Technology Push
Niche Markets
Demand Pull
1960
1970
1980
1990
2000
2010
2020
Scale Up
Chapter 6: Germany's Gift to the World
Germany’s Renewable Energy Law (EEG) guaranteed a stable purchase price for PV electricity that transformed the world PV market, catalyzed a global process of learning by doing and created opportunities for massive economies of scale.
Germany contributed to the development of inexpensive PV by creating a far bigger market opportunity than had ever existed before. After two decades of building an advocacy coalition, a policy window opened when the Green Party became a ruling partner in 1998 leading the German Parliament to pass the Renewable Energy Law (EEG in German) in March, 2000. The EEG has its roots in the 1968 student protests, the anti-nuclear movement of the 1970s, and the emerging environmental movement catalyzed by the Chernobyl accident in 1986. Support for PV was originally grassroots and local but was later institutionalized at the federal level and reached its apex in the revisions to the EEG in 2004, which favored PV. This long-term grassroots movement seems to have underpinned a rising expectation that the government would support renewables and PV in particular. The direction of policymaking was clear even in the late 1990s when firms like Q-Cells were founded. From 2004 to 2012, the EEG supported the adoption of over 30 gigawatts of PV in Germany with a subsidy program that totaled over 200 billion euros. The EEG transformed the world PV market, accounting for half of global PV installations in the peak period of the program, 2004 to 2010, during which the world market grew by a factor of thirty.
The EEG catalyzed a global process of learning by doing and created opportunities for massive economies of scale. For the first time, equipment providers could design machines specifically for PV applications rather than repurposing them from the computer industry. This allowed PV producers to automate their production processes. The size of the new market opportunity got Wall Street investors interested and enabled PV startups to hold initial public offerings, raise hundreds of millions of dollars, and invest in scaling up production to levels that were orders of magnitude larger than had been seen before. All of this reduced the costs of PV, which in turn expanded demand further as lower prices attracted new adopters, which enabled further scale. By 2012, prices of PV modules dropped to 16% of their pre-EEG level.
German PV producers surpassed Japanese producers and became the largest in the world. Solarworld, Q-Cells, and others eventually ran into trouble in their limited ability to lower costs as much as their new competition in China did. Despite substantial advantages associated with being located in the most important market in the world, Q-Cells —once the largest—was never able to scale up to the levels of its Chinese competition. It had locked in expensive silicon procurement contracts, diversified excessively, was late to target ambitious cost reductions, and eventually was cut off from capital during the global financial crisis, just as its Chinese competitors were investing tens of billions in scale up.
“Indeed, the German people are paying significant money, but in Germany, we can afford this—we are a rich country. It’s a gift to the world.” - Markus Steigenberger, Agora Energiewende [NYTimes (9/14/2014)]
Still, in the longer term, domestic beneficiaries of the EEG thrived, particularly the local solar installers who were overwhelmed with demand. The other actors that took full advantage of the opportunity were PV equipment providers such as Centrotherm, Roth & Rau, Rena, and Schmid. They also benefitted from the talent emerging from Germany’s education system and its steady investment in PV R&D since 1981. The machine makers contributed most to industrializing PV manufacturing by designing PV-specific machinery, which they sold to German producers and later to the Chinese. In this period the technological frontier moved away from cell design and toward equipment design. Around 2004, these firms began selling “turnkey” systems, which integrated several machines into a production line and required less know-how by producers. The rapid increase in demand the EEG caused required speed on the part of producers, so the turnkey option sold well.
More broadly, the EEG showed the world that PV was a serious technology that could be scaled up, developed as an industrial production process, and integrated into electric grids in large amounts. The policy itself, particularly the feed-in-tariff component, was used as a model that could be implemented in a wide variety of countries—at first in Spain and Italy and later in Asia and Africa. Some argue that the success of the EEG showed that transforming the energy system was easier and less expensive than anticipated. In this interpretation, the EEG enabled the Energy Transition policy adopted by Germany in 2010 as well as the Paris Agreement in December 2015. Because this wide array of beneficial impacts has had their biggest impact outside Germany, the EEG has been called Germany’s “Gift to the World.” One interviewee said it may turn out to have been the most momentous technological development in Germany since the printing press.
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From a national innovation systems perspective, Germany used its long history of education, research, and engineering prowess to develop a production equipment manufacturing industry that continues to lead the world, a decade after the largest producers in Germany lost their lead.
Germany was remarkably open to new policy ideas, borrowing important aspects of the design of the EEG from California (guaranteed purchase prices) and Japan (declining subsidy levels). The development of the EEG was more of a bottom up process than policy making in any of the other PV countries. It evolved over 25 years beginning with protests, moving to local initiatives, and eventually national policy—a process that overcame the objections of large electric utilities. The costs of the EEG were substantial (over $200b) and born by rate payers. Another hallmark of the German innovation system was a long time horizon, in that the EW had forty-year targets. It also was cleverly savvy on political economy considerations, leaving large industrial electricity consumers out of the costs burden. Finally, the EEG and EW reflect a cultural ability to manage transformative change that has roots in the post-war rebuilding after WWI, WWII, the rise of the EU, and the integration of the former East after the fall of the Berlin Wall.
