortfall. A "solar-wind hybrid" system is needed to provide optimal performance over a range of conditions in the same way a hybrid car combines an on-board rechargeable energy storage system with a conventional propulsion system.
I was surprised to find out that there is currently no federal support for small wind systems. However, residential solar and fuel cell systems, which share the same competitive market as small wind, have been receiving a 30% federal tax credit. The federal Production Tax Credit applies only to large utility-scale wind projects, not to individuals installing their own wind systems for on-site power.
Because the "solar-wind hybrid" argument is so straightforward, it wouldn't surprise me if we saw more government support for small wind in the near future. Germany's decision to shift subsidies from solar to wind is likely to be repeated by other governments.
For investors looking to bet (I couldn't get myself to use the word "invest") on the wind industry, FPL Group (FPL – Last trade $55.98) is the main play. Wind represents about 12% of FPL Group's diversified energy portfolio, and the company was responsible for a third of the new construction of wind power installations around the U.S. last year. By the end of this year, FPL will have $6 billion invested in wind energy production, including three of the nation's five biggest wind farms. FPL is the world's second biggest wind-generating utility, after Iberdrola of Spain.
Because the feasibility of small wind still needs to be proven, it's too early to say whether the shift to wind technologies will dent solar valuations. But that's not the point – we need to think of wind and solar as complimentary technologies. A hybrid system could provide better performance over a wide range of conditions. However, a "solar-wind hybrid" will only be materialized if wind receives the necessary government support to catch up with the solar industry.
Disclaimer: I do not own any of the stocks mentioned above. I don't own a solar panel.