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Slashing Solar Subsidies, and Lighting Way for China

The fine balance in Germany between markets and green energy policy highlights the real-world challenges for moving away from traditional power sources.

Germany's famous solar subsidies — which I wrote about ("Germany's Fine Failure") a year and a half ago — have come under steady pressure from Berlin since Angela Merkel’s government shifted rightward in an election at the end of 2009. For the second year in a row, Germany has trimmed the public incentives that helped make this damp and overcast nation the largest solar panel market in the world.

At first it sounds like a cruel idea, particularly since Merkel and her allies have also reversed the nation's historic phase-out of nuclear power. But in fact it's a sign of health. The subsidies are working so well that Berlin wants to bring solar technology (gradually) into the mainstream energy market.

"These figures demonstrate the success of solar power in Germany and show how big interest is in renewable energy overall," Environment Minister Norbert Roettgen told journalists when he announced the subsidy cuts this month. "But in the interest of electricity consumers, the subsidies have to be made more cost efficient."

Germany's "feed-in tariffs" have made it profitable for businesses as well as individuals to install panels on their roofs or build solar parks. Solar power is still relatively expensive, but a feed-in tariff makes it worthwhile by guaranteeing an artificially high price for anyone who delivers solar energy to the national grid.

The strategy has worked. But power companies pass on those costs to consumers, which means most Germans don't bother to buy solar-generated energy. Now Germans want to ease the tariffs and make solar power more competitive in the retail market. Berlin has cut the tariffs twice, in roughly 15 percent increments, since last year.

Overall it's a good thing — an example of governments and markets working together nicely. But lately, as Reuters reports ("Is a Solar Trade War About to Flare"), the Chinese have been taking advantage of these Western experiments with public energy policy.

Both Germany and the United States produce good photovoltaic panels, but China has built a fearsome reputation over the last decade as a provider of inexpensive equipment. "Chinese solar companies now control two-thirds of solar cell production in the $39 billion global PV market," according to Reuters, and the complaint rising from both Europe and the United States is that Beijing deliberately slashes the price of equipment so Chinese companies can take advantage of subsidies in other parts of the world.

"European and U.S. subsidies are designed to boost solar usage no matter who builds the hardware," Reuters writes. "Chinese subsidies, Western firms complain, help Chinese solar manufacturers alone.”

Which has led to worries about a trade war. The United Steelworkers union in the United States has lodged a formal complaint about what it says are China's illegal subsidies, and the Obama administration may take the case to the World Trade Organization.

Of course it's fair enough for China to subsidize its own domestic industries, but solar panel manufacturers in the U.S. and Germany argue that they have almost no access to the Chinese market while China can sell equipment wherever smart subsidies are creating a solar boom.

Sen. Sherrod Brown, a Democrat from Ohio, supports the Steelworkers' complaint because his home state stands to gain or lose a lot of solar energy jobs. "Clean energy represents the future of manufacturing," he said in a statement. "Acting now means that we won't displace America's dependence on foreign oil for a dependence on Chinese-made clean energy technology."

But the Chinese argued back in a formal response to the Steelworkers' complaint that a trade war might be bad for global warming. "If the U.S. closes the door for trading with the rest of the world, including China, in renewable energy products," Beijing declared, "the U.S. may significantly delay the already long struggle for developing alternative energy sources, if not entirely destroy this opportunity for humankind.”

Meanwhile, the latest trimming of solar subsidies in Germany pleased Wall Street because they were less harsh than expected. Investors saw no "dramatic harm to the industry" in the world's most important solar-power market, according to the Wall Street Journal, and therefore "solar power product manufacturers, particularly those based in China, saw their stocks bounce more than 10 percent."