“Those that fail to learn from history, are doomed to repeat it” – Winston Churchill

This often quoted phrase reminds us that we should never take for granted the examples set by those before us. Whether it be foreign policy or invention, the lessons taught to us by history are equally important.

Since 2009, with the passing of the Green Energy and Green Economy Act (GEA), Ontario has started down a road first tread by Germany. The GEA was modeled after the evolution of Germany’s 1990 Electricity Feed-In Law, which was initially designed to promote small-scale wind and hydro electricity projects and later modified in 2000 and 2004 for solar energy. Following the first modification in 2000, Germany saw a 20 times increase in solar installations within 5 years and another 8 times jump by 2010. During this time, many German solar businesses were founded and flourished under an environment of heavy government subsidies.

So if everything worked out, then why aren’t more countries adopting feed-in-tariff (FIT) programs? After all, there are far more sunny locations than Germany. Unfortunately, Germany’s FIT program was far from perfect. The sudden increase in manufacturing, assembly, and installation of solar in Germany and other parts of Europe brought solar panel prices down sharply. This in turn made the FIT incentives in Germany even more attractive to investors leading to a larger installation than initially expected. This cost the German government more than anticipated, but more importantly, it left manufacturers with very thin profit margins while solar cells became a highly commoditized product.

As it was, the German solar market may have survived, but two major developments occurred: a drastic reduction in government subsidies and China’s entry into the silicon PV market. On one hand, Germany no longer had the political will to pay the growing FIT bill. The unanticipated drop in solar panel prices and the resulting surge of investor interest was more than many politicians could stomach and the FIT funding was sharply cut 30%. Almost simultaneously, China entered the silicon PV market, driving the cost of silicon PV sharply and evaporating the thin profit margins that German manufacturers were reliant on. This unfortunate combination of events has led the bankruptcy of numerous German solar businesses as well as other large solar corporations around the world.

Now as it stands in the 2012 market, the outlook for the German solar energy economy is mixed. While the installed capacity continues to grow at impressive rates and installation and operation corporations are flourishing, the health of the solar manufacturing industry is on life support. The latter industry is now forced to compete with China at the game they play best – high volume, low margin manufacturing. Worst of all, China has been accused of illegally dumping solar cells into the market at prices below cost, resulting in the US and Germany instituting tariffs on Chinese PV imports or incentives for buying home made products. As in most ultra-competitive markets, vertical integration has been the only way to maintain healthy profit margins by cutting costs normally accrued with middle-men suppliers.

With the brief history of solar FITs discussed, how can we best apply this knowledge to Ontario? Firstly, both the German and Ontario FIT programs have shown that they can be incredibly successful at encouraging investment in clean energy technologies; however, this occurs at the expense of the tax payers. In return, taxpayers should hope to expect the creation of jobs in an emerging industry as well as an increase in clean energy production capacity. In order to reduce the burden on the tax payers and for these newly created jobs to become stable and self-sufficient in the market, the FIT must be reduced gradually until the cost of solar energy reaches grid-parity. One particular lesson to learn from Germany was how sensitive the market will be to the FIT rate. If the FIT rate is left high and enough contracts are given, the high demand leads to large increases in manufacturing capabilities. When the FIT rate is then sharply decreased, the resulting decrease in production volume can lead to poor profitability. In other words, the Ontario government must be vigilant when changing the FIT rates so that abrupt swings in capacity are avoided. This vigilance should also include avoiding circumstances where no FIT contracts are awarded for extended periods, such as the 6 month freeze that began towards the end of 2011.

The second important lesson that Ontario can learn from both Germany and the other emerging solar markets around the world is to be conscious of the commoditization of solar cells and solar panels. The Ontario solar industry is primarily composed of solar panel assembly and installation, with the bulk of solar cells being purchased from abroad. There is some inherent protection against international solar panel manufacturers due to their bulky size leading to expensive shipping costs; however, increasing competition from highly efficient, vertically integrated solar corporations may lead to the gradual extinction of Ontario based solar businesses. Furthermore, while it may seem prudent for Ontario to produce its own home-grown vertically integrated solar energy corporation with Ontario based solar cell production, the recent dominance of Chinese solar cell production warns us otherwise. The relatively high cost of labor in places like Ontario or Germany compared with China are incredibly difficult to overcome (even with robotic assembly lines and 24/7 production). Therefore, if Ontario cannot compete on solar cell price, we must focus on quality – higher efficiency solar cells. More efficient solar cells not only reduce the number of cells required to reach a power production target, but reduce cost of the supporting equipment and installation costs. It is here where we may yet find our niche in this booming global market and it will be up to the imagination and innovation of Ontario engineers and business leaders to develop such a disruptive technology venture.

Jonathan Boulanger

(Year 4 PhD in Engineering Physics at McMaster University)